##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003


or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______to ______




---

Commission file number 001-31266



---

Travelers Property Casualty Corp.

(Exact name of registrant as specified in its charter)


|                                                                           |  |                                                
|-------------------------------------------------------------------------- |  | -----------------------------------------------
|Connecticut
(State or other jurisdiction of incorporation
or organization) |  | 06-1008174
(I.R.S. Employer Identification No.)

One Tower Square, Hartford, Connecticut 06183
(Address of principal executive offices) (Zip Code)(860) 277-0111
(Registrants telephone number, including area code)



---

Securities registered pursuant to Section 12(b) of the Act:

|                                                                                                                                                  |  |                                                                        
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------
|Title of each class                                                                                                                               |  | Name of each exchange on which registered                              
|                                                                                                                                                  |  |                                                                        
|                                                                                                                                                  |  |                                                                        
|Class A Common Stock, par value $.01 per share
Class B Common Stock, par value $.01 per share
4.5% Convertible Junior Subordinated Notes due 2032 |  | New York Stock Exchange
New York Stock Exchange
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  x  No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. x

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes  x  No  o

As of June 30, 2003 the aggregate market value of the registrants voting and
non-voting common equity held by non-affiliates was $15,918,126,490 (this
amount reflects 505,543,985 shares of class A common stock then held by
non-affiliates; and 499,681,492 shares of class B common stock then held by
non-affiliates.)

As of February 20, 2004, 508,673,940 shares of the registrants class A common
stock, par value $.01 per share, and 499,763,693 shares of the registrants
class B common stock, par value $.01 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.





---

TABLE OF CONTENTS



|                                                         |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                  
|                                                         | Item 1. BUSINESS                                                                             
|                                                         | Item 2. PROPERTIES                                                                           
|                                                         | Item 3. LEGAL PROCEEDINGS                                                                    
|                                                         | Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II                                                 
|                                                         | Item 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS                
|                                                         | Item 6. SELECTED FINANCIAL DATA                                                              
|                                                         | Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                         | Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|                                                         | Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                                                         | Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|                                                         | Item 9A. CONTROLS AND PROCEDURES                                                             
|PART III                                                
|                                                         | Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                                                         | Item 11. EXECUTIVE COMPENSATION                                                              
|                                                         | Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                                                         | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|                                                         | Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES                                              
|PART IV                                                 
|                                                         | Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                    
|SIGNATURES                                              
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
|EXHIBIT INDEX                                           
|COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS            
|AMENDED & RESTATED EXECUTIVE EMPLOYMENT AGREEMENT       
|STATEMENT OF RATIO OF EARNINGS TO FIXED CHARGES         
|SUBSIDIARIES OF THE COMPANY                             
|CONSENT OF KPMG LLP                                     
|SECTION 302 CERTIFICATION OF CEO                        
|SECTION 302 CERTIFICATION OF CFO                        
|SECTION 906 CERTIFICATION OF CEO                        
|SECTION 906 CERTIFICATION OF CFO                        



---



##### Table of Contents



Travelers Property Casualty Corp.

Annual Report on Form 10-K

For Fiscal Year Ended December 31, 2003

TABLE OF CONTENTS

|            |  |                                                                                        |  |  |     |  |  | 
|----------- |  | -------------------------------------------------------------------------------------- |  |  | --- |  |  | 
|Item Number |  | Page                                                                                  
|            |  |                                                                                       
|            |  | Part I                                                                                 |  |  |     | 
|1.          |  | Business                                                                               |  |  | 1   | 
|2.          |  | Properties                                                                             |  |  | 39  | 
|3.          |  | Legal Proceedings                                                                      |  |  | 39  | 
|4.          |  | Submission of Matters to a Vote of Security Holders                                    |  |  | 44  | 
|            |  | Part II                                                                                |  |  |     | 
|5.          |  | Market for Registrants Common Equity and Related Stockholder Matters                  |  |  | 45  | 
|6.          |  | Selected Financial Data                                                                |  |  | 47  | 
|7.          |  | Managements Discussion and Analysis of Financial Conditions and Results of Operations |  |  | 49  | 
|7A.         |  | Quantitative and Qualitative Disclosures About Market Risk                             |  |  | 96  | 
|8.          |  | Financial Statements and Supplementary Data                                            |  |  | 98  | 
|9.          |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   |  |  | 168 | 
|9A.         |  | Controls and Procedures                                                                |  |  | 168 | 
|            |  | Part III                                                                               |  |  |     | 
|10.         |  | Directors and Executive Officers of the Registrant                                     |  |  | 168 | 
|11.         |  | Executive Compensation                                                                 |  |  | 174 | 
|12.         |  | Security Ownership of Certain Beneficial Owners and Management                         |  |  | 184 | 
|13.         |  | Certain Relationships and Related Transactions                                         |  |  | 188 | 
|14.         |  | Principal Accounting Fees and Services                                                 |  |  | 192 | 
|            |  | Part IV                                                                                |  |  |     | 
|15.         |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                        |  |  | 193 | 
|            |  | Signatures                                                                             |  |  | 194 | 
|            |  | Index to Consolidated Financial Statements and Schedules                               |  |  | 196 | 
|            |  | Exhibit Index                                                                          |  |  | 204 | 





---



##### Table of Contents






PART I




Item 1. BUSINESS

Travelers Property Casualty Corp. (TPC) is a property casualty insurance
holding company engaged, through its subsidiaries, in two business segments:
Commercial Lines and Personal Lines. Travelers Property Casualty Corp. and its
consolidated subsidiaries (collectively, the Company) provide a wide range of
commercial and personal property and casualty insurance products and services
to businesses, government units, associations and individuals.

TPCs predecessor companies have been in the insurance business for more than
135 years. It is a Connecticut corporation that was formed in 1979 and, prior
to its March 2002 Initial Public Offering (IPO), was an indirect wholly-owned
subsidiary of Citigroup Inc. (together with its consolidated subsidiaries,
Citigroup). In January 1996, Travelers Insurance Group Holdings Inc. (TIGHI)
was formed to hold TPCs property and casualty insurance subsidiaries. In
April 1996, TIGHI purchased from Aetna Services, Inc. (Aetna) all of the
outstanding capital stock of Aetnas significant property and casualty
insurance subsidiaries for approximately $4.200 billion in cash. In April
1996, TIGHI also completed an initial public offering of its common stock. In
April 2000, TPC completed a cash tender offer and merger, as a result of which
TIGHI became its wholly-owned subsidiary. In the tender offer and merger, TPC
acquired all of TIGHIs outstanding shares of common stock which it did not
already own, representing approximately 14.8% of its outstanding common stock,
for approximately $2.413 billion in cash financed by a loan from Citigroup.

On October 1, 2001, the Company completed its acquisition of the Northland
Company and Associates Lloyds Insurance Company (Northland) from Citigroup. On
October 3, 2001, the capital stock of Associates Insurance Company (Associates)
was contributed to the Company by Citigroup. Accordingly, the results of
operations and the assets and liabilities of these companies are included in
the Companys financial statements as of their acquisition dates. On August 1,
2002, Commercial Insurance Resources, Inc. (CIRI), a subsidiary of the Company
and the holding company for the Gulf Insurance Group (Gulf), completed the sale
of a 24% ownership interest, on a fully diluted basis, in CIRI to a group of
outside investors and senior employees of Gulf.

TPC was reorganized in connection with its IPO in March 2002. Pursuant to the
reorganization, which was completed on March 19, 2002, TPCs consolidated
financial statements have been adjusted to exclude the accounts of certain
formerly wholly-owned TPC subsidiaries, principally The Travelers Insurance
Company (TIC) and its subsidiaries (U.S. life insurance operations), certain
other wholly-owned non-insurance subsidiaries of TPC and substantially all of
TPCs assets and certain liabilities not related to the property casualty
business.

