<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)                              1999           1998          1997          1996       1995
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>            <C>           <C>           <C>           <C>
Total revenues                                                    $   10,572     $   10,451    $    9,911    $    8,197    $ 4,569

Income before cumulative effect of changes in
  accounting principles                                           $    1,409     $    1,343    $    1,236    $      391    $   419
Cumulative effect of changes in accounting principles                   (133)            --            --            --         --
-----------------------------------------------------------------------------------------------------------------------------------
Net income                                                        $    1,276     $    1,343    $    1,236    $      391    $   419
===================================================================================================================================
Total assets                                                      $   50,257     $   51,274    $   50,682    $   49,779    $24,062
Long-term debt                                                    $      850     $    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    $      900         --
Stockholders' equity                                              $    8,941     $    9,125    $    7,777    $    6,480    $ 3,601
Stockholders' equity excluding accumulated other
  changes in equity from nonowner sources                         $    9,143     $    8,204    $    7,055    $    6,195    $ 3,321
Year-end common shares outstanding (2)                                 387.3          391.9         393.1         399.6        N/A

Basic Earnings per Share (3,5)
Income before cumulative effect of changes in
  accounting principles                                           $     3.62     $     3.43    $     3.13    $     1.02    $  1.28
Cumulative effect of changes in accounting principles                  (0.34)            --            --            --         --
-----------------------------------------------------------------------------------------------------------------------------------
Net income                                                        $     3.28     $     3.43    $     3.13    $     1.02    $  1.28
===================================================================================================================================
Diluted Earnings per Share (4,5)
Income before cumulative effect of changes in
  accounting principles                                           $     3.61     $     3.42    $     3.12    $     1.02    $  1.28
Cumulative effect of changes in accounting principles                  (0.34)            --            --            --         --
-----------------------------------------------------------------------------------------------------------------------------------
Net income                                                        $     3.27     $     3.42    $     3.12    $     1.02    $  1.28
===================================================================================================================================
Per common share data:
Cash dividends                                                    $     0.50     $     0.40    $     0.30    $     0.15        N/A
Book value                                                        $    23.09     $    23.28    $    19.78    $    16.22        N/A
Book value excluding accumulated other changes
  in equity from nonowner sources                                 $    23.61     $    20.93    $    17.95    $    15.50        N/A
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


(1) On April 2, 1996, Travelers Property Casualty Corp. (TAP) purchased from
    Aetna Services, Inc. all of the outstanding capital stock of Travelers
    Casualty and Surety Company (formerly the Aetna Casualty & Surety Company)
    and the Standard Fire Insurance Company (collectively, Aetna P&C). 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 Initial Public Offering (IPO). As part of
    this transaction, The Travelers Insurance Group Inc. (TIGI), TAP's parent,
    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.
(3) Basic earnings per share is computed by dividing income available to common
    stockholders by the weighted average number of common shares outstanding for
    the period.
(4) Diluted earnings per share 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.





                                       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 principally 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 85% 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.

In November 1999, President Clinton signed into law the Gramm-Leach-Bliley Act
(the Act), which will become effective in most significant respects on March 11,
2000. Under the Act, bank holding companies, such as Citigroup, all of whose
depository institutions are "well capitalized" and "well managed," as defined in
Federal Reserve Regulation Y, and which obtain satisfactory Community
Reinvestment Act ratings, will have the ability to declare themselves to be
"financial holding companies" and such companies and their affiliates will have
the ability to engage in a broader spectrum of activities than those currently
permitted, including insurance underwriting and brokerage. Citigroup anticipates
that its declaration to become a financial holding company will become effective
shortly after the effective date of the Act, and that as a result, Citigroup and
its affiliates (including the Company) will be permitted to continue to operate
their insurance business as currently structured and, if they so determine, to
expand those businesses through acquisition or otherwise.


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1999
-----------------------------------------------------------------------------------------------------------------------------------
(in millions, except per share data)                                                      1999               1998              1997
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                <C>               <C>
Revenues .....................................................................      $   10,572         $   10,451        $    9,911
-----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in accounting principles ..........      $    1,409         $    1,343        $    1,236
Cumulative effect of changes in accounting principles ........................            (133)                --                --
-----------------------------------------------------------------------------------------------------------------------------------
Net income (1) ...............................................................      $    1,276         $    1,343        $    1,236
-----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
  Income before cumulative effect of changes in accounting principles ........      $     3.62         $     3.43        $     3.13
  Cumulative effect of changes in accounting principles ......................           (0.34)                --                --
-----------------------------------------------------------------------------------------------------------------------------------
  Net income .................................................................      $     3.28         $     3.43        $     3.13
-----------------------------------------------------------------------------------------------------------------------------------
  Weighted average number of common shares outstanding .......................           388.6              392.0             395.5
-----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
  Income before cumulative effect of changes in accounting principles ........      $     3.61         $     3.42        $     3.12
  Cumulative effect of changes in accounting principles ......................           (0.34)                --                --
-----------------------------------------------------------------------------------------------------------------------------------
  Net income .................................................................      $     3.27         $     3.42        $     3.12
-----------------------------------------------------------------------------------------------------------------------------------
  Weighted average number of common
  shares outstanding and common stock equivalents ............................           390.0              392.7             395.8
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


(1)Net income includes $72 million, $93 million and $110 million of realized
   investment gains in 1999, 1998 and 1997, respectively.






                                       2
<PAGE>   3
Net income was $1.276 billion in 1999, $1.343 billion in 1998 and $1.236 billion
in 1997. Net income in 1999 included a charge of $160 million related to the
initial adoption of the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants' (AcSEC) Statement of Position 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" (SOP 97-3) and a benefit of $27 million related to the initial
adoption of AcSEC Statement of Position 98-7, "Deposit Accounting: Accounting
for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk"
(SOP 98-7). The net charge of $133 million due to the initial adoption of these
Statements of Position has been accounted for as a cumulative effect of a change
in accounting principles.

Excluding realized investment gains and the cumulative effect of changes in
accounting principles in 1999 described above, operating income was $1.337
billion or $3.43 per share (diluted) in 1999, $1.250 billion or $3.18 per share
(diluted) in 1998 and $1.126 billion or $2.85 per share (diluted) in 1997. The
increase in operating income in 1999 from 1998 was primarily due to favorable
prior-year reserve development and lower weather-related losses in Commercial
Lines, a benefit as a result of legislative actions in the states of New York
and Pennsylvania that changed the manner in which these states finance their
workers' compensation second-injury funds, an increase in income due to the
growth in Personal Lines and lower operating expenses. These factors were
partially offset by higher catastrophe losses principally due to Hurricane
Floyd, higher loss ratios in the TRAVELERS SECURE(R) program, a charge related
to curtailing the sale of TRAVELERS SECURE(R) auto and homeowners products and
lower favorable prior-year reserve development in Personal Lines and lower
Commercial Lines fee income. 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.

Revenues of $10.572 billion in 1999 increased $121 million from 1998. Revenues
of $10.451 billion in 1998 increased $540 million from 1997. The 1999 increase
was primarily attributable to growth in earned premiums in Personal Lines,
partially offset by lower earned premiums in Commercial Lines, lower realized
investment gains and lower fee income. 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.

Commercial Lines earned premiums decreased $150 million to $4.375 billion in
1999, reflecting the impact of higher ceded premiums in 1999 due to additional
reinsurance coverage, the highly competitive marketplace and the Company's
continued disciplined approach to underwriting and risk management. 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,
partially offset by continued decreases resulting from the Company's selective
underwriting and market conditions characterized by difficult pricing and
increased competition. Personal Lines earned premiums of $3.634 billion in 1999
increased $363 million from 1998. Personal Lines earned premiums of $3.271
billion in 1998 increased $354 million from 1997. These increases in earned
premiums reflected growth in independent agents business and growth in affinity
marketing and joint marketing arrangements. During the third quarter of 1999,
the Company's management decided to curtail the sale of its TRAVELERS SECURE(R)
auto and homeowners products because insured losses exceeded levels anticipated
in the pricing of the products. The TRAVELERS SECURE(R) program marketed
Personal Lines products through the independent agents of Primerica Financial
Services, a unit of Citigroup.

Net investment income was $2.092 billion in 1999, a decrease of $8 million from
1998. 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.

Fee income was $275 million in 1999, a $31 million decrease from 1998. Fee
income was $306 million in 1998, a $59 million decrease from 1997. National
Accounts within Commercial Lines is the primary source of fee income due to its
service fee business. The decrease in fee income in both 1999 and 1998 was the
result of the depopulation of involuntary pools serviced by the Company and the
Company's continued success in lowering workers' compensation losses of service
customers.







                                       3
<PAGE>   4
Claims and expenses of $8.657 billion in 1999 increased $43 million from 1998.
This increase was primarily the result of higher claims associated with the
growth in premiums in Personal Lines, higher catastrophe losses principally due
to Hurricane Floyd, higher loss ratios in the TRAVELERS SECURE(R) program, the
TRAVELERS SECURE(R) charge and lower favorable prior-year reserve development in
Personal Lines, mostly offset by favorable prior-year reserve development and
lower weather-related losses in Commercial Lines, the benefit related to the
legislative actions in New York and Pennsylvania that changed the manner in
which these states finance their workers' compensation second-injury funds, and
a reduction in operating expenses. 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
operating expenses.

The Company's effective tax rate was 26%, 27% and 29% in 1999, 1998 and 1997,
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. Both the 1999 and 1998 effective tax rate were lower, compared to 1998
and 1997, respectively, due to a proportionately larger amount of tax-exempt
income versus pre-tax income.

The statutory and GAAP combined ratios were as follows:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
                                                                    1999       1998      1997
----------------------------------------------------------------------------------------------
STATUTORY:
<S>                                                               <C>        <C>       <C>
    Loss and Loss Adjustment Expense (LAE) ratio...............     74.3%      73.6%     72.4%
    Underwriting expense ratio.................................     28.8       28.6      29.9
    Combined ratio before policyholder dividends...............    103.1      102.2     102.3
    Combined ratio.............................................    103.7      102.7     103.5
----------------------------------------------------------------------------------------------

GAAP:
    Loss and LAE ratio.........................................     73.0%      73.5%     72.3%
    Underwriting expense ratio.................................     28.3       29.1      29.6
    Combined ratio before policyholder dividends...............    101.3      102.6     101.9
    Combined ratio.............................................    101.9      103.1     102.6
----------------------------------------------------------------------------------------------
</TABLE>


For purposes of computing GAAP combined ratios, fee income is allocated as a
reduction of losses and loss adjustment expenses and other underwriting
expenses.

GAAP combined ratios differ from statutory combined ratios primarily due to the
deferral and amortization of certain expenses for GAAP reporting purposes only.

The 1999 statutory combined ratio before policyholder dividends includes the
treatment, on a statutory basis only, of a commutation of an asbestos liability
to an insured. In addition, the 1999 statutory and GAAP combined ratios before
policyholder dividends include an adjustment in Personal Lines associated with
the termination of a quota share reinsurance arrangement. Excluding these items,
the statutory and GAAP combined ratios before policyholder dividends for 1999
would have been 101.8% and 101.5%, respectively.

The improvement in the 1999 statutory and GAAP combined ratios before
policyholder dividends excluding these items compared to 1998 was due to
favorable prior-year reserve development in Commercial Lines, continued
productivity improvements and expense savings, partially offset by higher
catastrophe losses, higher loss ratios in the TRAVELERS SECURE(R) program and
the charge related to curtailing the sale of TRAVELERS SECURE(R) policies. In
addition, the 1999 GAAP combined ratio before policyholder dividends benefited
from legislative actions in the states of New York and Pennsylvania that changed
the manner in which these states finance their workers' compensation
second-injury funds.







                                       4
<PAGE>   5
The 1997 statutory and GAAP combined ratios include an adjustment in Commercial
Lines due to a change to conform the Travelers Casualty and Surety Company
(formerly The Aetna Casualty and Surety Company) and The Standard Fire Insurance
Company (collectively, 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.

RESULTS OF OPERATIONS BY SEGMENT

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL LINES
(in millions)                                                                           1999             1998             1997
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>               <C>              <C>
Revenues .......................................................................      $ 6,492           $ 6,699          $ 6,557
--------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in accounting principles ............      $ 1,159           $ 1,018          $   946
Cumulative effect of changes in accounting principles ..........................         (133)               --               --
--------------------------------------------------------------------------------------------------------------------------------
Net income (1) .................................................................      $ 1,026           $ 1,018          $   946
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>


(1) Commercial Lines net income includes $82 million, $76 million and $100
    million of realized investment gains in 1999, 1998 and 1997, respectively.

Net income was $1.026 billion in 1999, $1.018 billion in 1998 and $946 million
in 1997. Net income in 1999 included a charge of $160 million related to the
initial adoption of SOP 97-3 and a benefit of $27 million related to the initial
adoption of SOP 98-7. The net charge of $133 million due to the initial adoption
of these Statements of Position has been accounted for as a cumulative effect of
a change in accounting principles.

Commercial Lines operating income, which excludes realized investment gains in
all years and the cumulative effect of changes in accounting principles in 1999,
was $1.077 billion, $942 million and $846 million in 1999, 1998 and 1997,
respectively. The 1999 increase compared to 1998 included a benefit as a result
of legislative actions in the states of New York and Pennsylvania that changed
the manner in which these states finance their workers' compensation
second-injury funds. The improvement also reflected favorable prior-year reserve
development, lower weather-related losses and lower operating expenses,
partially offset by lower fee income. Operating results in 1999 reflected the
Company's long-standing insistence on maintaining discipline in the highly
competitive commercial lines marketplace and on growing business only where
market conditions warrant. During 1999, the Company began to see modest price
increases on renewal business. However, these increases varied significantly and
reinforced the fact that rates in many areas still have not improved to the
point of producing acceptable returns. The 1998 increase compared to 1997 was
due to increased after-tax net investment income, expense reductions and lower
environmental and cumulative injury incurred losses, partially offset by
increased losses from catastrophes and other weather-related events. Operating
results during this period 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 disciplined approach to underwriting and risk
management.

Revenues of $6.492 billion in 1999 decreased $207 million from 1998. Revenues of
$6.699 billion in 1998 increased $142 million from 1997. The decrease in 1999
reflected lower levels of earned premiums, net investment income and fee income,
partially offset by an increase in realized investment gains. The 1998 increase
reflected higher earned premiums and net investment income, partially offset by
declines in fee income and realized investment gains.







                                       5
<PAGE>   6
Commercial Lines net written premiums in 1999 totaled $4.408 billion, down $206
million from 1998. This decrease continued to reflect the highly competitive
marketplace and the Company's disciplined approach to underwriting and risk
management, as well as additional reinsurance coverage in 1999. 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
disciplined approach to underwriting and risk management.

Fee income was $275 million, $306 million and $365 million in 1999, 1998 and
1997, respectively. The decreases in fee income were the result of the
depopulation of involuntary pools serviced by the Company and the Company's
continued success in lowering workers' compensation losses of service customers.

National Accounts works with national and regional brokers 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 $488 million in 1999
compared to $625 million in 1998. This decrease continued to reflect the
Company's disciplined approach to underwriting and risk management, as well as
the impact of additional reinsurance coverage in 1999. 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 disciplined approach to underwriting
and risk management.

For 1999, new business in National Accounts was significantly lower than 1998,
reflecting the Company's continued disciplined approach to the highly
competitive marketplace. The business retention ratio for 1999 was moderately
higher than 1998, primarily reflecting the loss of one large account in 1998.
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 cost containment
programs.

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 of
$1.816 billion in 1999 were $16 million above 1998 premium levels. This increase
reflected the improving rate environment and growth in specific business
markets, partially offset by the Company's continued disciplined approach to
underwriting and risk management. 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 disciplined approach to
underwriting and risk management.

For 1999, new premium business in Commercial Accounts was significantly less
than 1998, reflecting the Company's continued focus on obtaining new business
accounts only where it can maintain its selective underwriting policy. The
business retention ratio was virtually the same as 1998 reflecting the Company's
focus on the retention of existing business while maintaining its product
pricing standards and its selective underwriting policy. For 1998, new premium
business in Commercial Accounts significantly declined compared to 1997,
reflecting the Company's focus on maintaining 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.




                                       6
<PAGE>   7
Select Accounts serves small businesses through a network of independent agents.
Select Accounts net written premiums were $1.494 billion in both 1999 and 1998
and $1.432 billion in 1997. The results in 1999 compared to 1998 continued to
reflect the highly competitive marketplace and the Company's disciplined
approach to underwriting and risk management. 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 in 1998 reflected lower ceded premiums, partially offset by
the highly competitive marketplace and the Company's disciplined approach to
underwriting and risk management.

New premium business in Select Accounts was significantly lower in 1999 compared
to 1998 reflecting its selective underwriting policy in the highly competitive
marketplace. The business retention ratio remained strong in 1999 and was
virtually the same as 1998 and 1997. New premium business in Select Accounts was
moderately lower in 1998 compared to 1997 reflecting the highly competitive
marketplace and the Company's disciplined approach to underwriting and risk
management.

Specialty Accounts markets products to national, mid-size and small customers
and distributes them through both wholesale brokers and retail agents and
brokers throughout the United States. Specialty Accounts net written premiums of
$610 million in 1999 were $85 million below 1998 premium levels. This decrease
reflected the impact of additional reinsurance coverage, a highly competitive
marketplace and the Company's continued disciplined approach to underwriting and
risk management. Specialty Accounts net written premiums were $695 million in
1998 as compared to $682 million in 1997. This increase reflected strong
production in excess and surplus lines, partially offset by a highly competitive
marketplace and the Company's disciplined approach to underwriting and risk
management.

Commercial Lines claims and expenses of $4.927 billion in 1999 decreased $400
million from 1998 and increased $94 million in 1998 compared to 1997. The 1999
decrease reflected the benefit resulting from the legislative actions in the
states of New York and Pennsylvania that changed the manner in which these
states finance their workers' compensation second-injury funds. This decrease
also included favorable prior-year reserve development, lower weather-related
losses and lower operating expenses. 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 expense
reductions.

Catastrophe losses, net of tax and reinsurance, were $27 million, $25 million
and $5 million in 1999, 1998 and 1997, respectively. The 1999 catastrophe losses
were due to Hurricane Floyd in the third quarter and tornadoes in Oklahoma in
the second quarter. 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.

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

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                                                                    1999         1998      1997
-------------------------------------------------------------------------------------------------
STATUTORY:
<S>                                                                <C>         <C>        <C>
    Loss and LAE ratio..........................................     77.9%       78.5%      78.4%
    Underwriting expense ratio..................................     30.7        29.7       30.6
    Combined ratio before policyholder dividends................    108.6       108.2      109.0
    Combined ratio..............................................    109.7       109.1      111.0
-------------------------------------------------------------------------------------------------
GAAP:
    Loss and LAE ratio..........................................     75.2%       78.4%      78.3%
    Underwriting expense ratio..................................     29.8        31.1       30.4
    Combined ratio before policyholder dividends................    105.0       109.5      108.7
    Combined ratio..............................................    106.1       110.4      109.9
-------------------------------------------------------------------------------------------------
</TABLE>





                                       7
<PAGE>   8
For purposes of computing GAAP combined ratios, fee income is allocated as a
reduction of losses and loss adjustment expenses and other underwriting
expenses.

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.

The 1999 statutory combined ratio before policyholder dividends includes the
treatment, on a statutory basis only, of the commutation of an asbestos
liability to an insured. Excluding the commutation, the statutory combined ratio
before policyholder dividends was 106.1% in 1999 compared to 108.2% in 1998. The
improvement was primarily due to favorable prior-year reserve development and
lower weather-related losses. The decrease in the 1999 GAAP combined ratio
before policyholder dividends compared to 1998 was due to favorable prior-year
reserve development, lower weather-related losses and the benefit of the New
York and Pennsylvania legislative actions, partially offset by lower fee income.
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 expense reductions and lower environmental and
cumulative injury incurred losses, partially offset by higher catastrophe and
other weather-related losses and lower fee income.


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
PERSONAL LINES
(in millions)                                                 1999          1998           1997
------------------------------------------------------------------------------------------------
<S>                                                          <C>           <C>            <C>
Revenues...................................................  $4,077        $3,743         $3,341
Net income (1).............................................  $  358        $  437         $  413
------------------------------------------------------------------------------------------------
</TABLE>


(1) Personal Lines net income includes $10 million of realized investment losses
    in 1999 and $17 million and $10 million of realized investment gains in 1998
    and 1997, respectively.

Net income of $358 million in 1999 decreased $79 million from 1998. Net income
of $437 million in 1998 increased $24 million from $413 million in 1997.
Personal Lines operating income, which excludes realized investment gains and
losses, was $368 million, $420 million and $403 million in 1999, 1998 and 1997,
respectively. The 1999 decrease in operating income was due to higher
catastrophe losses primarily due to Hurricane Floyd, higher loss ratios in the
TRAVELERS SECURE(R) program, the charge related to curtailing the sale of
TRAVELERS SECURE(R) auto and homeowners products and lower prior-year favorable
reserve development, partially offset by the increase in income due to the
growth in earned premiums. 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.

Revenues were $4.077 billion in 1999 compared to $3.743 billion in 1998 and
$3.341 billion in 1997. Both the 1999 and 1998 increases, compared to 1998 and
1997, respectively, reflected growth in earned premiums in all distribution
channels and higher net investment income. Personal Lines had approximately 5.3
million, 5.1 million and 4.6 million policies in force at December 31, 1999,
1998 and 1997, respectively.






                                       8
<PAGE>   9
Personal Lines net written premiums in 1999 totaled $3.733 billion (excluding an
adjustment of $72 million due to an adjustment associated with the termination
of a quota share reinsurance arrangement), compared to $3.490 billion in 1998
and $3.005 billion (excluding an adjustment of $69 million due to an adjustment
associated with a change in the quota share reinsurance arrangement) in 1997.
The increases in 1999 and 1998 primarily reflected growth in independent agents
business and growth in affinity marketing and joint marketing arrangements.
Business retention continued to be strong. During the third quarter of 1999, the
Company's management decided to curtail the sale of TRAVELERS SECURE(R) auto and
homeowners products. The growth in premiums from the independent agent
distribution channel has been partially 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.

Personal Lines claims and expenses of $3.561 billion in 1999 increased $457
million from 1998. This increase was primarily the result of higher losses
associated with the growth in premiums and related claim volumes, higher
catastrophe losses and lower favorable prior-year reserve development. In
addition, 1999 included higher loss ratios in the TRAVELERS SECURE(R) program
and the charge related to curtailing the sale of TRAVELERS SECURE(R) auto and
homeowners products. 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.

Catastrophe losses, net of tax and reinsurance, were $79 million, $44 million
and $10 million in 1999, 1998 and 1997, respectively. Catastrophe losses in 1999
were primarily due to Hurricane Floyd in the third quarter, wind and hail storms
on the East Coast and tornadoes in the Midwest in the second quarter and a wind
and ice storm in the Midwest and Northeast in the first quarter. Catastrophe
losses in 1998 were primarily due to Hurricanes Bonnie and Georges, severe first
quarter winter storms and second and third quarter wind and hail storms.

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

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                                                               1999          1998           1997
-------------------------------------------------------------------------------------------------
<S>                                                           <C>            <C>           <C>
STATUTORY:
    Loss and LAE ratio.......................................  70.0%          66.7%         63.5%
    Underwriting expense ratio...............................  26.7           27.2          28.7
    Combined ratio...........................................  96.7           93.9          92.2
-------------------------------------------------------------------------------------------------
GAAP:
    Loss and LAE ratio.......................................  70.3%          66.7%         63.5%
    Underwriting expense ratio...............................  26.5           26.5          28.3
    Combined ratio...........................................  96.8           93.2          91.8
-------------------------------------------------------------------------------------------------
</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.