On March 21, 2002, TPC issued 231.0 million shares of its class A common stock
in an IPO, representing approximately 23% of TPCs common equity. After the
IPO, Citigroup Inc. beneficially owned all of the 500.0 million shares of TPCs
outstanding class B common stock, each share of which is entitled to seven
votes, and 269.0 million shares of TPCs class A common stock, each share of
which is entitled to one vote, representing at the time 94% of the combined
voting power of all classes of TPCs voting securities and 77% of the equity
interest in TPC. Concurrent with the IPO, TPC issued $892.5 million aggregate
principal amount of 4.5% convertible junior subordinated notes, which mature on
April 15, 2032. The IPO and the offering of the convertible notes are
collectively referred to as the Offerings.

1



---



##### Table of Contents



On August 20, 2002, Citigroup made a tax-free distribution to its stockholders
(the Citigroup Distribution), of a portion of its ownership interest in TPC,
which, together with the shares issued in the IPO, represented more than 90% of
TPCs common equity and more than 90% of the combined voting power of TPCs
outstanding voting securities. For each 100 shares of Citigroup outstanding
common stock, approximately 4.32 shares of TPC class A common stock and 8.88
shares of TPC class B common stock were distributed. At December 31, 2003 and
2002, Citigroup held for their own account 9.87% and 9.95%, respectively, of
TPCs common equity and 9.87% and 9.98%, respectively, of the combined voting
power of TPCs outstanding voting securities. Citigroup received a private
letter ruling from the Internal Revenue Service that the Citigroup Distribution
was tax-free to Citigroup, its stockholders and TPC. As part of the ruling
process, Citigroup agreed to vote the shares it continues to hold following the
Citigroup Distribution pro rata with the shares held by the public and to
divest the remaining shares it holds within five years following the Citigroup
Distribution.

On March 11, 2003, TPC issued $1.4 billion of senior notes comprising $400.0
million of 3.75% senior notes due March 15, 2008, $500.0 million of 5.00%
senior notes due March 15, 2013 and $500.0 million of 6.375% senior notes due
March 15, 2033. The notes pay interest semi-annually on March 15 and September
15 of each year, beginning September 15, 2003, are senior unsecured obligations
and rank equally with all of TPCs other senior unsecured indebtedness. TPC
may redeem some or all of the notes prior to maturity by paying a make-whole
premium based on U.S. Treasury rates. The net proceeds from the sale of these
notes were contributed to its primary subsidiary, TIGHI, so that TIGHI could
prepay and refinance $500.0 million of 3.60% indebtedness to Citigroup and to
redeem $900.0 million aggregate principal amount of TIGHIs 8.00% to 8.08%
junior subordinated debt securities held by subsidiary trusts. These trusts,
in turn, used these funds to redeem $900.0 million of preferred capital
securities on April 9, 2003.

On November 16, 2003, the Company entered into an agreement and plan of merger
(the merger) with The St. Paul Companies, Inc. (St. Paul). The transaction
will be treated as a purchase business combination by the Company of St. Paul
under accounting principles generally accepted in the United States of America.
In this merger, the acquired entity (St. Paul) will issue the equity interests
and this business combination meets the criteria of a reverse acquisition.
Each share of TPCs class A and class B common stock will be exchanged for
0.4334 of a share (the exchange ratio) of St. Paul common stock. The
transaction is subject to customary closing conditions, including the approval
by the shareholders of both companies as well as certain regulatory approvals.
A special shareholder meeting to consider and vote upon the merger has been
scheduled for March 19, 2004. The transaction is expected to close in the
second quarter of 2004.

The principal executive offices of the Company are located at One Tower Square,
Hartford, Connecticut 06183; telephone number (860) 277-0111. This discussion
of the Companys business is organized as follows: (i) a description of each
of the Companys two business segments (Commercial Lines and Personal Lines)
and related services; (ii) a description of Interest Expense and Other; and
(iii) certain other information.1



---

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


2



---



##### Table of Contents



COMMERCIAL LINES

The Companys Commercial Lines segment offers a broad array of property and
casualty insurance and insurance-related services to its clients. Commercial
Lines is organized into the following five marketing and underwriting groups,
each of which focuses on a particular client base or product grouping to
provide products and services that specifically address clients needs:



| |  | National Accounts provides large corporations with casualty products and
services and includes the Companys residual market business which offers
workers compensation products and services to the involuntary market;                                                                                                       
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Commercial Accounts provides property and casualty products to mid-sized
businesses, property products to large businesses and boiler and machinery
products to businesses of all sizes, and includes dedicated groups focused
on the construction industry, transportation industry, agribusiness, and
ocean and inland marine;
| 
| |  | Select Accounts provides small businesses with property and casualty
products, including packaged property and liability policies;                                                                                                                                                                                              
| 
| |  | Bond provides a wide range of customers with specialty products built
around the Companys market leading surety bond business along with an
expanding executive liability practice for middle and small market private
accounts and not-for-profit accounts; and                                                               
| 
| |  | Gulf provides a broad array of specialty coverages to all sizes of
customers with particular emphasis on small and mid-sized accounts.                                                                                                                                                                                          

In 2003, Commercial Lines generated net written premiums of approximately
$8.119 billion.

Selected Product and Market Information

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

Many National Accounts customers require insurance-related services in addition
to or in lieu of pure risk coverage, primarily for workers compensation and,
to a lesser extent, general liability and commercial automobile exposures.
These types of services include risk management services, such as claims
administration, loss control and risk management information services, and are
generally offered in connection with large deductible or self-insured programs.
These services generate fee income rather than net written premiums, which are
not reflected in the accompanying table. Net written premiums were as follows:

3



---



##### Table of Contents



|                                      |                 |      |         |         |  |      |         |         |  |   |         |         |  |            |      |       |  
|------------------------------------- | --------------- | ---- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- |  | ---------- | ---- | ----- | -
|(for the year ended December 31,      |                 |      |         |         |  |      |         |         |  |   |         |         |  | % of Total
|in millions)                          |                 | 2003 |         | 2002    |  | 2001 |         | 2003   
|                                      |                 |      |         |         |  |      |         |        
|Net written premiums by product line: |                 |      |         |         |  |      |         |         |  |   |         |         |  |            |      |      
|Commercial multi-peril                |                 | $    | 2,397.0 |         |  | $    | 2,113.9 |         |  | $ | 1,757.9 |         |  |            | 29.5 | %    
|Workers compensation                 |                 |      | 1,351.5 |         |  |      | 1,135.0 |         |  |   | 1,030.6 |         |  |            | 16.6 |      
|Commercial automobile                 |                 |      | 1,419.1 |         |  |      | 1,454.7 |         |  |   | 914.3   |         |  |            | 17.5 |      
|Property                              |                 |      | 1,175.2 |         |  |      | 1,088.8 |         |  |   | 833.1   |         |  |            | 14.5 |      
|Fidelity and surety                   |                 |      | 610.7   |         |  |      | 541.9   |         |  |   | 506.6   |         |  |            | 7.5  |      
|General liability                     |                 |      | 1,165.9 |         |  |      | 1,035.2 |         |  |   | 695.1   |         |  |            | 14.4 |      
|                                      |                 |      |         |         |  |      |         |         |  |   |         |         |  |            |      |      
|                                      | Total           |      | $       | 8,119.4 |  |      | $       | 7,369.5 |  |   | $       | 5,737.6 |  |            |      | 100.0 | %
|                                      |                 |      |         |         |  |      |         |         |  |   |         |         |  |            |      |      
|Net written premiums by market:       |                 |      |         |         |  |      |         |         |  |   |         |         |  |            |      |      
|National Accounts                     |                 | $    | 902.8   |         |  | $    | 734.6   |         |  | $ | 418.9   |         |  |            | 11.1 | %    
|Commercial Accounts                   |                 |      | 3,725.7 |         |  |      | 3,556.1 |         |  |   | 2,407.1 |         |  |            | 45.9 |      
|Select Accounts                       |                 |      | 2,047.6 |         |  |      | 1,869.5 |         |  |   | 1,713.2 |         |  |            | 25.2 |      
|                                      |                 |      |         |         |  |      |         |         |  |   |         |         |  |            |      |      
|                                      | Total Core      |      |         | 6,676.1 |  |      |         | 6,160.2 |  |   |         | 4,539.2 |  |            |      | 82.2  |  
|Bond                                  |                 |      | 780.5   |         |  |      | 629.9   |         |  |   | 590.2   |         |  |            | 9.6  |      
|Gulf                                  |                 |      | 662.8   |         |  |      | 579.4   |         |  |   | 608.2   |         |  |            | 8.2  |      
|                                      |                 |      |         |         |  |      |         |         |  |   |         |         |  |            |      |      
|                                      | Total Specialty |      |         | 1,443.3 |  |      |         | 1,209.3 |  |   |         | 1,198.4 |  |            |      | 17.8  |  
|                                      |                 |      |         |         |  |      |         |         |  |   |         |         |  |            |      |      
|                                      | Total           |      | $       | 8,119.4 |  |      | $       | 7,369.5 |  |   | $       | 5,737.6 |  |            |      | 100.0 | %
|                                      |                 |      |         |         |  |      |         |         |  |   |         |         |  |            |      |      

Product Lines

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

Commercial Multi-Perilprovides a combination of property and liability
coverage typically for small businesses. Property insurance covers damages
such as those caused by fire, wind, hail, water, theft and vandalism, and
protects businesses from financial loss due to business interruption resulting
from a covered loss. Liability coverage insures businesses against third-party
liability from accidents occurring on their premises or arising out of their
operations, such as injuries sustained from products sold.

Workers Compensationprovides coverage for employers for specified benefits
payable under state or federal law for workplace injuries to employees. There
are typically four types of benefits payable under workers compensation
policies: medical benefits, disability benefits, death benefits and vocational
rehabilitation benefits. The Company emphasizes managed care cost containment
strategies, which involve employers, employees and care providers in a
cooperative effort that focuses on the injured employees early return to work,
cost-effective quality care, and customer service in this market. The Company
offers the following three types of workers compensation products:



| |  |  | guaranteed cost insurance products, in which policy premium charges
are fixed for the period of coverage and do not vary as a result of the
insureds loss experience;                                                                                                                                                                                                                        
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | loss-sensitive insurance products, including large deductible and
retrospectively rated policies, in which fees or premiums are adjusted
based on actual loss experience of the insured during the policy period;
and                                                                                                                                                                         
|
| |  |  | service programs, which are generally sold to the Companys National
Accounts customers, where the Company receives fees rather than premiums
for providing loss prevention, risk management, and claim and benefit
administration services to organizations under service agreements. The
Company also participates in state assigned risk pools as a servicing
carrier and pool participant.

4



---



##### Table of Contents



Commercial Automobileprovides coverage for businesses against losses incurred
from personal bodily injury, bodily injury to third parties, property damage to
an insureds vehicle, and property damage to other vehicles and other property
resulting from the ownership, maintenance or use of automobiles and trucks in a
business.

Propertyprovides coverage for loss or damage to buildings, inventory and
equipment from natural disasters, including hurricanes, windstorms,
earthquakes, hail, and severe winter weather. Also covered are manmade events
such as terrorism, theft, vandalism, fires, explosions, storms, and financial
loss due to business interruption resulting from covered property damage. For
additional information on terrorism, see - Terrorism Risk Insurance Act of
2002. Property also includes specialized equipment insurance, which provides
coverage for loss or damage resulting from the mechanical breakdown of boilers
and machinery, ocean and inland marine, which provides coverage for goods in
transit and unique, one-of-a-kind exposures and miscellaneous assumed
reinsurance.

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

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

Principal Markets and Methods of Distribution

The Company distributes its commercial products through approximately 5,800
brokers and independent agencies located throughout the United States that are
serviced by approximately 80 field offices and two customer service centers.
In recent years, the Company has made significant investments in enhanced
technology utilizing state-of-the-art Internet-based applications to provide
real-time interface capabilities with the Companys independent agencies and
brokers. The Company builds relationships with well-established, independent
insurance agencies and brokers. In selecting new independent agencies and
brokers to distribute the Companys products, the Company considers each
agencys or brokers profitability, financial stability, staff experience and
strategic fit with its operating and marketing plans. Once an agency or broker
is appointed, the Company carefully monitors its performance.

National Accountssells a variety of casualty products and services to large
companies. National Accounts also includes the Companys residual market
business, which primarily offers workers compensation products and services to
the involuntary market. National Accounts clients generally select
loss-sensitive products in connection with a large deductible or self-insured
program and, to a lesser extent, a retrospectively rated or a guaranteed cost
insurance policy. Through a network of field offices, the Companys
underwriting specialists work closely with national and regional brokers to
tailor insurance programs to meet clients needs. Workers compensation
accounted for approximately 76% of sales to National Accounts customers during
2003, based on gross written premiums and fee income. National
Accounts generated $330.7 million of service fee income in 2003,
excluding residual market business discussed below.

5



---



##### Table of Contents



The Companys residual market business sells claims and policy management
services to workers compensation and automobile assigned risk plans and to
self-insurance pools throughout the United States. The Company services
approximately 35% of the total workers compensation assigned risk market. The
Company is one of only two servicing carriers that operate
nationally. Assigned risk plan contracts generated approximately
$197.3 million in service fee income in 2003.

Commercial Accountssells a broad range of property and casualty insurance
products through a large network of independent agents and brokers. Commercial
Accounts casualty products primarily target mid-sized businesses with 75 to
1,000 employees, while its property products target large, mid-sized and small
businesses. The Company offers a full line of products to its Commercial
Accounts customers with an emphasis on guaranteed cost programs.

A key objective of Commercial Accounts is continued focus on first party
product lines of business, which cover risks of loss to property of the
insured. Beyond the traditional middle market network, dedicated units exist to
complement the middle market or specifically respond to the unique or unusual
business client insurance needs. These units are:



| |  |  | Construction - dedicated claim, engineering and underwriting
expertise solely targeting construction risks;               
| | - |  | --------------------------------------------------------------------------------------------------------------------------
|
| |  |  | National property - underwrites large property schedules insuring
buildings, property and business interruption exposures;
|
| |  |  | Transportation - auto products tailored to the trucking industry distributed via general agents;                          
|
| |  |  | Boiler and machinery - comprehensive breakdown coverages for equipment;                                                   
|
| |  |  | Marine - inland and ocean coverages for mid-sized to large accounts;                                                      
|
| |  |  | Agribusiness - insurance programs for small to mid-sized farmowners,
ranchowners and commercial growers;                  
|
| |  |  | Specialty excess and surplus - products sold through general agents
targeting small commercial risks; and                 
|
| |  |  | Affinity - programs sold to association, franchise, trade or affinity
groups.                                             

Select Accountsis one of the leading providers of property casualty products
to small businesses. It generally serves firms with one to 75 employees.
Products offered by Select Accounts are guaranteed cost policies, often a
packaged product covering property and liability exposures. Products are sold
through independent agents, who are often the same agents that sell the
Companys Commercial Accounts and Personal Lines products.

6



---



##### Table of Contents



The Company offers its independent agents a small business system that helps
them connect all aspects of sales and service through a comprehensive service
platform. Components of the platform include agency automation capabilities
and a state-of-the-art service center that functions as an extension of an
agencys customer service operations, both of which are highly utilized by
agencies. More than 87% of Select Accounts eligible business volume is
processed by 4,500 agencies using its Issue Express systems, which allow agents
to quote and issue policies from agency offices. Approximately 2,800 agencies
have chosen to take advantage of Select Accounts service center, which offers
agencies a wide range of services, from coverage and billing inquiries to
policy changes; the assistance of licensed service professionals; and extended
hours of operations. Select Accounts is an industry leader in its array of
agency automation solutions. The Company provides its agents with a wide
selection of online service capabilities, including customer service, marketing
and claim functionality. For example, online e-Bill services allow customers
to pay bills and view billing history online. These e-services are easily
accessible in real-time via a robust agent Web site.