The 1999 statutory and GAAP combined ratios for Personal Lines include an
adjustment associated with the termination of a quota share reinsurance
arrangement. Excluding this adjustment, the statutory and GAAP combined ratios
for 1999 would have been 96.5% and 97.3%, respectively. The increase in the 1999
statutory and GAAP combined ratios excluding this adjustment compared to 1998
was due to higher catastrophe losses due to Hurricane Floyd, higher loss ratios
in the TRAVELERS SECURE(R) program, the TRAVELERS SECURE(R) charge and lower
favorable prior-year development in the automobile bodily injury line.






                                       9
<PAGE>   10
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 alternative
distribution channels.


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
INTEREST EXPENSE AND OTHER
(in millions)                                                  1999          1998           1997
-------------------------------------------------------------------------------------------------
<S>                                                           <C>           <C>            <C>
Revenues...................................................   $   3         $   9          $  13
Net loss...................................................   $(108)        $(112)         $(123)
-------------------------------------------------------------------------------------------------
</TABLE>


The primary component of net loss for 1999, 1998 and 1997 was after-tax interest
expense of $99 million, $105 million and $106 million, respectively.

ENVIRONMENTAL CLAIMS
As a result of various state and federal legislative and regulatory efforts
aimed at environmental remediation, the insurance industry has been, and
continues to be, involved in litigation involving policy coverage and liability
issues. The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), enacted in 1980 and later modified, enables private parties as well
as federal and state governments to take action with respect to releases and
threatened releases of hazardous substances. This federal statute permits both
the recovery of response costs from certain liable parties and may require
liable parties to directly undertake their own remedial action. 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. These decisions often pertain to insurance policies that were issued
by the Company prior to the mid-1970s. The 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, 1999, approximately 22% of
the net environmental loss reserve (i.e., approximately $149 million) consists
of the case reserve for resolved claims. The balance, approximately 78% of the
net aggregate reserve (i.e., approximately $527 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 by settlement on an insured-by-insured basis as opposed to a
claim-by-claim basis. 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 as well as
extinguishes any pending coverage litigation dispute with the insured. 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.








                                       10
<PAGE>   11
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 this 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
other coverage available, if any, including the number of years of coverage, if
any and the applicable law in each jurisdiction. Analysis of these and other
factors, including the potential for future claims, results in the establishment
of the bulk reserve.

The duration of the Company's investigation and review of such claims and the
extent of time necessary to determine an appropriate estimate, if any, of the
value of the claim to the Company, 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.

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. 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, 1999, calculated as described above, the Company had
approximately 39,000 pending environmental-related claims tendered by 968 active
policyholders. Of the total pending environmental-related claims, 28,800 claims
relate to Travelers P&C policies tendered by 413 policyholders and 10,200 claims
relate to Aetna P&C policies tendered by 646 policyholders. Approximately 91 of
these Aetna P&C policyholders are also included in the 413 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.






                                       11
<PAGE>   12
The following table displays activity for environmental losses and loss expenses
and reserves for 1999, 1998 and 1997.


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
ENVIRONMENTAL LOSSES
(in millions)                                                1999           1998          1997
-----------------------------------------------------------------------------------------------
<S>                                                        <C>           <C>            <C>
Beginning reserves:
  Direct................................................   $  928        $ 1,193        $1,369
  Ceded.................................................      (96)           (74)         (127)
-----------------------------------------------------------------------------------------------
    Net.................................................      832          1,119         1,242
Incurred losses and loss expenses:
  Direct................................................      139            123            79
  Ceded.................................................      (82)           (73)          (14)

Losses paid:
  Direct ...............................................      266            388           271
  Ceded.................................................      (53)           (51)          (67)

Other:
  Direct................................................        -              -            16
  Ceded.................................................        -              -             -
-----------------------------------------------------------------------------------------------
Ending reserves:
  Direct................................................      801            928         1,193
  Ceded.................................................     (125)           (96)          (74)
-----------------------------------------------------------------------------------------------
    Net.................................................   $  676        $   832        $1,119
===============================================================================================
</TABLE>


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

Over the past two years, the Company has experienced a substantial reduction in
the number of policyholders with pending coverage litigation disputes pertaining
to environmental claims as well as a continued reduction in the number of
policyholders with active environmental claims.

As of December 31, 1999, the number of policyholders with pending coverage
litigation disputes pertaining to environmental claims was 270, approximately
33% less than the number pending as of December 31, 1998 and approximately 50%
less than the number pending as of December 31, 1997. As of December 31, 1999,
the Company, for approximately $1.57 billion (before reinsurance), has resolved
the environmental liabilities presented by 4,953 of the 5,921 policyholders who
have tendered environmental claims to the Company. This resolution comprises 84%
of the policyholders who have tendered such claims. 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. Generally the settlement dollars paid in disputed coverage claims are
a percentage of the total coverage sought by such insureds.

The Company has direct environmental reserves (before reinsurance) of
approximately $801 million, $530 million of which relates to the following: a)
968 policyholders with unresolved environmental claims (the remaining 16% of the
5,921 policyholders who have tendered environmental claims); b) policyholders
that may tender an environmental claim in the future; and c) for the anticipated
cost of coverage litigation disputes pertaining to such environmental claims.
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.





                                       12
<PAGE>   13
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, including whether such
claims qualify as products or non-products claims, 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, 1999, approximately 11% of the net aggregate reserve (i.e.,
approximately $94 million) is for pending asbestos claims. The balance,
approximately 89% (i.e., approximately $733 million) of the net asbestos
reserve, represents incurred but not reported losses for which the Company has
not received any specific claims.




                                       13
<PAGE>   14
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 1999,
1998 and 1997.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
ASBESTOS LOSSES
(in millions)                                    1999         1998         1997
--------------------------------------------------------------------------------
<S>                                           <C>          <C>          <C>
Beginning reserves:
  Direct ................................     $ 1,252      $ 1,363      $ 1,443
  Ceded .................................        (266)        (249)        (370)
--------------------------------------------------------------------------------
    Net .................................         986        1,114        1,073
Incurred losses and loss expenses:
  Direct ................................         128          135           87
  Ceded .................................         (71)         (69)         (18)
Losses paid:
  Direct ................................         330          246          174
  Ceded .................................        (114)         (52)        (140)
Other:
  Direct ................................          --           --            7
  Ceded .................................          --           --           (1)
--------------------------------------------------------------------------------
Ending reserves:
  Direct ................................       1,050        1,252        1,363
  Ceded .................................        (223)        (266)        (249)
--------------------------------------------------------------------------------
    Net .................................     $   827      $   986      $ 1,114
================================================================================
</TABLE>


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

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.




                                       14
<PAGE>   15
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.

As a result of these processes and procedures, the reserves carried for
environmental and asbestos claims at December 31, 1999 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.




                                       15
<PAGE>   16
At December 31, 1999, approximately 21% of the net aggregate reserve (i.e.,
approximately $179 million) is for pending CIOTA claims. The balance,
approximately 79% (i.e., approximately $692 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 1999, 1998
and 1997.


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
CIOTA LOSSES
(in millions)                                                1999           1998          1997
-----------------------------------------------------------------------------------------------
<S>                                                        <C>           <C>            <C>
Beginning reserves:
  Direct.................................................  $1,346        $ 1,520        $1,560
  Ceded..................................................    (392)          (432)         (446)
-----------------------------------------------------------------------------------------------
    Net..................................................     954          1,088         1,114
Incurred losses and loss expenses:
  Direct.................................................     (36)           (31)           32
  Ceded..................................................      28             29            (6)

Losses paid:
  Direct ................................................     126            143            72
  Ceded..................................................     (51)           (11)          (20)
-----------------------------------------------------------------------------------------------
Ending reserves:
  Direct.................................................   1,184          1,346         1,520
  Ceded..................................................    (313)          (392)         (432)
-----------------------------------------------------------------------------------------------
    Net..................................................  $  871        $   954        $1,088
===============================================================================================
</TABLE>


INVESTMENT PORTFOLIO
At December 31, 1999, the carrying value of the Company's investment portfolio
was $29.8 billion, representing 59% of total assets of $50.3 billion. The
average yield (excluding realized and unrealized investment gains) was 7.2%,
7.4% and 7.4% for the years ended December 31, 1999, 1998 and 1997,
respectively. The after-tax average yield (excluding realized and unrealized
investment gains) was 5.2%, 5.2% and 5.0% for the years ended December 31, 1999,
1998 and 1997, 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,
1999 totaled $25.3 billion, comprised of $23.1 billion of publicly traded fixed
maturities and $2.2 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, 1999 were Aa3 and Baa1,
respectively. Included in the fixed maturity portfolio at such date was
approximately $1.5 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.







                                       16
<PAGE>   17
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, 1999:


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
                                                                                       PERCENT OF
(in millions)                                                  CARRYING VALUE     TOTAL CARRYING VALUE
------------------------------------------------------------------------------------------------------
<S>                                                            <C>                <C>
QUALITY RATING:
  Aaa.........................................................   $ 11,284                   44.6%
  Aa..........................................................      4,728                   18.7
  A...........................................................      4,310                   17.0
  Baa.........................................................      3,484                   13.8
------------------------------------------------------------------------------------------------------
  Total investment grade......................................     23,806                   94.1
  Non-investment grade........................................      1,499                    5.9
------------------------------------------------------------------------------------------------------
Total fixed maturity investments..............................   $ 25,305                   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, 1999, the Company held CMOs with a market value of $2.3 billion.
Approximately 66% of CMO holdings were fully collateralized by GNMA, FNMA or
FHLMC securities at such date, and the balance was fully collateralized by
portfolios of individual mortgage loans. In addition, the Company held $1.4
billion of GNMA, FNMA or FHLMC mortgage-backed pass-through securities at
December 31, 1999. 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, 1999.
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, 1999
and 1998 was $29.8 billion and $31.9 billion, respectively, of which 85% and 88%
was invested in fixed maturity securities, respectively. 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.






                                       17
<PAGE>   18
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, 1998. 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 7 and 9 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,
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, 1999 and 1998.

For long-term debt and fixed rate trust securities, the change in fair value is
determined by calculating hypothetical December 31, 1999 and 1998 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 $1.2 billion and $1.4 billion based on a 100
basis point increase in interest rates as of December 31, 1999 and 1998,
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 56% of total assets and approximately 4% of total
liabilities as of December 31, 1999 and approximately 60% of total assets and
approximately 5% of total liabilities as of December 31, 1998. 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.






                                       18
<PAGE>   19
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, 1999 and 1998, 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, 1999 and 1998 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
In 1999, Commercial Lines began to see higher rates on renewal business.
However, these increases varied significantly by region and industry reinforcing
the fact that rates in many areas and business markets still have not improved
to the point of producing acceptable returns. This is an improvement over the
past few years where the trend in market conditions, characterized by difficult
pricing and increased competition, was evidenced by pricing declines in all
markets.

In National Accounts, where programs include risk service, such as claims
settlement, loss control and risk management information services, which is
generally offered in connection with a large deductible or self-insured program,
and risk transfer, which is typically provided through a guaranteed cost or
retrospectively rated insurance policy, pricing declines have continued. This
business continued 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. Although National Accounts
believes that pricing will continue to be very competitive in 2000, recent data
has suggested that the pricing environment may be stabilizing. However, National
Accounts will continue to reject business that is not expected to produce
acceptable returns, which is reflected in a decline in anticipated business
volumes.

Commercial Accounts began to see modest price increases on renewal business
during 1999. However, these increases varied significantly by region and
industry, reinforcing the fact that rates in many areas and business segments
still have not improved to the point of producing acceptable returns. In this
environment, Commercial Accounts continues to reject unprofitable business, as
reflected in the decline in new business.

For Select Accounts, the highly competitive marketplace and soft underwriting
cycle continued to pressure the pricing of guaranteed cost products. Premiums on
this business continued 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 continued 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. In the last six months of
1999, Select Accounts began to see small price increases on renewal business.
However, as noted above in Commercial Accounts, these increases varied
significantly by region and industry.