Personnel in the Companys field offices and other points of local service,
which are located throughout the United States, work closely with agents to
ensure a strong local presence in the marketplace. Select Accounts has also
established strict underwriting guidelines integrated with the Companys local
field office structures. The agents either submit applications to the
Companys field underwriting locations or service centers for underwriting
review, quote, and issuance or they utilize one of the Companys automated
quote and issue systems. Automated transactions are edited by the Companys
systems and issued only if they conform to established underwriting guidelines.
Exceptions are reviewed by the Companys underwriters and retrospective agency
audits are conducted on a systematic sampling basis. The Company uses policy
level management information to analyze and understand results and to identify
problems and opportunities.

Bondunderwrites and markets its products to national, mid-sized and small
businesses and organizations as well as individuals, and distributes them
through national, regional and wholesale brokers, and retail agents primarily
throughout the United States. The Company believes that it has a competitive
advantage with respect to many of these products based on Bonds reputation for
timely and consistent decision-making, underwriting, claim-handling abilities,
industry expertise and strong producer and customer relationships founded on a
nationwide network of underwriting, industry and claim experts as well as
Bonds ability to cross-sell its products to customers of both Commercial Lines
and Personal Lines.

Bonds range of products includes fidelity and surety bonds, directors and
officers liability insurance, errors and omissions insurance, professional
liability insurance, employment practices liability insurance, fiduciary
liability insurance, and other related coverages. In addition, the Company
markets packaged products, which combine fidelity, employment practices
liability insurance, directors and officers liability insurance, other
related professional liability insurance and fiduciary liability insurance into
one product with either individual or aggregate limits. Bond is organized into
two broad product line groups: Surety and Executive Liability. Surety is
organized around construction and commercial customers. Executive Liability is
organized around commercial and financial services customers.

Gulfprovides a broad range of specialty coverages including management and
professional liability, excess and surplus lines, environmental, umbrella and
fidelity. Gulf also provides insurance products specifically designed for
financial institutions, the entertainment industry and sports organizations.
Gulfs strategy focuses on identifying market niches where it has specialized
underwriting and claims expertise.

Pricing and Underwriting

Pricing levels for Commercial Lines property and casualty insurance products
are generally developed based upon the frequency and severity of estimated
losses, the expenses of producing business and managing claims, and a
reasonable allowance for profit. The Company has a disciplined approach to
underwriting and risk management that emphasizes a profit-orientation rather
than premium volume or market share.

7



---



##### Table of Contents



The Company has developed an underwriting and pricing methodology that
incorporates underwriting, claims, engineering, actuarial and product
development disciplines for particular industries. This approach is designed
to maintain high quality underwriting and pricing discipline. It utilizes
proprietary data gathered and analyzed by the Company with respect to its
Commercial Lines business over many years. The underwriters and engineers use
this information to assess and evaluate risks prior to quotation. This
information provides specialized knowledge about specific industry segments.
This methodology enables the Company to streamline its risk selection process
and develop pricing parameters that will not compromise the Companys
underwriting integrity.

For smaller businesses, Select Accounts uses a process based on Standard
Industrial Classification codes to allow agents and field underwriting
representatives to make underwriting and pricing decisions within predetermined
classifications, because underwriting criteria and pricing tend to be more
standardized for these smaller exposures.

A significant portion of Commercial Lines business is written with large
deductible insurance policies. Under some workers compensation insurance
contracts with deductible features, the Company is obligated to pay the
claimant the full amount of the claim. The Company is subsequently reimbursed
by the contractholder for the deductible amount, and is subject to credit risk
until such reimbursement is made. At December 31, 2003, contractholder
receivables and payables on unpaid losses associated with large deductible
policies were each approximately $3.121 billion. Retrospectively rated
policies are also used for workers compensation coverage. Although the
retrospectively rated feature of the policy substantially reduces insurance
risk for the Company, it does introduce credit risk to the Company.
Receivables on unpaid losses from holders of retrospectively rated policies
totaled approximately $254.2 million at December 31, 2003. Significant
collateral, primarily letters of credit and, to a lesser extent surety bonds
and cash collateral, is generally requested for large deductible plans and/or
retrospectively rated policies that provide for deferred collection of
deductibles and/or ultimate premiums. The amount of collateral requested is
predicated upon the creditworthiness of the customer and the nature of the
insured risks. Commercial Lines continually monitors the credit exposure on
individual accounts and the adequacy of collateral.

The Company continually monitors its exposure to natural and manmade peril
catastrophic losses and attempts to mitigate such exposure. The Company uses
sophisticated computer modeling techniques to analyze underwriting risks of
business in hurricane-prone, earthquake-prone and target risk areas. The
Company relies upon this analysis to make underwriting decisions designed to
manage its exposure on catastrophe-exposed business. See  Reinsurance.

8



---



##### Table of Contents



Geographic Distribution

The following table shows the distribution of Commercial Lines direct written
premiums for the states that accounted for the majority of premium volume for
the year ended December 31, 2003:

|              |  |       |       |  
|------------- |  | ----- | ----- | -
|              |  | % of 
|State         |  | Total
|              |  |      
|California    |  |       | 11.9  | %
|New York      |  |       | 10.0  |  
|Texas         |  |       | 6.3   |  
|Illinois      |  |       | 5.1   |  
|Massachusetts |  |       | 5.1   |  
|Florida       |  |       | 4.7   |  
|New Jersey    |  |       | 4.2   |  
|Pennsylvania  |  |       | 3.6   |  
|All Others(1) |  |       | 49.1  |  
|              |  |       |       |  
|Total         |  |       | 100.0 | %
|              |  |       |       |  



|(1) |  | No other single state accounted for 3.0% or more of the total direct
written premiums written in 2003 by the Company.
|--- |  | ---------------------------------------------------------------------------------------------------------------------

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, and joint marketing arrangements with other
insurers. In 2003, Personal Lines generated net written premiums of
approximately $5.081 billion.

Selected Product and Distribution Channel Information

The accompanying table sets forth net written premiums for Personal Lines by
product line and distribution channel for the periods indicated. For a
description of the product lines and distribution channels referred to in the
accompanying table, see  Product Lines and  Principal Markets and Methods
of Distribution, respectively. Net written premiums were as follows.

|                                      |       |      |         |         |  |      |         |         |  |   |         |         |  |            |      |       |  
|------------------------------------- | ----- | ---- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- |  | ---------- | ---- | ----- | -
|(for the year ended December 31,      |       |      |         |         |  |      |         |         |  |   |         |         |  | % of Total
|in millions)                          |       | 2003 |         | 2002    |  | 2001 |         | 2003   
|                                      |       |      |         |         |  |      |         |        
|Net written premiums by
product line: |       |      |         |         |  |      |         |         |  |   |         |         |  |            |      |      
|Personal automobile                   |       | $    | 3,053.3 |         |  | $    | 2,842.9 |         |  | $ | 2,590.7 |         |  |            | 60.1 | %    
|Homeowners and other                  |       |      | 2,028.1 |         |  |      | 1,732.1 |         |  |   | 1,517.2 |         |  |            | 39.9 |      
|                                      |       |      |         |         |  |      |         |         |  |   |         |         |  |            |      |      
|                                      | Total |      | $       | 5,081.4 |  |      | $       | 4,575.0 |  |   | $       | 4,107.9 |  |            |      | 100.0 | %
|                                      |       |      |         |         |  |      |         |         |  |   |         |         |  |            |      |      

|                                              |       |   |         |         |  |   |         |         |  |   |         |         |  |  |      |       |  
|--------------------------------------------- | ----- | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- |  |  | ---- | ----- | -
|Net written premiums by
distribution
channel: |       |   |         |         |  |   |         |         |  |   |         |         |  |  |      |      
|Independent agents                            |       | $ | 4,159.2 |         |  | $ | 3,735.6 |         |  | $ | 3,307.9 |         |  |  | 81.9 | %    
|Other                                         |       |   | 922.2   |         |  |   | 839.4   |         |  |   | 800.0   |         |  |  | 18.1 |      
|                                              |       |   |         |         |  |   |         |         |  |   |         |         |  |  |      |      
|                                              | Total |   | $       | 5,081.4 |  |   | $       | 4,575.0 |  |   | $       | 4,107.9 |  |  |      | 100.0 | %
|                                              |       |   |         |         |  |   |         |         |  |   |         |         |  |  |      |      

9



---



##### Table of Contents



Product Lines

The Company writes most types of property and casualty insurance covering
personal risks. Personal Lines had approximately 5.8 million policies in force
at December 31, 2003. The primary coverages in Personal Lines are personal
automobile and homeowners insurance sold to individuals.

Personal Automobileprovides 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 and Otherprovides protection against losses to dwellings and
contents from a wide variety of perils, as well as coverage for liability
arising from ownership or occupancy. The Company writes homeowners insurance
for dwellings, condominiums and rental property contents. The Company also
writes coverage for personal watercraft, personal articles such as jewelry, and
umbrella liability protection.

Principal Markets and Methods of Distribution

The Companys Personal Lines products are distributed primarily through
approximately 7,200 independent agencies located throughout the United States,
supported by personnel in twelve marketing regions, three single
state companies and six business service
centers. In selecting new independent agencies to distribute the Companys
products, the Company considers each agencys profitability, financial
stability, staff experience and strategic fit with the Companys operating and
marketing plans. Once an agency is appointed, the Company carefully monitors
its performance. While the Companys principal markets for Personal Lines
insurance are in states along the East Coast, in the South and Texas, Personal
Lines is expanding its geographical presence across the United States.

The Company uses a consistent
operating model with agents outside of the single state companies. The model provides technological alternatives to agents to maximize their
ease of doing business. Personal Lines agents quote and issue 96% of the
Companys Personal Lines policies directly from their agencies by leveraging
either their own agency management system or using the Companys proprietary
quote and issuance systems which allows agents to rate, quote and issue
policies on line. All of these quote and issue platforms interface with the
Companys underwriting and rating systems, which edit transactions for
compliance with the Companys underwriting and pricing programs. Business
processed by agents on these platforms is subjected to consultative review by
the Companys in-house underwriters. In the past year, the Company continued
to increase use of Internet-based proprietary systems, and agents have
transitioned approximately 94% of the Companys new business to these
platforms. The Company also provides an industry-leading download capability
that refreshes the individual agency system databases of approximately 3,700
agents each day with updated policy information.

The Company continues to develop functionality to provide its agents with a
comprehensive array of online service capabilities packaged together in an
easy-to-use agency service portal, including customer service, marketing and
claim functionality. Agencies can also choose to shift the on-going core
service responsibility for the Companys customers to one of the Companys four
Customer Care Centers, where the Company functions as an extension of an
agencys servicing operation by providing a comprehensive array of direct
customer service needs, including response to billing and coverage inquiries,
and policy changes. Approximate1y 1,000 agents take advantage of this service
alternative.

Personal Lines operates single state companies in Massachusetts, New Jersey and
Florida with products marketed primarily through independent agents. These
states represented 21% of Personal Lines direct written premiums in 2003. The
companies were established to manage complex markets in Massachusetts and New
Jersey and property catastrophe exposure in Florida. Each company has
dedicated resources in underwriting, claim, finance, legal and service
functions. The establishment of these separate companies limits capital at
risk in these markets.

10



---



##### Table of Contents



Personal Lines also markets through additional distribution channels, including
sponsoring organizations such as employers and consumer associations, and joint
marketing arrangements with other insurers. The Company handles the sales and
service for these programs either through a sponsoring independent agent or
through two of the Companys call center locations. The Company is one of the
leading providers of personal lines products to members of affinity groups. A
number of well-known corporations endorse the Companys product offerings to
their employees primarily through a payroll deduction payment process. The
Company has significant relationships with the majority of the American
Automobile Association (AAA) clubs in the United States and other affinity
groups that endorse the Companys tailored offerings to their members. Since
1995, the Company has had a marketing agreement with GEICO to receive referrals
for homeowners business. This agreement has added profitable business and
helped to geographically diversify the homeowners line of business.

Pricing and Underwriting

Pricing levels for Personal Lines property and casualty insurance products are
generally developed based upon the frequency and severity of incurred losses
and loss adjustment expense, the expenses of producing business and a
reasonable allowance for profit and contingencies. The Company has a
disciplined approach to underwriting and risk management that places emphasis
on underwriting profit rather than market share.

The Company has developed a product management methodology that integrates the
disciplines of underwriting, claim, actuarial and product development. This
approach is designed to maintain high quality underwriting discipline and
pricing segmentation. Proprietary data is analyzed with respect to the
Companys Personal Lines business over many years. The Company uses a variety
of proprietary and vendor produced risk differentiation models to facilitate
its pricing segmentation. The Companys Personal Lines product managers
establish strict underwriting guidelines integrated with its filed pricing and
rating plans, which enable the Company to streamline its risk selection and
pricing processes.

Pricing for personal automobile insurance is driven by changes in the frequency
of claims and by inflation in the cost of automobile repairs, medical care and
litigation of liability claims. As a result, the profitability of the business
is largely dependent on promptly identifying and rectifying disparities between
premium levels and projected claim costs, and obtaining approval from state
regulatory authorities when necessary for filed rate changes.

Pricing in the homeowners business is also driven by changes in the frequency
of claims and by inflation in the cost of building supplies, labor and
household possessions. Most homeowners policies offer, but do not require,
automatic increases in coverage to reflect growth in replacement costs and
property values. In addition to the normal risks associated with any multiple
peril coverage, the profitability and pricing of homeowners insurance is
affected by the incidence of natural disasters, particularly hurricanes, winter
storms, wind and hail, water damage, earthquakes and tornadoes. In order to
reduce the Companys exposure to catastrophe losses, the Company has limited
the writing of new homeowners business and selectively non-renewed existing
homeowners business in some markets. In addition, underwriting standards have
been tightened, price increases have been implemented in some catastrophe-prone
areas, and deductibles have been put in place in hurricane and wind and hail
prone areas. The Company uses computer-modeling techniques to assess its level
of exposure to loss in hurricane and earthquake catastrophe-prone areas.
Changes to methods of marketing and underwriting in some jurisdictions are
subject to state-imposed restrictions, which can make it more difficult for an
insurer to significantly reduce catastrophe exposures.

11



---



##### Table of Contents



Insurers writing personal lines property casualty policies may be unable to
increase prices until some time after the costs associated with coverage have
increased, primarily because of state insurance rate regulation. The pace at
which an insurer can change rates in response to increased costs depends, in
part, on whether the applicable state law requires prior approval of rate
increases or notification to the regulator either before or after a rate change
is imposed. In states with prior approval laws, rates must be approved by the
regulator before being used by the insurer. In states having file-and-use
laws, the insurer must file rate changes with the regulator, but does not need
to wait for approval before using the new rates. A use-and-file law requires
an insurer to file rates within a period of time after the insurer begins using
the new rate. Approximately one-half of the states require prior approval of
most rate changes.

Independent agents either submit applications to the Companys service centers
for underwriting review, quote, and issuance or they utilize one of its
automated quote and issue systems. Automated transactions are edited by the
Companys systems and issued if they conform to established guidelines.
Exceptions are reviewed by underwriters in the Companys business centers or by
agency managers. Audits are conducted by business center underwriters and
agency managers, on a systematic sampling basis, across all of the Companys
independent agency generated business. Each agent is assigned to a specific
employee or team of employees responsible for working with the agent on
business plan development, marketing, and overall growth and profitability.
The Company uses agency level management information to analyze and understand
results and to identify problems and opportunities.

The Personal Lines products sold through additional marketing channels are
underwritten by the Companys employees. Underwriters work with the Company
management on business plan development, marketing, and overall growth and
profitability. Channel-specific production and claim information is used to
analyze results and identify problems and opportunities.