                                       19
<PAGE>   20
Specialty Accounts also operated 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,
to continue using reinsurance judiciously and to increase its efforts to
cross-sell its expanding array of specialty products to existing customers of
National Accounts, Commercial Accounts, Select Accounts, Personal Lines and
various other Citigroup units where it believes it has the greatest sales and
profit opportunities.

The highly competitive marketplace and the Company's selective underwriting
criteria continued to have an adverse impact on premium and fee levels during
1999. However, the Company did begin to achieve modest price increases,
primarily in the middle market. Although the increases vary significantly by
region and industry, the Company believes that the pricing environment is
stabilizing.

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 alternative 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 as some
personal auto carriers have reduced prices in selected markets. Additionally,
auto loss costs have deteriorated slightly. These trends are expected to
continue in 2000. Personal Lines will continue to emphasize underwriting
discipline in this competitive marketplace and pursue a strategy of flat to
modest increases in auto rates. Market conditions for homeowners insurance have
remained stable, with the industry experiencing modest rate increases. Personal
Lines expects homeowners rate increases to continue in 2000. Homeowners loss
cost trends have held at modest levels.

Travelers Group 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. While some of the insurance industry's cost control methods have
been challenged in litigation, it continues to be the Company's objective to be
a low-cost provider of property and casualty insurance, with an emphasis on
claim payout and performance and enhanced productivity.

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 creates
the opportunity for realized investment gains on disposition of fixed maturity
investments.




                                       20
<PAGE>   21
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.

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

LIQUIDITY AND CAPITAL RESOURCES
TAP was formed in January 1996 to hold the property and casualty insurance
subsidiaries of The Travelers Insurance Group Inc. (TIGI). TAP's principal asset
is the capital stock of its insurance subsidiaries.

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, 1999 totaled $29.8 billion, of
which 84.8% was invested in fixed maturity investments, 4.2% in common stocks
and other equity securities, 1.7% in mortgage loans and real estate and 9.3% in
short-term investments and other investments.

Cash flow needs at TAP include stockholder dividends and debt service. TAP is a
holding company and has no direct operations. Accordingly, TAP meets its cash
flow needs primarily through dividends from operating subsidiaries. In addition,
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.
Also, TAP will continue to be able to make borrowings from a syndicate of banks
under a Credit Facility in the amount of $250 million, none of which is
currently utilized. The Credit Facility expires in December 2001. Under the
Credit Facility, TAP is required to maintain a certain level of consolidated
stockholders' equity (as defined in the agreement). At December 31, 1999, this
requirement was exceeded by approximately $4.8 billion. In addition, the Credit
Facility places restrictions on the amount of consolidated debt TAP can incur.
If the Company had borrowings under the Credit Facility, the interest rate would
be based upon LIBOR plus a negotiated margin. TAP compensates the banks for the
Credit Facility through commitment fees. TAP also issues commercial paper
directly to investors and maintains unused credit availability under the Credit
Facility at least equal to the amount of commercial paper outstanding. At
December 31, 1999, TAP had no commercial paper outstanding.





                                       21
<PAGE>   22
On October 1, 1999 and September 1, 1999, TAP repaid $200 million for its 6-1/4%
notes and $200 million for its 6-3/4% notes, respectively, which matured on
those dates. Long-term debt outstanding at December 31, 1999 was as follows:


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(in millions)                                                        1999
--------------------------------------------------------------------------------
<S>                                                               <C>
   6-3/4% Notes due 2001........................................   $  500
   6-3/4% Notes due 2006........................................      150
   7-3/4% Notes due 2026........................................      200
--------------------------------------------------------------------------------
    Total ......................................................   $  850
================================================================================
</TABLE>


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 2000, dividend payments to TAP from its insurance
subsidiaries are limited to $1.2 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, 1999, all of
the Company's insurance subsidiaries had adjusted capital in excess of amounts
requiring any company or regulatory action.

Management believes that the realization of the Company's recognized net
deferred tax asset of $1.6 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 of approximately $12.0 billion on average over the last three years and
has generated federal taxable income exceeding $8.0 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.




                                       22
<PAGE>   23
Reserves for losses and loss adjustment expenses on a statutory basis were $19.9
billion, $20.7 billion and $21.4 billion at December 31, 1999, 1998 and 1997,
respectively. Both the 1999 and 1998 decreases, compared to 1998 and 1997,
respectively, included net payments of $504 million and $663 million,
respectively, for environmental and cumulative injury claims. These decreases
were also impacted by favorable prior-year reserve development combined with a
shift in business mix from longer-tail Commercial Lines business to shorter-tail
Personal Lines business.

In connection with the 1992 sale of American Re-Insurance Company (Am Re) a
reinsurance agreement was entered into 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, the Company has an 80% participation in payments on
those losses up to a maximum payment 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 January 18, 2000, January 19, 1999 and January 28, 1998, the Company, through
the Travelers Property Casualty Corp. Capital Accumulation Plan, reissued
467,207, 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. The fair market values per share of the 2000, 1999 and 1998
restricted stock awards at the grant date were $36.49, $31.88 and $43.71,
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 $22 million, $12
million and $7 million for the years ended December 31, 1999, 1998 and 1997,
respectively. At December 31, 1999, there were 5,844,149 shares available for
future grants under all existing stock incentive plans of TAP, including, but
not limited to the restricted stock plan.

On October 8, 1999, TAP's Board of Directors authorized the expenditure of up to
$200 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, 1999, TAP had repurchased $81 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 successfully implemented its Year 2000 program and achieved
compliance with respect to its business critical systems and encountered no
significant problems with its third party customers, financial institutions,
vendors and others with whom it conducts business. The Company will continue to
monitor its systems and applications throughout 2000 to ensure ongoing
compliance and while there can be no assurances that no Year 2000 related issues
may arise, as of December 31, 1999, the Company believes, based on information
currently available, that Year 2000 related events are not likely to have a
material effect on its results of operations, financial condition or liquidity.

The total pre-tax cost associated with the required modifications and
conversions was approximately $51 million and was expensed as incurred in the
period 1996 - 1999.




                                       23
<PAGE>   24
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. The Company has received a small number of claims to date; losses for
Year 2000 insurance claims and litigation costs related to Year 2000 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 or phrases such as "believe," "expect,"
"anticipate," "intend," "estimate," "may affect," and similar expressions or
future or conditional verbs such as "will," "should," "would," and "could." 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 actual amount of liabilities associated with
certain environmental and asbestos-related insurance claims. Readers are also
directed to other risks and uncertainties discussed in documents filed by the
Company with the Securities and Exchange Commission.







                                       24
<PAGE>   25
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENT OF INCOME
                     (In millions, except per share amounts)


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
For the Year Ended December 31,                                            1999          1998         1997
-----------------------------------------------------------------------------------------------------------
<S>                                                                     <C>           <C>          <C>
REVENUES
Premiums                                                                $  8,009      $  7,796     $  7,225
Net investment income                                                      2,092         2,100        2,051
Fee income                                                                   275           306          365
Realized investment gains                                                    112           143          169
Other revenues                                                                84           106          101
-----------------------------------------------------------------------------------------------------------
  Total revenues                                                          10,572        10,451        9,911
-----------------------------------------------------------------------------------------------------------
CLAIMS AND EXPENSES
Claims and claim adjustment expenses                                       6,059         5,947        5,484
Amortization of deferred acquisition costs                                 1,260         1,197        1,127
Interest expense                                                             152           161          163
General and administrative expenses                                        1,186         1,309        1,385
-----------------------------------------------------------------------------------------------------------
  Total claims and expenses                                                8,657         8,614        8,159
-----------------------------------------------------------------------------------------------------------
Income before federal income taxes and cumulative
  effect of changes in accounting principles                               1,915         1,837        1,752
-----------------------------------------------------------------------------------------------------------
Federal income taxes:
 Current expense                                                             287           394          422
 Deferred expense                                                            219           100           94
-----------------------------------------------------------------------------------------------------------
    Total federal income taxes                                               506           494          516
-----------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in accounting principles        1,409         1,343        1,236
Cumulative effect of change in accounting for insurance-related
  assessments, net of tax                                                   (160)           --           --
Cumulative effect of change in accounting for insurance and
  reinsurance contracts that do not transfer insurance risk,
  net of tax                                                                  27            --           --
-----------------------------------------------------------------------------------------------------------
Net income                                                              $  1,276      $  1,343     $  1,236
===========================================================================================================
BASIC EARNINGS PER SHARE
Income before cumulative effect of changes in accounting principles     $   3.62      $   3.43     $   3.13
Cumulative effect of changes in accounting principles                      (0.34)           --           --
-----------------------------------------------------------------------------------------------------------
Net income                                                              $   3.28      $   3.43     $   3.13
===========================================================================================================
DILUTED EARNINGS PER SHARE
Income before cumulative effect of changes in accounting principles     $   3.61      $   3.42     $   3.12
Cumulative effect of changes in accounting principles                      (0.34)           --           --
-----------------------------------------------------------------------------------------------------------
Net income                                                              $   3.27      $   3.42     $   3.12
===========================================================================================================
</TABLE>




                 See notes to consolidated financial statements.




                                       25
<PAGE>   26
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                          (In millions, except shares)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
At December 31,                                                                       1999          1998
---------------------------------------------------------------------------------------------------------
<S>                                                                               <C>           <C>
ASSETS
Fixed maturities, available for sale at fair value (cost, $25,711 and $26,580)     $ 25,305      $ 27,977
Equity securities, at fair value (cost, $1,166 and $796)                              1,261           828
Mortgage loans                                                                          464           574
Real estate held for sale                                                                50            83
Short-term securities                                                                 1,535         1,597
Other investments                                                                     1,221           827
---------------------------------------------------------------------------------------------------------
        Total investments                                                            29,836        31,886
---------------------------------------------------------------------------------------------------------
Cash                                                                                     55            62
Investment income accrued                                                               385           409
Premium balances receivable                                                           2,738         2,901
Reinsurance recoverables                                                              9,424         9,153
Deferred acquisition costs                                                              525           518
Deferred federal income taxes                                                         1,552         1,109
Contractholder receivables                                                            2,059         2,019
Goodwill                                                                              1,390         1,457
Other assets                                                                          2,293         1,760
---------------------------------------------------------------------------------------------------------
        Total assets                                                               $ 50,257      $ 51,274
=========================================================================================================
LIABILITIES
Claims and claim adjustment expense reserves                                       $ 29,003      $ 29,589
Unearned premium reserves                                                             4,274         4,166
Contractholder payables                                                               2,059         2,019
Long-term debt                                                                          850         1,250
Other liabilities                                                                     4,230         4,225
---------------------------------------------------------------------------------------------------------
        Total liabilities                                                            40,416        41,249
---------------------------------------------------------------------------------------------------------
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         5,479
Retained earnings                                                                     4,133         3,052
Accumulated other changes in equity from nonowner sources                              (202)          921
Treasury stock, at cost (shares, 13,159,386 and 8,544,687)                             (451)         (298)
Unearned compensation                                                                   (22)          (33)
---------------------------------------------------------------------------------------------------------
        Total stockholders' equity                                                    8,941         9,125
---------------------------------------------------------------------------------------------------------
        Total liabilities and stockholders' equity                                 $ 50,257      $ 51,274
=========================================================================================================
</TABLE>



                 See notes to consolidated financial statements.