Geographic Distribution

The following table shows the distribution of Personal Lines direct written
premiums for the states that accounted for the majority of premium volume for
the year ended December 31, 2003:

|              |  |       |       |  
|------------- |  | ----- | ----- | -
|              |  | % of 
|State         |  | Total
|              |  |      
|New York      |  |       | 18.4  | %
|Texas         |  |       | 9.5   |  
|Massachusetts |  |       | 8.2   |  
|New Jersey    |  |       | 7.7   |  
|Pennsylvania  |  |       | 7.1   |  
|Florida       |  |       | 5.1   |  
|Georgia       |  |       | 4.4   |  
|Virginia      |  |       | 4.1   |  
|Connecticut   |  |       | 4.0   |  
|California    |  |       | 3.3   |  
|All Others(1) |  |       | 28.2  |  
|              |  |       |       |  
|Total         |  |       | 100.0 | %
|              |  |       |       |  



|(1) |  | No other single state accounted for 3.0% or more of the total direct
written premiums written in 2003 by the Company.
|--- |  | ---------------------------------------------------------------------------------------------------------------------

12



---



##### Table of Contents



CLAIMS MANAGEMENT

The Companys claims management strategy and its execution are critical to
operating results and business retention. Claim payout and expense represent a
substantial portion of every premium dollar the Company earns. The Companys
claims management strategy is based on four core tenets:



| |  |  | fair, efficient, fact-based claims management controls losses for the
Company and its customers;                                                                                  
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | use of advanced technology provides front-line claims professionals
with necessary information and facilitates prompt claim resolution;                                           
|
| |  |  | specialization of claims professionals and segmentation of claims by
complexity, as indicated by severity and causation, allow the Company to
focus its resources effectively; and
|
| |  |  | excellent customer service enhances customer retention.                                                                                                                           

Claims Services includes field claims management teams, located in 39 offices
in 32 states, with appropriate authority and access to resources to address the
claim needs of customers and their agents or brokers, as well as the Companys
underwriters. In addition to the field teams, claim staffs are dedicated to
each of the Personal Lines single state companies in Florida, Massachusetts and
New Jersey as well as to the Commercial Lines Bond and Gulf markets and the
construction business within Commercial Accounts. Specialized investigative,
technical and legal resources are used. This structure permits the Company to
maintain the economies of scale of a larger, established company while
retaining the agility to respond promptly to the needs of customers, brokers,
agents and underwriters. The Companys home office operations provide
additional support in the form of work flow design, quality management,
information technology, advanced management information and data analysis,
training, financial reporting and control, and human resources strategy.

Claim Services employs diverse professionals, including claim adjusters,
appraisers, investigators, staff attorneys, system specialists and training,
management and support personnel. Approved external service providers, such as
independent adjusters and appraisers, investigators and attorneys, are
available for use as appropriate.

An integral part of the Companys strategy to benefit customers and
shareholders is its continuing leadership in the fight against insurance fraud.

Claim Services uses advanced management information and data analysis for more
effective claim results. This assists the Company in reviewing its claim
practices and results to evaluate and improve its performance. The Companys
claim management strategy is focused on segmentation of claims, technical
specialization, and effective claim resolution. In recent years, the Company
has dedicated claim professionals to its construction market, invested
significant additional resources in its Major Case organization and expanded
its catastrophe response team. The Companys proven catastrophe response
strategy and its catastrophe claim handling teams were instrumental in its
industry-leading response to a variety of weather-related losses that impacted
our industry in 2003, including hurricane Isabel, a significant storm that
struck the east coast of the United States in mid-September. The Company is a
leading user of digital and wireless technology and Internet-based claim
notification. Additionally, TravGlassSM, the Companys Internet-based claims
application, includes a network of pre-approved and customer or agent selected
glass repair providers, to more effectively meet its customers automobile
glass repair needs.

13



---



##### Table of Contents



Another strategic advantage is TravCompSM, a workers compensation claim
resolution and medical management program that assists adjusters in the prompt
investigation and effective management of workers compensation claims.
Innovative medical and claims management technologies permit nurse, medical and
claims professionals to share appropriate vital information that supports
prompt investigation, effective return to work and claim resolution strategies.
These new technologies, together with effective matching of professional
skills and authority to specific claim issues, have resulted in more efficient
management of workers compensation claims with lower medical, wage replacement
costs, and loss adjustment expenses.

Asbestos and environmental claims are separately managed by the Companys
Special Liability Group. See  Asbestos and Environmental Claims.

REINSURANCE

The Company reinsures a portion of the risks it underwrites in order to control
its exposure to losses and protect capital resources. The Company cedes to
reinsurers a portion of these risks and pays premiums based upon the risk and
exposure of the policies subject to such reinsurance. Reinsurance involves
credit risk and is generally subject to aggregate loss limits. Although the
reinsurer is liable to the Company to the extent of the reinsurance ceded, the
Company remains liable as the direct insurer on all risks reinsured.
Reinsurance recoverables are reported after reductions for known insolvencies
and after allowances for uncollectible amounts. The Company also holds
collateral, including trust agreements, escrow funds and letters of credit,
under certain reinsurance agreements. The Company monitors the financial
condition of reinsurers on an ongoing basis and reviews its reinsurance
arrangements periodically. Reinsurers are selected based on their financial
condition, business practices and the price of their product offerings. For
additional information concerning reinsurance, see note 6 of the notes to the
Companys consolidated financial statements.

The Company utilizes a variety of reinsurance agreements to control its
exposure to large property and casualty losses, including:



| |  |  | facultative reinsurance, in which reinsurance is provided for
all or a portion of the insurance provided by a single policy and
each policy reinsured is separately negotiated;  
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | treaty reinsurance, in which reinsurance is provided for a
specified type or category of risks; and                                                                              
|
| |  |  | catastrophe reinsurance, in which the Company is indemnified
for an amount of loss in excess of a specified retention with respect
to losses resulting from a catastrophic event.

The following presents the Companys top five reinsurers, except Lloyds of
London (Lloyds), which is discussed in more detail below, by reinsurance
recoverable at December 31, 2003 (in millions):

|                                      |  |             |        |                               |  |     |  |                             
|------------------------------------- |  | ----------- | ------ | ----------------------------- |  | --- |  | ----------------------------
|                                      |  | Reinsurance |        |                               |  |    
|Reinsurer                             |  | Recoverable |        | A.M. Best Rating of Reinsurer
|                                      |  |             |        |                              
|American Re-Insurance Company         |  |             | $913.2 |                               |  | A+  |  | second highest of 16 ratings
|General Reinsurance Corporation       |  |             | 436.5  |                               |  | A++ |  | highest of 16 ratings       
|Transatlantic Reinsurance Company     |  |             | 397.2  |                               |  | A++ |  | highest of 16 ratings       
|Employers Reinsurance Corporation     |  |             | 360.7  |                               |  | A   |  | third highest of 16 ratings 
|Swiss Reinsurance America Corporation |  |             | 300.7  |                               |  | A+  |  | second highest of 16 ratings

14



---



##### Table of Contents



As of December 31, 2003, the Company had reinsurance recoverables from Lloyds
of $580.0 million. In 1996, Lloyds restructured its operations with respect
to claims for years prior to 1993 and reinsured these into Equitas Limited,
which is currently unrated. Approximately $269.1 million of the Companys
Lloyds reinsurance recoverable at December 31, 2003 relates to Equitas
liabilities. The remaining recoverables of $310.9 million are from the
continuing market of Lloyds, which is rated A- (4th highest of 16 ratings) by
A.M. Best.

The impact of Lloyds restructuring on the collectibility of amounts
recoverable by the Company from Lloyds cannot be quantified at this time. It
is the opinion of the Companys management that it is possible that an
unfavorable impact on collectibility could have a material adverse effect on
its operating results in a future period. However, it is the opinion of the
Companys management that it is not likely that the outcome of these matters
would have a material adverse effect on its financial condition or liquidity.

At December 31, 2003, the Company had $11.174 billion in reinsurance
recoverables. Of this amount, $2.204 billion is for mandatory pools and
associations that relate primarily to workers compensation service business
and have the obligation of the participating insurance companies on a joint and
several basis supporting these cessions. An additional $2.411 billion of this
amount is attributable to structured settlements relating primarily to personal
injury claims, for which the Company has purchased annuities and remains
contingently liable in the event of any defaults by the companies issuing the
annuities. Of the remaining $6.559 billion ceded to reinsurers at December 31,
2003, $1.035 billion is attributable to asbestos and environmental claims and
the remainder principally reflects reinsurance in support of ongoing business.
At December 31, 2003, $705.5 million of reinsurance recoverables were
collateralized by letters of credit, trust agreements and escrow funds. Also
at December 31, 2003, the Company had an allowance for estimated uncollectible
reinsurance recoverables of $386.4 million.

For a description of reinsurance related litigation, see Item 3, Legal
Proceedings.

Current Net Retention Policy

The descriptions below relate to the Companys reinsurance arrangements in
effect at January 1, 2004. Most casualty and property reinsurance agreements
have terrorism sublimits or exclusions. For third-party liability, including
automobile no-fault, the reinsurance agreement used by Commercial Lines limits
the net retention to a maximum of $8.0 million per insured, per occurrence.
Reinsurance is also used to limit net retained policy limits to $10.0 million
for commercial property. For executive liability coverages such as errors and
omissions liability, directors and officers liability, employment practices
liability and blended insurance, the Company generally retains up to $5.0
million per risk. For surety protection, the Company generally retains up to
$23.5 million per principal but may retain higher amounts based on the type of
obligation, credit quality and other credit risk factors. Personal Lines
retains the first $5.0 million of umbrella policies and purchases facultative
reinsurance for limits over $5.0 million. For personal property insurance,
there is a $6.0 million maximum retention per risk.

15



---



##### Table of Contents



Catastrophe Reinsurance

The Company utilizes reinsurance agreements with nonaffiliated reinsurers to
control its exposure to losses resulting from one occurrence. For the
accumulation of net property losses arising out of one occurrence, reinsurance
agreements cover an average of 48% of total losses between $425.0 million and
$1.35 billion. These agreements exclude nuclear, chemical, and biochemical
losses for domestic terrorism and all terrorism losses as defined by the
Terrorism Risk Insurance Act of 2002.

The Company conducts an ongoing review of its risk and catastrophe coverages
and makes changes it deems appropriate.

Terrorism Risk Insurance Act of 2002

On November 26, 2002, the Terrorism Risk Insurance Act of 2002 (the Terrorism
Act) was enacted into Federal law and established a temporary Federal program
in the Department of the Treasury that provides for a system of shared public
and private compensation for insured losses resulting from acts of terrorism
committed by or on behalf of a foreign interest. In order for a loss to be
covered under the Terrorism Act (i.e., subject losses), the loss must be the
result of an event that is certified as an act of terrorism by the U.S.
Secretary of Treasury. In the case of a war declared by Congress, only
workers compensation losses are covered by the Terrorism Act. The Terrorism
Insurance Program (the Program) generally requires that all commercial property
casualty insurers licensed in the U.S. participate in the Program. The Program
became effective upon enactment and terminates on December 31, 2005. The
amount of compensation paid to participating insurers under the Program is 90%
of subject losses, after an insurer deductible, subject to an annual cap. The
deductible under the Program was 7% for 2003, and is 10% for 2004 and 15% for
2005. In each case, the deductible percentage is applied to the insurers
direct earned premiums from the calendar year immediately preceding the
applicable year. The Program also contains an annual cap that limits the
amount of subject losses to $100 billion aggregate per program year. Once
subject losses have reached the $100 billion aggregate during a program year,
there is no additional reimbursement from the U.S. Treasury and an insurer that
has met its deductible for the program year is not liable for any losses (or
portion thereof) that exceed the $100 billion cap. The Companys deductible
under this federal program is $927.7 million for 2004. The Company had no
terrorism-related losses in 2003.

Florida Reinsurance Fund

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

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

16



---



##### Table of Contents



RESERVES

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

The process of estimating loss reserves is imprecise due to a number of
variables. These variables are affected by both internal and external events
such as changes in claims handling procedures, inflation, judicial trends and
legislative changes. Many of these items are not directly quantifiable,
particularly on a prospective basis. Additionally, there may be significant
reporting lags between the occurrence of the insured event and the time it is
actually reported to the insurer. The Company continually refines reserve
estimates in a regular ongoing process as historical loss experience develops
and additional claims are reported and settled. The Company reflects
adjustments to reserves in the results of operations in the periods in which
the estimates are changed. In establishing reserves, the Company takes into
account estimated recoveries for reinsurance, salvage and subrogation. The
reserves are also reviewed periodically by a qualified actuary employed by the
Company. For additional information on the process of estimating reserves, see
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Critical Accounting Estimates.

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

Discounting

The liability for losses for some long-term disability payments under workers
compensation insurance and workers compensation excess insurance has been
discounted using an interest rate of 5%. The liability for losses for certain
fixed and determinable asbestos-related settlements, where all payment amounts
and their timing are known, has also been discounted using various interest
rates ranging from 1.56% to 5.50%. At December 31, 2003, 2002 and 2001, the
combined amounts of discount on the consolidated balance sheet were $754.3
million, $802.9 million and $792.4 million, respectively, of which 98%, 95% and
100%, respectively, related to workers compensation.

Other Factors

The table on page 19 sets forth the year-end reserves from 1993 through 2003
and the subsequent changes in those reserves, presented on a historical basis.
The original estimates, cumulative amounts paid and reestimated reserves in the
table for the years 1993 to 2001 and 1993 to 1995 have not been restated to
reflect the acquisition of Northland and Associates and of Aetnas property and
casualty insurance subsidiaries, respectively. Beginning in 2002 and 1996, the
table includes the reserve activity of Northland and Associates and Aetnas
property and casualty insurance subsidiaries, respectively. The data in the
table is presented in accordance with reporting requirements of the Securities
and Exchange Commission. Care must be taken to avoid misinterpretation by
those unfamiliar with this information or familiar with other data commonly
reported by the insurance industry. The accompanying data is not accident year
data, but rather a display of 1993 to 2003 year-end reserves and the subsequent
changes in those reserves.

17



---



##### Table of Contents



For instance, the cumulative deficiency or redundancy shown in the
accompanying table for each year represents the aggregate amount by which
original estimates of reserves as of that year-end have changed in subsequent
years. Accordingly, the cumulative deficiency for a year relates only to
reserves at that year-end and those amounts are not additive. Expressed
another way, if the original reserves at the end of 1993 included $4.0 million
for a loss that is finally paid in 2003 for $5.0 million, the $1.0 million
deficiency (the excess of the actual payment of $5.0 million over the original
estimate of $4.0 million) would be included in the cumulative deficiencies in
each of the years 1993 to 2002 shown in the accompanying table.

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

Other factors that affect the data in the accompanying table include the
discounting of certain reserves, as discussed above, and the use of
retrospectively rated insurance policies. For example, workers compensation
indemnity reserves (tabular reserves) are discounted to reflect the time value
of money. Apparent deficiencies will continue to occur as the discount on
these workers compensation reserves is accreted at the appropriate interest
rates. Also, a portion of National Accounts business is underwritten with
retrospectively rated insurance policies in which the ultimate loss experience
is primarily borne by the insured. For this business, increases in loss
experience result in an increase in reserves and an offsetting increase in
amounts recoverable from insureds. Likewise, decreases in loss experience
result in a decrease in reserves and an offsetting decrease in amounts
recoverable from these insureds. The amounts recoverable on these
retrospectively rated policies mitigate the impact of the cumulative
deficiencies or redundancies on the Companys earnings but are not reflected in
the accompanying table.

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

The differences between the reserves for loss and loss adjustment expenses
shown in the accompanying table, which is prepared in accordance with
accounting principles generally accepted in the United States of America and
those reported in the Companys annual reports filed with state insurance
departments, which are prepared in accordance with statutory accounting
practices, were $25.8 million, $(12.1) million and $(17.2) million for 2003,
2002 and 2001, respectively.