                                       26
<PAGE>   27
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                          (In millions, except shares)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------    -------------------------------------
                                                                                                 SHARES (IN THOUSANDS)
                                                                                      -------------------------------------
For the Year Ended December 31,                  1999         1998          1997         1999          1998          1997
----------------------------------------------------------------------------------    -------------------------------------
<S>                                          <C>           <C>           <C>            <C>           <C>           <C>
COMMON STOCK AND
  ADDITIONAL PAID-IN
  CAPITAL
Balance, beginning of year                   $  5,483      $  5,477      $  5,459       400,414       400,414       400,000
Net Capital Accumulation Plan grants               --             6            18            --            --           414
----------------------------------------------------------------------------------    -------------------------------------
Balance, end of year                            5,483         5,483         5,477       400,414       400,414       400,414
----------------------------------------------------------------------------------    -------------------------------------
RETAINED EARNINGS
Balance, beginning of year                      3,052         1,866           749
Net income                                      1,276         1,343         1,236
Dividends                                        (195)         (157)         (119)
----------------------------------------------------------------------------------
Balance, end of year                            4,133         3,052         1,866
----------------------------------------------------------------------------------
ACCUMULATED OTHER
  CHANGES IN EQUITY
  FROM NONOWNER
  SOURCES, NET OF TAX
Balance, beginning of year                        921           722           285
Net unrealized gain (loss) on investment
  securities, net of reclassification
  adjustment (see note 9)                      (1,131)          200           437
Foreign currency translation
  adjustments                                       8            (1)           --
----------------------------------------------------------------------------------
Balance, end of year                             (202)          921           722
----------------------------------------------------------------------------------
TREASURY STOCK (at cost)
Balance, beginning of year                       (298)         (266)          (13)       (8,545)       (7,315)         (407)
Net Capital Accumulation Plan grants               15            29            15           501           782           449
Treasury stock acquired                          (169)          (62)         (268)       (5,137)       (2,029)       (7,359)
Other                                               1             1            --            21            17             2
----------------------------------------------------------------------------------      -----------------------------------
Balance, end of year                             (451)         (298)         (266)      (13,160)       (8,545)       (7,315)
----------------------------------------------------------------------------------      -----------------------------------
UNEARNED COMPENSATION
Balance, beginning of year                        (33)          (22)           --
Net issuance of restricted stock under
  Capital Accumulation Plan                       (11)          (29)          (33)
Restricted stock amortization                      22            18            11
----------------------------------------------------------------------------------
Balance, end of year                              (22)          (33)          (22)
----------------------------------------------------------------------------------    -------------------------------------
Total stockholders' equity
  and shares outstanding                     $  8,941      $  9,125      $  7,777       387,254       391,869       393,099
==================================================================================    =====================================
SUMMARY OF CHANGES IN
  EQUITY FROM NONOWNER
  SOURCES
Net income                                   $  1,276      $  1,343      $  1,236
Other changes in equity from
  nonowner sources, net of tax                 (1,123)          199           437
----------------------------------------------------------------------------------
Total changes in equity from
   nonowner sources                          $    153      $  1,542      $  1,673
==================================================================================
</TABLE>


                 See notes to consolidated financial statements.




                                       27
<PAGE>   28
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                  (In millions)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
For the Year Ended December 31,                                               1999          1998          1997
--------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
 Net income                                                               $  1,276      $  1,343      $  1,236
  Adjustments to reconcile net income to net cash provided
       by operating activities
    Realized investment gains                                                 (112)         (143)         (169)
    Cumulative effect of changes in accounting principles, net of tax          133            --            --
    Depreciation and amortization                                               66            60            47
    Deferred federal income taxes                                              219           100            94
    Amortization of deferred policy acquisition costs                        1,260         1,197         1,127
    Premium balances receivable                                                163            (4)           79
    Reinsurance recoverables                                                  (122)          (60)           97
    Deferred policy acquisition costs                                       (1,266)       (1,214)       (1,210)
    Insurance reserves                                                        (627)         (341)         (121)
    Other                                                                     (349)         (220)         (557)
--------------------------------------------------------------------------------------------------------------
    Net cash provided by operating activities                                  641           718           623
--------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
 Proceeds from maturities of investments
  Fixed maturities                                                           1,678         1,551         1,422
  Mortgage loans                                                               231           160           154
 Proceeds from sales of investments
  Fixed maturities                                                          10,022         8,541        10,045
  Equity securities                                                            873           580           504
  Mortgage loans                                                                --            15           231
  Real estate held for sale                                                    122            33           129
 Purchases of investments
  Fixed maturities                                                         (10,840)      (10,206)      (13,421)
  Equity securities                                                         (1,072)         (505)         (554)
  Mortgage loans                                                               (42)          (34)          (38)
 Short-term securities, (purchases) sales, net                                 (82)          (98)          872
 Other investments, net                                                       (495)         (244)          (57)
 Securities transactions in course of settlement                              (279)         (169)          335
--------------------------------------------------------------------------------------------------------------
    Net cash provided by (used in) investing activities                        116          (376)         (378)
--------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
 Issuance (repayment) of commercial paper, net                                  --          (108)           83
 Payment of long-term debt                                                    (400)           --            --
 Purchase of treasury stock                                                   (169)          (62)         (268)
 Dividends to TIGI                                                            (164)         (131)          (98)
 Dividends to minority shareholders                                            (31)          (26)          (21)
--------------------------------------------------------------------------------------------------------------
    Net cash used in financing activities                                     (764)         (327)         (304)
--------------------------------------------------------------------------------------------------------------
 Net increase (decrease) in cash                                                (7)           15           (59)
 Cash at beginning of period                                                    62            47           106
--------------------------------------------------------------------------------------------------------------
 Cash at end of period                                                    $     55      $     62      $     47
==============================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 Income taxes paid                                                        $    356      $    399      $    677
 Interest paid                                                            $    159      $    161      $    163
--------------------------------------------------------------------------------------------------------------
</TABLE>



                 See notes to consolidated financial statements.


                                       28
<PAGE>   29
               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). 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

      DEPOSIT ACCOUNTING: ACCOUNTING FOR INSURANCE AND REINSURANCE CONTRACTS
      THAT DO NOT TRANSFER INSURANCE RISK

      Effective January 1, 1999, the Company adopted the Accounting Standards
      Executive Committee of the American Institute of Certified Public
      Accountants' (AcSEC) 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. The effect of initially
      adopting SOP 98-7 is to be reported as a cumulative catch-up adjustment.
      Restatement of previously issued financial statements is not permitted. As
      a result of adopting SOP 98-7, the Company recorded a benefit of $27
      million after tax, reflected as a cumulative catch-up adjustment. 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. See note 5.

      ACCOUNTING BY INSURANCE AND OTHER ENTERPRISES FOR INSURANCE-RELATED
      ASSESSMENTS

      Effective January 1, 1999, the Company adopted the AcSEC 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. The effect of the
      initial adoption of this SOP is to be reported as a cumulative catch-up
      adjustment. Restatement of previously issued financial statements is not
      permitted. As a result of adopting SOP 97-3, the Company recorded a charge
      of $160 million after tax, reflected as a cumulative catch-up adjustment.
      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. In the third quarter of 1999, the Company recorded a benefit to
      earnings of approximately $58 million after tax as a result of legislative
      actions in the states of New York and Pennsylvania that changed the manner
      in which these states finance their workers' compensation second-injury
      funds, one of the types of funds covered by SOP 97-3.






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

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

      ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
      INTERNAL USE

      During the third quarter of 1998, the Company adopted the 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.

      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. Impaired loans were not significant at December 31, 1999 and 1998.







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

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

       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, 1999
       and 1998.

       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.


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

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

       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, based upon an evaluation of expected future cash
       flows for the Company in accordance with Statement of Financial
       Accounting Standards No. FAS 121, "Accounting for the Impairment of
       Long-Lived Assets and for Long-Lived Assets to be Disposed of." An
       impairment would be measured by the amount the present value of the
       expected future net cash flows from operating activities of the Company
       (applying the discount rate(s) used to determine the fair value of the
       acquired assets and assumed liabilities at the date of acquisition) is
       less than the carrying amount of goodwill. Goodwill amortization expense
       included in the consolidated statement of income was $40 million for each
       of the years ended December 31, 1999, 1998 and 1997.

       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, 1999 and 1998 are $1.5 billion
       and $1.3 billion, respectively, of reserves related to workers'
       compensation that have been discounted using an interest rate of 5%.

       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.

       OTHER LIABILITIES
       Included in other liabilities in the consolidated balance sheet is the
       Company's estimate of its liability for guaranty-fund and other
       insurance-related assessments. The liability for expected state
       guaranty-fund and other premium-based assessments is recognized as the
       Company writes or becomes obligated to write or renew the premiums on
       which the assessments are expected to be based. The liability for
       loss-based assessments is recognized as the related losses are incurred.
       At December 31, 1999, the Company had a liability of $308 million for
       guaranty-fund and other assessments and related recoveries of $41
       million. The assessments are expected to be paid over a period ranging
       from one year to the life expectancy of certain workers' compensation
       claimants and the recoveries are expected to occur over the same period
       of time.

       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.




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

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

       The NAIC recently completed a process intended to codify statutory
       accounting practices for certain insurance enterprises. As a result, the
       NAIC issued a revised statutory Accounting Practices and Procedures
       Manual - version effective January 1, 2001 (the revised Manual) that will
       be effective for years beginning January 1, 2001. 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.

       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," (APB 25) 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" (FAS 123). See note 14.
       The Company accounts for its stock-based non-employee compensation plans
       at fair value.




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

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

       EARNINGS PER SHARE
       Basic Earnings per Share (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 the incremental shares
       assumed issued under the Company's Capital Accumulation Plan and other
       restricted stock plans. The following table is a reconciliation of the
       numerators and denominators of the basic and diluted earnings per share
       computation for income before accounting changes:

<TABLE>
<CAPTION>
       ===============================================================================================================
       (for the year ended December 31,                                  INCOME              SHARES          PER SHARE
        in millions, except per share amounts)                        (NUMERATOR)        (DENOMINATOR)        AMOUNTS
       ---------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                 <C>              <C>
       1999
       Basic EPS - income before accounting changes                     $ 1,409             388.6            $   3.62
       Effects of dilutive securities - restricted stock                      -               1.4               (0.01)
       ---------------------------------------------------------------------------------------------------------------
       Diluted EPS - income before accounting changes
         and assumed conversions                                        $ 1,409             390.0            $   3.61
       ===============================================================================================================
       1998
       Basic EPS - income before accounting changes                     $ 1,343             392.0            $   3.43
       Effects of dilutive securities - restricted stock                      -                .7               (0.01)
       ---------------------------------------------------------------------------------------------------------------
       Diluted EPS - income before accounting changes
         and assumed conversions                                        $ 1,343             392.7            $   3.42
       ===============================================================================================================
       1997
       Basic EPS - income before accounting changes                     $ 1,236             395.5            $   3.13
       Effects of dilutive securities - restricted stock                      -                .3               (0.01)
       ---------------------------------------------------------------------------------------------------------------
       Diluted EPS - income before accounting changes
         and assumed conversions                                        $ 1,236             395.8            $   3.12
       ===============================================================================================================
</TABLE>

       DERIVATIVE FINANCIAL INSTRUMENTS
       The Company uses derivative financial instruments, including interest
       rate swaps, currency swaps, options and forward contracts, as a means of
       hedging exposure to interest rate, equity price 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.

       Interest rate swaps, currency swaps, options and forward contracts were
       not significant at December 31, 1999 and 1998. See note 12.



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

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

       ACCOUNTING STANDARDS NOT YET ADOPTED

       ACCOUNTING FOR DERIVATIVE  INSTRUMENTS AND HEDGING ACTIVITIES
       In June 1998, the Financial Accounting Standards Board (FASB) issued
       Statement of Financial Accounting Standards No. 133, "Accounting for
       Derivative Instruments and Hedging Activities" (FAS 133). In June 1999,
       the FASB issued Statement of Financial Standards No. 137 "Deferral of the
       Effective Date of FASB Statement No. 133" (FAS 137) which allows entities
       which have not adopted FAS 133 to defer its effective date to all fiscal
       quarters of all fiscal years beginning after June 15, 2000. FAS 133
       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 recognized asset or liability or 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. Upon initial application of FAS 133,
       hedging relationships must be designated anew and documented pursuant to
       the provisions of this statement. The Company adopted the deferral
       provisions of FAS 137, effective January 1, 2000, and has not yet
       determined the impact that FAS 133 will have on its consolidated
       financial statements.

       NATURE OF OPERATIONS

       The Company is comprised of two business segments: Commercial Lines and
       Personal Lines. See note 3.

       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.



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

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

       National Accounts provides a variety of casualty products to large
       companies. Products are marketed through national and regional brokers.
       Programs offered by National Accounts include risk service, such as
       claims settlement, loss control and risk management information services,
       which is generally offered in connection with a large deductible or
       self-insured program, and risk transfer, which is typically provided
       through 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 and transportation industries, 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,
       cross-marketing arrangements with Citibank, a unit of Citigroup, and
       joint marketing arrangements with other insurers. During 1999, Personal
       Lines curtailed the sale of automobile and homeowners products through
       the independent agents of Primerica Financial Services, a unit of
       Citigroup.

       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.


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

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

     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.   FINANCIAL SERVICES REFORM

     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 85% 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.

     In November 1999, President Clinton signed into law the Gramm-Leach-Bliley
     Act (the Act), which will become effective in most significant respects on
     March 11, 2000. Under the Act, bank holding companies, such as Citigroup,
     all of whose depository institutions are "well capitalized" and "well
     managed," as defined in Federal Reserve Regulation Y, and which obtain
     satisfactory Community Reinvestment Act ratings, will have the ability to
     declare themselves to be "financial holding companies" and such companies
     and their affiliates will have the ability to engage in a broader spectrum
     of activities than those currently permitted, including insurance
     underwriting and brokerage. Citigroup anticipates that its declaration to
     become a financial holding company will become effective shortly after the
     effective date of the Act, and that as a result, Citigroup and its
     affiliates (including the Company) will be permitted to continue to operate
     their insurance business as currently structured and, if they so determine,
     to expand those businesses through acquisition or otherwise.

3.   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.



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

3.     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>
     1999
     Revenues
       Premiums                                                           $   4,375          $  3,634          $   8,009
       Net investment income                                                  1,689               400              2,089
       Fee income                                                               275                 -                275
       Realized investment gains (losses)                                       127               (15)               112
       Other                                                                     26                58                 84
     -------------------------------------------------------------------------------------------------------------------
         Total revenues                                                   $   6,492          $  4,077          $  10,569
     ===================================================================================================================
     Amortization and depreciation                                        $     662          $    663          $   1,325
     Federal income taxes                                                       405               159                564
     Operating income                                                         1,077               368              1,445
     Assets                                                                  42,521             7,544             50,065
     -------------------------------------------------------------------------------------------------------------------
     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
     -------------------------------------------------------------------------------------------------------------------
</TABLE>

       Operating income excludes realized investment gains (losses) and the
       cumulative effect of changes in accounting principles, and is reflected
       net of tax.


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

3.     SEGMENT INFORMATION, CONTINUED

       BUSINESS SEGMENT RECONCILIATIONS

<TABLE>
<CAPTION>
       ----------------------------------------------------------------------------------------------------------------
       (at and for the year ended December 31, in millions)                         1999            1998           1997
       ----------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>             <C>            <C>
       REVENUE RECONCILIATION

       Total revenues for reportable segments                                  $  10,569       $  10,442      $   9,898
       Other revenues (1)                                                              3               9             13
       ----------------------------------------------------------------------------------------------------------------
         Total consolidated revenues                                           $  10,572       $  10,451      $   9,911
       ================================================================================================================

       INCOME RECONCILIATION, NET OF TAX

       Total operating income for reportable segments                          $   1,445       $   1,362      $   1,249
       Other operating loss (2)                                                     (108)           (112)          (123)
       Realized investment gains                                                      72              93            110
       Cumulative effect of changes in accounting principles                        (133)              -              -
       ----------------------------------------------------------------------------------------------------------------
         Total consolidated net income                                         $   1,276       $   1,343      $   1,236
       ================================================================================================================

       ASSET RECONCILIATION

       Total assets for reportable segments                                    $  50,065       $  50,965      $  50,321
       Other assets (3)                                                              192             309            361
       ----------------------------------------------------------------------------------------------------------------
         Total consolidated assets                                             $  50,257       $  51,274      $  50,682
       ================================================================================================================

</TABLE>

       (1)    The source of other revenues is businesses that are in run-off
              and are not significant.
       (2)    The primary component of the other operating loss is after-tax
              interest expense of $99 million, $105 million and $106 million in
              1999, 1998 and 1997, respectively.
       (3)    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.


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

4.     INVESTMENTS

       FIXED MATURITIES

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

<TABLE>
<CAPTION>
       -------------------------------------------------------------------------------------------------------
                                                                                GROSS UNREALIZED
                                                                 AMORTIZED      -----------------         FAIR
       (at December 31, 1999, in millions)                            COST      GAINS      LOSSES        VALUE
       -------------------------------------------------------------------------------------------------------
<S>                                                              <C>            <C>        <C>        <C>
       Mortgage-backed securities -
         CMOs and pass-through securities                        $   3,826      $   26      $  68     $  3,784
       U.S. Treasury securities and obligations
         of U.S. Government and government
         agencies and authorities                                    1,676           6         33        1,649
       Obligations of states, municipalities and
         political subdivisions                                      9,978          72        323        9,727
       Debt securities issued by foreign governments                   853          24          7          870
       All other corporate bonds                                     9,185          57        150        9,092
       Redeemable preferred stock                                      193           1         11          183
       -------------------------------------------------------------------------------------------------------
          Total                                                  $  25,711      $  186      $ 592     $ 25,305
       =======================================================================================================
</TABLE>

<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
       ==========================================================================================================
</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.


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

4.     INVESTMENTS, CONTINUED

<TABLE>
<CAPTION>
       ---------------------------------------------------------------------------------------
                                                                    AMORTIZED             FAIR
       (at December 31, 1999, in millions)                               COST            VALUE
       ---------------------------------------------------------------------------------------
<S>                                                                 <C>              <C>
       Due in one year or less                                      $   1,217        $   1,218
       Due after 1 year through 5 years                                 4,850            4,850
       Due after 5 years through 10 years                               6,085            6,024
       Due after 10 years                                               9,733            9,429
       ---------------------------------------------------------------------------------------
                                                                       21,885           21,521
       Mortgage-backed securities                                       3,826            3,784
       ---------------------------------------------------------------------------------------
          Total                                                     $  25,711        $  25,305
       =======================================================================================
</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, 1999 and 1998, the Company held CMOs classified as
       available for sale with a fair value of $2.3 billion. Approximately 66%
       and 69% of the Company's CMO holdings are fully collateralized by GNMA,
       FNMA or FHLMC securities at December 31, 1999 and 1998, respectively. In
       addition, the Company held $1.4 billion and $2.1 billion of GNMA, FNMA or
       FHLMC mortgage-backed pass-through securities classified as available for
       sale at December 31, 1999 and 1998, 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 generally 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 14.
       The Company had $563 million and $1.0 billion of loaned securities
       outstanding at December 31, 1999 and 1998, 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 $10.0 billion, $8.5 billion and $10.0 billion in 1999, 1998 and
       1997, respectively. Gross gains of $193 million, $210 million and $172
       million and gross losses of $182 million, $93 million and $94 million,
       respectively, were realized on those sales.


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

4.     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, 1999, in millions)                  COST            GAINS       LOSSES          VALUE
       ------------------------------------------------------------------------------------------------------
<S>                                                     <C>                <C>          <C>          <C>
       Common stocks                                    $    364           $  127        $   5       $    486
       Nonredeemable preferred stocks                        802               13           40            775
       ------------------------------------------------------------------------------------------------------
         Total                                          $  1,166           $  140        $  45       $  1,261
       ======================================================================================================
       (at December 31, 1998, in millions)
       ------------------------------------------------------------------------------------------------------
       Common stocks                                    $    164           $   20        $  10       $    174
       Nonredeemable preferred stocks                        632               30            8            654
       ------------------------------------------------------------------------------------------------------
         Total                                          $    796           $   50        $  18       $    828
       ======================================================================================================
</TABLE>

       Proceeds from sales of equity securities were $873 million, $580 million
       and $504 million in 1999, 1998 and 1997, respectively, resulting in gross
       realized gains of $70 million, $74 million and $78 million and gross
       realized losses of $45 million, $60 million and $55 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, 1999 and 1998.

       Aggregate annual maturities on mortgage loans include $6 million which
       are past maturity and $158 million, $40 million, $4 million, $31 million,
       $26 million and $199 million for 2000, 2001, 2002, 2003, 2004 and 2005
       and thereafter, respectively.

       CONCENTRATIONS

       At December 31, 1999 and 1998, the Company had concentrations of credit
       risk in tax-exempt investments of the State of Texas of $1.4 billion and
       in the State of New York of $1.3 billion and $1.5 billion, respectively.

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

       Included in fixed maturities are below investment grade assets totaling
       $1.5 billion and $1.2 billion at December 31, 1999 and 1998,
       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.


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

4.     INVESTMENTS, CONTINUED

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

       NET INVESTMENT INCOME

<TABLE>
<CAPTION>
       --------------------------------------------------------------------------------------------------------------
       (for the year ended December 31, in millions)                           1999             1998             1997
       --------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>              <C>              <C>
       Gross investment income:
         Fixed maturities                                                  $  1,699         $  1,736         $  1,695
         Mortgage loans                                                          68               90              103
         Other                                                                  384              323              324
       --------------------------------------------------------------------------------------------------------------
                                                                              2,151            2,149            2,122
       Investment expenses                                                       59               49               71
       --------------------------------------------------------------------------------------------------------------
       Net investment income                                               $  2,092         $  2,100         $  2,051
       ==============================================================================================================
</TABLE>

       REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES)

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

<TABLE>
<CAPTION>
       -------------------------------------------------------------------------------------------------------------
       (for the year ended December 31, in millions)                              1999           1998           1997
       -------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>            <C>            <C>
       REALIZED
       Fixed maturities                                                         $   11         $  117         $   78
       Equity securities                                                            25             14             23
       Mortgage loans                                                               29              9             20
       Real estate held for sale                                                    50              1             18
       Other                                                                        (3)             2             30
       -------------------------------------------------------------------------------------------------------------
       Realized investment gains                                                $  112         $  143         $  169
       =============================================================================================================
</TABLE>


       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)                                 1999           1998           1997
       ----------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>               <C>            <C>
       UNREALIZED
       Fixed maturities                                                         $  (1,803)        $  336         $  667
       Equity securities                                                               63            (28)            37
       Other                                                                            -              -            (30)
       ----------------------------------------------------------------------------------------------------------------
                                                                                   (1,740)           308            674
       Related taxes                                                                 (609)           108            237
       ----------------------------------------------------------------------------------------------------------------
       Change in unrealized gains (losses) on investment securities                (1,131)           200            437
       Balance, beginning of year                                                     929            729            292
       ----------------------------------------------------------------------------------------------------------------
       Balance, end of year                                                     $    (202)        $  929         $  729
       ================================================================================================================
</TABLE>




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

5.     REINSURANCE

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

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

       In connection with the 1992 sale of American Re-Insurance Company (Am
       Re), a reinsurance agreement was entered into 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, the Company has
       an 80% participation in payments on those losses up to a maximum payment
       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.




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

5.     REINSURANCE, CONTINUED

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

<TABLE>
<CAPTION>
        -------------------------------------------------------------------------------------------------------------------
        (for the year ended December 31, in millions)                               1999              1998             1997
        -------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>              <C>               <C>
        WRITTEN PREMIUMS
        Direct                                                                  $  9,056         $   9,059         $  8,862
        Assumed from:
         Affiliated companies                                                        208               243              264
         Non-affiliated companies                                                    519               523              421
        Ceded to:
         Affiliated companies                                                        (42)              (43)             (54)
         Non-affiliated companies                                                 (1,528)           (1,678)          (1,661)
        -------------------------------------------------------------------------------------------------------------------
        Total net written premiums                                              $  8,213         $   8,104         $  7,832
        ===================================================================================================================
        EARNED PREMIUMS
        Direct                                                                  $  8,869         $   8,751         $  8,250
        Assumed from:
         Affiliated companies                                                        194               238              305
         Non-affiliated companies                                                    538               503              429
        Ceded to:
         Affiliated companies                                                        (43)              (33)             (50)
         Non-affiliated companies                                                 (1,549)           (1,663)          (1,709)
        -------------------------------------------------------------------------------------------------------------------
        Total net earned premiums                                               $  8,009         $   7,796         $  7,225
        ===================================================================================================================
        Percentage of amount assumed to net earned                                   9.1%              9.5%            10.2%
        -------------------------------------------------------------------------------------------------------------------
        Ceded claims incurred                                                   $  1,500         $   1,312         $  1,082
        -------------------------------------------------------------------------------------------------------------------
</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)                                     1999             1998
       ----------------------------------------------------------------------------------------
<S>                                                                  <C>               <C>
       REINSURANCE RECOVERABLES
       Property-casualty business:
         Pools and associations                                      $   2,781         $  3,070
         Non-affiliated companies                                        5,695            5,118
         Affiliated companies                                              799              787

       Accident and health business:
         Affiliated companies                                              149              178
       ----------------------------------------------------------------------------------------
       Total reinsurance recoverables                                $   9,424         $  9,153
       ========================================================================================
</TABLE>



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

5.     REINSURANCE, CONTINUED

       In 1996, Lloyd's of London (Lloyd's) restructured its operations with
       respect to claims for years prior to 1993 and reinsured these into
       Equitas Limited (Equitas). Amounts recoverable from unaffiliated insurers
       at December 31, 1999 and 1998 include $304 million and $310 million,
       respectively, recoverable from Equitas. The outcome of the restructuring
       of Lloyd's is uncertain and the impact, if any, on collectibility of
       amounts recoverable by the Company from Equitas 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
       appropriately stated.

6.     INSURANCE CLAIMS RESERVES

       Claims and claim adjustment expense reserves were as follows:

<TABLE>
<CAPTION>
       -------------------------------------------------------------------------------------------------
       (at December 31, in millions)                                               1999             1998
       -------------------------------------------------------------------------------------------------
<S>                                                                           <C>              <C>
       Claims and claim adjustment expense reserves:
         Property-casualty                                                    $  28,854        $  29,411
         Accident and health                                                        149              178
       -------------------------------------------------------------------------------------------------
         Total                                                                $  29,003        $  29,589
       =================================================================================================
</TABLE>



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

6.     INSURANCE CLAIMS RESERVES, CONTINUED

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

<TABLE>
<CAPTION>
       ------------------------------------------------------------------------------------------------------------------
       (for the year ended December 31, in millions)                                    1999          1998           1997
       ------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>           <C>            <C>
       Claims and claim adjustment expense
         reserves at beginning of year                                             $  29,411     $  30,138      $  30,969
       Less reinsurance recoverables on unpaid losses                                  8,648         8,732          9,153
       ------------------------------------------------------------------------------------------------------------------
       Net balance at beginning of year                                               20,763        21,406         21,816
       ------------------------------------------------------------------------------------------------------------------
       Provision for claims and claim adjustment expenses
         for claims arising in the current year                                        6,194         6,057          5,730
       Estimated claims and claim adjustment expenses for
          claims arising in prior years                                                 (242)         (323)          (492)
       ------------------------------------------------------------------------------------------------------------------

           Total increases                                                             5,952         5,734          5,238
       ------------------------------------------------------------------------------------------------------------------
       Claims and claim adjustment expense payments for claims arising in:
         Current year                                                                  2,573         2,352          1,944
         Prior years                                                                   4,159         4,025          3,704
       ------------------------------------------------------------------------------------------------------------------
           Total payments                                                              6,732         6,377          5,648
       ------------------------------------------------------------------------------------------------------------------
       Net balance at end of year                                                     19,983        20,763         21,406
       Plus reinsurance recoverables on unpaid losses                                  8,871         8,648          8,732
       ------------------------------------------------------------------------------------------------------------------
       Claims and claim adjustment expense
         reserves at end of year                                                   $  28,854     $  29,411      $  30,138
       ==================================================================================================================
</TABLE>

        The decreases in the claims and claim adjustment expense reserves in
        1999 and 1998, from 1998 and 1997, respectively, were primarily
        attributable to net payments of $504 million and $663 million,
        respectively, for environmental and cumulative injury claims.

        In 1999, estimated claims and claim adjustment expenses for claims
        arising in prior years included approximately $205 million primarily
        relating to net favorable development in certain Personal Lines
        coverages, predominantly automobile coverages, and in certain Commercial
        Lines coverages, predominantly in the general liability and commercial
        multi-peril lines of business. In addition, in 1999 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 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.


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

6.     INSURANCE CLAIMS RESERVES, CONTINUED

       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.

       The claims and claim adjustment expense reserves included $1.5 billion
       and $1.8 billion for asbestos and environmental-related claims net of
       reinsurance at December 31, 1999 and 1998, 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.

       As a result of these processes and procedures, the reserves carried for
       environmental and asbestos claims at December 31, 1999 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.


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

7.     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, 1999, this requirement was exceeded by approximately $4.8
       billion. In addition, the Credit Facility places restrictions on the
       amount of consolidated debt TAP can incur. At December 31, 1999, 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, 1999, 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.

       On each of September 1, 1999 and October 1, 1999, TAP repaid $200 million
       for its 6-3/4% note and 6-1/4% note, respectively, which matured on those
       dates. Long-term debt outstanding at December 31, 1999 and 1998 was as
       follows:

<TABLE>
<CAPTION>
       -----------------------------------------------------------------
       (in millions)                                 1999           1998
       -----------------------------------------------------------------
<S>                                                <C>          <C>
       6-3/4% Notes due 1999                       $    -       $    200
       6-1/4% Notes due 1999                            -            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
       -----------------------------------------------------------------
         Total                                     $  850       $  1,250
       =================================================================
</TABLE>



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

8.     FEDERAL INCOME TAXES
<TABLE>
<CAPTION>
       --------------------------------------------------------------------------------------------------------------------
       (for the year ended December 31, in millions)                                1999             1998             1997
       --------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>              <C>              <C>
       EFFECTIVE TAX RATE
       Income before federal income taxes and cumulative effect
          of changes in accounting principles                                   $  1,915         $  1,837         $  1,752
       Statutory tax rate                                                             35%              35%              35%
       --------------------------------------------------------------------------------------------------------------------
       Expected federal income taxes                                                 670              643              613
       Tax effect of:
         Nontaxable investment income                                               (168)            (154)            (108)
         Other, net                                                                    4                5               11
       --------------------------------------------------------------------------------------------------------------------
       Federal income taxes                                                     $    506         $    494         $    516
       ====================================================================================================================
       Effective tax rate                                                             26%              27%              29%
       --------------------------------------------------------------------------------------------------------------------
       COMPOSITION OF FEDERAL INCOME TAXES
         Current expense:
         United States                                                          $    278         $    386         $    413
         Foreign                                                                       9                8                9
       --------------------------------------------------------------------------------------------------------------------
           Total                                                                     287              394              422
       --------------------------------------------------------------------------------------------------------------------
       Deferred expense:
         United States                                                               219              100               94
       --------------------------------------------------------------------------------------------------------------------
       Federal income tax expense                                               $    506         $    494         $    516
       ====================================================================================================================
</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)                                                1999             1998
       --------------------------------------------------------------------------------------------------
<S>                                                                             <C>              <C>
       Deferred tax assets:
         Claims and claim adjustment expense reserves                           $  1,027         $  1,154
         Unearned premium reserves                                                   222              206
         Employee benefits                                                           135              108
         Insurance-related assessments                                                98                -
         Investments                                                                  89                -
         Acquisition-related reserves                                                 45              117
         Other                                                                       164              178
       --------------------------------------------------------------------------------------------------
           Total                                                                   1,780            1,763
       --------------------------------------------------------------------------------------------------
       Deferred tax liabilities:
         Deferred acquisition costs                                                  184              181
         Investments                                                                   -              429
         Other                                                                        44               44
       --------------------------------------------------------------------------------------------------
           Total                                                                     228              654
       --------------------------------------------------------------------------------------------------
       Net deferred tax asset                                                   $  1,552         $  1,109
       ===================================================================================================
</TABLE>


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

8.     FEDERAL INCOME TAXES, CONTINUED

       The Company is a member of a subgroup of companies comprised of TIGI and
       its non-life insurance subsidiaries. This subgroup is included in the
       consolidated federal income tax return filed by 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 $1.6 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 of approximately $12.0
       billion on average over the last three years and has generated federal
       taxable income exceeding $8.0 billion on average each year during this
       same period.

9.     STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY

       MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUSTS

       The Company formed statutory business trusts under the laws of the state
       of Delaware, which exist 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 (Junior 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 financial structure of each of the Company's subsidiary
       trusts at December 31, 1999 and 1998 was as follows:


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

9.     STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, CONTINUED

<TABLE>
<CAPTION>
       ------------------------------------------------------------------------------------------------------
                                                                        TRAVELERS P&C           TRAVELERS P&C
                                                                            CAPITAL I              CAPITAL II
       ------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                      <C>
       TRUST SECURITIES (TAP SECURITIES)
       Issuance date                                                        April 1996               May 1996
       Securities issued                                                    32,000,000              4,000,000
       Liquidation preference per security                                      $   25                 $   25
       Liquidation value (in millions)                                          $  800                 $  100
       Coupon rate                                                                8.08%                  8.00%
       Distributions payable                                                 Quarterly              Quarterly
       Distributions guaranteed by (1)                                             TAP                    TAP
       Common shares issued to parent                                          989,720                123,720
       ------------------------------------------------------------------------------------------------------
       JUNIOR SUBORDINATED DEBENTURES (TAP DEBENTURES)
       Amount owned (in millions)                                               $  825                 $  103
       Coupon rate                                                                8.08%                  8.00%
       Interest payable                                                      Quarterly              Quarterly
       Maturity date                                                    April 30, 2036           May 15, 2036
       Redeemable by issuer on or after                                 April 30, 2001           May 15, 2001
       ------------------------------------------------------------------------------------------------------
</TABLE>

       (1)    Under the arrangements, taken as a whole, payments due are fully
              and unconditionally guaranteed on a subordinated basis.

       Travelers P&C Capital I and Travelers P&C Capital II will use the
       proceeds from any redemption of TAP Securities to redeem a like amount of
       TAP Debentures.

       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 Services, Inc., 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.


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

9.     STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, CONTINUED

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

       On January 18, 2000, January 19, 1999 and January 28, 1998, the Company,
       through the Travelers Property Casualty Corp. Capital Accumulation Plan
       (TAP CAP), reissued 467,207, 476,431 and 763,654 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 2000, 1999 and 1998 restricted stock awards was
       $36.49, $31.88 and $43.71, 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 $22 million, $12
       million and $7 million for the years ended December 31, 1999, 1998 and
       1997, respectively. At December 31, 1999, 5,844,149 shares were available
       for future grants under all existing plans of TAP, including, but not
       limited to, the restricted stock plan.

       On August 12, 1998, TAP's Board of Directors authorized a $150 million
       repurchase program, which was completed in October of 1999. On October 6,
       1999, TAP's Board of Directors authorized the expenditure of up to $200
       million for the repurchase of its Class A Common Stock. The repurchases
       have been 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, 1999, TAP had repurchased $81
       million of its common stock pursuant to the current repurchase plan.

       CLASS B
       TIGI owns all of the outstanding shares of Class B Common Stock
       representing 84.7% of the economic interest in TAP at December 31, 1999.
       Class B holders are entitled to 10 votes per share on any matter
       submitted to vote of the TAP stockholders.

       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 $1.2 billion in 2000 without prior approval
       of the Connecticut Insurance Department.


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

9.     STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, CONTINUED

       STATUTORY NET INCOME AND SURPLUS

       Statutory net income of TAP's insurance subsidiaries was $1.4 billion,
       $1.4 billion and $1.1 billion for the years ended December 31, 1999, 1998
       and 1997, respectively. Statutory capital and surplus of TAP's insurance
       subsidiaries was $7.7 billion and $7.1 billion at December 31, 1999 and
       1998, respectively.

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

       Changes in each component of Accumulated Other Changes in Equity from
       Nonowner Sources were as follows:

<TABLE>
<CAPTION>
        ---------------------------------------------------------------------------------------------
                                                                  NET                     ACCUMULATED
                                                           UNREALIZED                           OTHER
                                                                GAINS        FOREIGN       CHANGES IN
                                                          (LOSSES) ON       CURRENCY      EQUITY FROM
        (for the year ended                                INVESTMENT    TRANSLATION         NONOWNER
        December 31, in millions)                          SECURITIES     ADJUSTMENT          SOURCES
        ---------------------------------------------------------------------------------------------
<S>                                                       <C>            <C>              <C>
        BALANCE, JANUARY 1, 1997                              $   292          $  (7)         $   285
        Net unrealized gains on investment
           securities, net of tax of $272                         503              -              503
        Less: Reclassification adjustment for gains
           included in net income, net of tax of ($35)            (66)             -              (66)
        ---------------------------------------------------------------------------------------------
        Current period change                                     437              -              437
        ---------------------------------------------------------------------------------------------
        BALANCE, DECEMBER 31, 1997                                729             (7)             722
        Net unrealized gains on investment
           securities, net of tax of $154                         285              -              285
        Less: Reclassification adjustment for gains
           included in net income, net of tax of ($46)            (85)             -              (85)
        Foreign currency translation adjustment,
          net of tax of $0                                         -              (1)              (1)
        ---------------------------------------------------------------------------------------------
        Current period change                                     200             (1)             199
        ---------------------------------------------------------------------------------------------
        BALANCE, DECEMBER 31, 1998                                929             (8)             921
        Net unrealized losses on investment
           securities, net of tax of  ($596)                   (1,108)             -           (1,108)
        Less: Reclassification adjustment for gains
           included in net income, net of tax of  ($13)           (23)             -              (23)
        Foreign currency translation adjustment,
           net of tax of $3                                        -               8                8
        ---------------------------------------------------------------------------------------------
        Current period change                                  (1,131)             8           (1,123)
        ---------------------------------------------------------------------------------------------
        BALANCE, DECEMBER 31, 1999                            $  (202)         $   -          $  (202)
        =============================================================================================
</TABLE>



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

10.    BENEFIT PLANS

       PENSION AND OTHER POSTRETIREMENT BENEFITS

       The Company participates in a qualified, noncontributory defined benefit
       pension plan sponsored by an affiliate. In addition, the Company provides
       certain other postretirement benefits to retired employees through a plan
       sponsored by an affiliate. The Company's share of net expense for the
       qualified pension and other postretirement benefit plans was $30 million,
       $31 million and $26 million for 1999, 1998 and 1997, respectively.

       401(k) SAVINGS PLAN

       Substantially all employees of the Company are eligible to participate in
       a 401(k) savings plan sponsored by Citigroup. There are no Company
       matching contributions for substantially all employees.


11.    LEASES

       Most leasing functions for TIGI and its subsidiaries are administered by
       the Company. See note 14. 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 $112 million, $106 million and $118
       million in 1999, 1998 and 1997, respectively.

       Future minimum annual rentals under noncancellable operating leases are
       $99 million, $81 million, $56 million, $35 million, $16 million and $88
       million for 2000, 2001, 2002, 2003, 2004 and 2005 and thereafter,
       respectively. Future sublease rental income of approximately $47 million
       will partially offset these commitments.

12.    DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

       DERIVATIVE FINANCIAL INSTRUMENTS

       The Company uses derivative financial instruments, including interest
       rate swaps, interest rate futures, options and forward contracts, as a
       means of hedging exposure to foreign currency, equity price changes
       and/or interest rate risk on anticipated transactions or existing assets
       and liabilities. The Company does not hold or issue derivative
       instruments for trading purposes.

       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, interest rate swaps and
       currency swaps, credit risk is limited to the amount that it would cost
       the Company to replace the contract. The Company is a writer of option
       contracts and as such has no credit risk since the counterparty has no
       performance obligation after it has paid a 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.


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

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


       The off-balance-sheet risk of interest rate swaps, currency swaps,
       options and forward contracts was not significant at December 31, 1999
       and 1998.

       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, 1999 and 1998, investments in fixed maturities had a fair
       value, which equaled carrying value, of $25.3 billion and $28.0 billion,
       respectively. The fair value of investments in fixed maturities for which
       a quoted market price or dealer quote are not available was $949 million
       and $1.2 billion at December 31, 1999 and 1998, respectively. The
       carrying values of cash, short-term securities, mortgage loans and
       investment income accrued approximated their fair values. See notes 1 and
       4.

       At December 31, 1999 and 1998, the carrying value of $850 million and
       $1.3 billion, respectively, of long-term debt approximated its fair
       value. Fair value is based upon bid price at December 31, 1999 and 1998.
       At December 31, 1999, the TAP Debentures had a carrying value and a fair
       value of $900 million and $814 million, respectively, and at December 31,
       1998, the carrying value of $900 million approximated their fair value.
       Fair value is based upon the closing price at December 31, 1999 and 1998.

       The carrying values of $1.7 billion and $1.4 billion of financial
       instruments classified as other assets approximated their fair values at
       December 31, 1999 and 1998, respectively. The carrying values of $3.4
       billion and $3.5 billion of financial instruments classified as other
       liabilities at December 31, 1999 and 1998, respectively, also
       approximated their fair values. Fair value is determined using various
       methods including discounted cash flows, as appropriate for the various
       financial instruments.

13.    COMMITMENTS AND CONTINGENCIES

       FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

       See note 12 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 and
       limited liability corporations. The off-balance-sheet risks of these
       financial instruments were not significant at December 31, 1999 and 1998.


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

13.    COMMITMENTS AND CONTINGENCIES, CONTINUED

       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,
       1999, the Company believes, based on information currently available,
       that the ultimate resolution of these legal proceedings would not be
       likely to have a material adverse effect on its results of operations,
       financial condition or liquidity.

14.    RELATED PARTY TRANSACTIONS

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

       An affiliate maintains a short-term investment pool in which the Company
       participates. The positions of each company participating in the pool are
       calculated and adjusted daily. At December 31, 1999 and 1998, the pool
       totaled approximately $2.6 billion and $2.3 billion, respectively. The
       Company's share of the pool amounted to $1.3 billion and $1.4 billion at
       December 31, 1999 and 1998, respectively, and is included in short-term
       securities in the consolidated balance sheet.



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

14.    RELATED PARTY TRANSACTIONS, CONTINUED

       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>
       1999
       Net income, as reported                                                $  1,276       $   3.27
       FAS 123 pro forma adjustments, after tax                                    (37)         (0.09)
       ----------------------------------------------------------------------------------------------
       Net income, pro forma                                                  $  1,239       $   3.18
       ==============================================================================================
       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
       ==============================================================================================
</TABLE>

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

<TABLE>
<CAPTION>
       -------------------------------------------------------------------------------------------------
                                                                       1999           1998          1997
       -------------------------------------------------------------------------------------------------
<S>                                                                 <C>            <C>           <C>
       Expected volatility of Citigroup stock                          44.1%          37.1%         31.5%
       Risk-free interest rate                                         5.29%          4.70%         5.83%
       Expected annual dividends per Citigroup share                $  0.63        $  0.43       $  0.31
       Expected annual forfeiture rate                                   5%              5%            5%
       =================================================================================================
</TABLE>


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

14.    RELATED PARTY TRANSACTIONS, CONTINUED

       At December 31, 1999, the Company had $102 million of securities pledged
       as collateral to Citibank to support a letter of credit facility for
       certain of the Company's surety customers. There were no securities
       pledged to Citibank at December 31, 1998.

       Most leasing functions for TIGI and its subsidiaries are administered by
       the Company. See note 11. The Company leases furniture and equipment from
       subsidiaries of TIGI. The rental expense charged to the Company for this
       furniture and equipment was $28 million, $42 million and $48 million in
       1999, 1998 and 1997, 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 5.

       The Company purchases annuities from affiliates to settle certain claims.
       Reinsurance recoverables at December 31, 1999 and 1998 included $799
       million and $787 million, respectively, related to these annuities.

15.    NONCASH FINANCING AND INVESTING ACTIVITIES

       There were no significant noncash financing or investing activities for
       the years ended December 31, 1999, 1998 or 1997.


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

16.    SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
       ----------------------------------------------------------------------------------------------------------------------------
                                                             FIRST         SECOND         THIRD        FOURTH
       1999 (in millions, except per share amounts)        QUARTER        QUARTER       QUARTER       QUARTER            TOTAL
       ----------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>            <C>           <C>           <C>             <C>
       Total revenues                                      $ 2,573        $ 2,634       $ 2,619       $ 2,746         $ 10,572
       Total expenses                                        2,122          2,154         2,189         2,192            8,657
       ----------------------------------------------------------------------------------------------------------------------------
       Income before federal income taxes
         and cumulative effect of changes
         in accounting principles                              451            480           430           554            1,915
       Federal income tax expense                              117            126           110           153              506
       ----------------------------------------------------------------------------------------------------------------------------
       Income before cumulative effect of changes
         in accounting principles                              334            354           320           401            1,409
       Cumulative effect of change in accounting
         for insurance-related assessments, net of tax        (160)             -             -             -             (160)
       Cumulative effect of change in accounting
         for insurance and reinsurance contracts
         that do not transfer insurance risk, net of tax        27              -             -             -               27
       ----------------------------------------------------------------------------------------------------------------------------

       Net income                                          $   201        $   354       $   320       $   401         $  1,276
       ============================================================================================================================
       Basic Earnings per Share
       Income before cumulative effect of changes
         in accounting principles                          $  0.85        $  0.91       $  0.82       $  1.04         $   3.62
       Cumulative effect of changes in
         accounting principles                               (0.34)             -             -             -            (0.34)
       ----------------------------------------------------------------------------------------------------------------------------

       Net income                                          $  0.51        $  0.91       $  0.82       $  1.04         $   3.28
       ============================================================================================================================
       Diluted Earnings per Share
       Income before cumulative effect of changes
         in accounting principles                          $  0.85        $  0.91       $  0.82       $  1.03         $   3.61
       Cumulative effect of changes in
         accounting principles                               (0.34)             -             -             -            (0.34)
       ----------------------------------------------------------------------------------------------------------------------------

       Net income                                          $  0.51        $  0.91       $  0.82       $  1.03         $   3.27
       ============================================================================================================================
       Common stock price
         High                                              $    38 1/2    $    41 3/8   $    41 7/8   $    38 7/8     $     41 7/8
         Low                                               $    28 3/16   $    33 3/8   $    28 3/4   $    27 11/16   $     27 11/16
         Close                                             $    35 3/4    $    39 1/8   $    29 1/2   $    34 1/4     $     34 1/4
       Dividends per share of common stock                 $ 0.125        $ 0.125       $ 0.125       $ 0.125         $  0.500
       ----------------------------------------------------------------------------------------------------------------------------
</TABLE>




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

16.    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
       ========================================================================================================================
       Basic Earnings per Share                        $  0.88        $  0.80       $  0.80         $  0.94       $   3.43
       Diluted Earnings per Share                      $  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>

       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.


                                       61
<PAGE>   62
                          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, 1999 and 1998, 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,
1999. 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, 1999 and 1998, 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, 1999, in
conformity with generally accepted accounting principles.

As discussed in note 1 to the consolidated financial statements, in 1999 the
Company changed its methods of accounting for insurance and reinsurance
contracts that do not transfer insurance risk and its accounting for
insurance-related assessments.


/s/ KPMG LLP


Hartford, Connecticut
January 18, 2000




                                       62