18



---



##### Table of Contents





|                                                                   |                   |         |       |         |  |         |        |         |  |         |        |        |  |   |        |        |  |   |        |        | 
|------------------------------------------------------------------ | ----------------- | ------- | ----- | ------- |  | ------- | ------ | ------- |  | ------- | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|at December 31, (in millions)                                      |                   | 1993(a) |       | 1994(a) |  | 1995(a) |        | 1996(a) |  | 1997(a)
|                                                                   |                   |         |       |         |  |         |        |         |  |        
|Reserves for loss and loss adjustment expense
originally estimated |                   | $       | 9,319 |         |  | $       | 9,712  |         |  | $       | 10,090 |        |  | $ | 21,816 |        |  | $ | 21,406 |       
|Cumulative amounts paid as of                                      |                   |         |       |         |  |         |        |         |  |         |        |        |  |   |        |        |  |   |        |       
|                                                                   | One year later    |         |       | 1,706   |  |         |        | 1,595   |  |         |        | 1,521  |  |   |        | 3,704  |  |   |        | 4,025  | 
|                                                                   | Two years later   |         |       | 2,843   |  |         |        | 2,631   |  |         |        | 2,809  |  |   |        | 6,600  |  |   |        | 6,882  | 
|                                                                   | Three years later |         |       | 3,610   |  |         |        | 3,798   |  |         |        | 3,903  |  |   |        | 8,841  |  |   |        | 8,850  | 
|                                                                   | Four years later  |         |       | 4,563   |  |         |        | 4,676   |  |         |        | 4,761  |  |   |        | 10,355 |  |   |        | 10,480 | 
|                                                                   | Five years later  |         |       | 5,274   |  |         |        | 5,388   |  |         |        | 5,322  |  |   |        | 11,649 |  |   |        | 11,915 | 
|                                                                   | Six years later   |         |       | 5,882   |  |         |        | 5,855   |  |         |        | 5,842  |  |   |        | 12,893 |  |   |        | 13,376 | 
|                                                                   | Seven years later |         |       | 6,289   |  |         |        | 6,324   |  |         |        | 6,146  |  |   |        | 14,154 |  |   |        |        | 
|                                                                   | Eight years later |         |       | 6,718   |  |         |        | 6,485   |  |         |        | 6,668  |  |   |        |        |  |   |        |        | 
|                                                                   | Nine years later  |         |       | 6,879   |  |         |        | 6,954   |  |         |        |        |  |   |        |        |  |   |        |        | 
|                                                                   | Ten years later   |         |       | 7,329   |  |         |        |         |  |         |        |        |  |   |        |        |  |   |        |        | 
|Reserves reestimated as of                                         |                   |         |       |         |  |         |        |         |  |         |        |        |  |   |        |        |  |   |        |       
|                                                                   | One year later    |         |       | 9,270   |  |         |        | 9,486   |  |         |        | 9,848  |  |   |        | 21,345 |  |   |        | 21,083 | 
|                                                                   | Two years later   |         |       | 9,234   |  |         |        | 9,310   |  |         |        | 9,785  |  |   |        | 21,160 |  |   |        | 20,697 | 
|                                                                   | Three years later |         |       | 9,108   |  |         |        | 9,395   |  |         |        | 9,789  |  |   |        | 20,816 |  |   |        | 20,417 | 
|                                                                   | Four years later  |         |       | 9,271   |  |         |        | 9,427   |  |         |        | 9,735  |  |   |        | 20,664 |  |   |        | 20,168 | 
|                                                                   | Five years later  |         |       | 9,298   |  |         |        | 9,463   |  |         |        | 9,711  |  |   |        | 20,427 |  |   |        | 22,570 | 
|                                                                   | Six years later   |         |       | 9,349   |  |         |        | 9,441   |  |         |        | 9,661  |  |   |        | 22,851 |  |   |        | 22,625 | 
|                                                                   | Seven years later |         |       | 9,370   |  |         |        | 9,445   |  |         |        | 10,562 |  |   |        | 22,861 |  |   |        |        | 
|                                                                   | Eight years later |         |       | 9,374   |  |         |        | 10,286  |  |         |        | 10,553 |  |   |        |        |  |   |        |        | 
|                                                                   | Nine years later  |         |       | 10,280  |  |         |        | 10,265  |  |         |        |        |  |   |        |        |  |   |        |        | 
|                                                                   | Ten years later   |         |       | 10,274  |  |         |        |         |  |         |        |        |  |   |        |        |  |   |        |        | 
|Cumulative deficiency(a)                                           |                   |         | 955   |         |  |         | 553    |         |  |         | 463    |        |  |   | 1,045  |        |  |   | 1,219  |       
|Gross liability  end of year                                      |                   |         |       |         |  | $       | 15,013 |         |  | $       | 15,213 |        |  | $ | 30,969 |        |  | $ | 30,138 |       
|Reinsurance recoverables                                           |                   |         |       |         |  |         | 5,301  |         |  |         | 5,123  |        |  |   | 9,153  |        |  |   | 8,732  |       
|                                                                   |                   |         |       |         |  |         |        |         |  |         |        |        |  |   |        |        |  |   |        |       
|Net liability  end of year                                        |                   |         |       |         |  | $       | 9,712  |         |  | $       | 10,090 |        |  | $ | 21,816 |        |  | $ | 21,406 |       
|                                                                   |                   |         |       |         |  |         |        |         |  |         |        |        |  |   |        |        |  |   |        |       
|Gross reestimated liability-latest                                 |                   |         |       |         |  | $       | 16,088 |         |  | $       | 15,770 |        |  | $ | 32,365 |        |  | $ | 31,725 |       
|Reestimated reinsurance
recoverables-latest                        |                   |         |       |         |  |         | 5,823  |         |  |         | 5,217  |        |  |   | 9,504  |        |  |   | 9,100  |       
|                                                                   |                   |         |       |         |  |         |        |         |  |         |        |        |  |   |        |        |  |   |        |       
|Net reestimated liability-latest                                   |                   |         |       |         |  | $       | 10,265 |         |  | $       | 10,553 |        |  | $ | 22,861 |        |  | $ | 22,625 |       
|                                                                   |                   |         |       |         |  |         |        |         |  |         |        |        |  |   |        |        |  |   |        |       
|Gross cumulative deficiency                                        |                   |         |       |         |  | $       | 1,075  |         |  | $       | 557    |        |  | $ | 1,396  |        |  | $ | 1,587  |       
|                                                                   |                   |         |       |         |  |         |        |         |  |         |        |        |  |   |        |        |  |   |        |       

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                   |                   |         |        |         |  |         |        |            |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        |  | 
|------------------------------------------------------------------ | ----------------- | ------- | ------ | ------- |  | ------- | ------ | ---------- |  | ---------- | ------ | ---------- |  | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ |  | 
|at December 31, (in millions)                                      |                   | 1998(a) |        | 1999(a) |  | 2000(a) |        | 2001(a)(b) |  | 2002(a)(b) |        | 2003(a)(b)
|                                                                   |                   |         |        |         |  |         |        |            |  |            |        |           
|Reserves for loss and loss adjustment expense
originally estimated |                   | $       | 20,763 |         |  | $       | 19,983 |            |  | $          | 19,435 |            |  | $ | 20,197 |        |  | $ | 23,268 |        |  | $ | 24,055 | 
|Cumulative amounts paid as of                                      |                   |         |        |         |  |         |        |            |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        | 
|                                                                   | One year later    |         |        | 4,159   |  |         |        | 4,082      |  |            |        | 4,374      |  |   |        | 5,018  |  |   |        | 5,170  |  |   |        |  | 
|                                                                   | Two years later   |         |        | 6,879   |  |         |        | 6,957      |  |            |        | 7,517      |  |   |        | 8,745  |  |   |        |        |  |   |        |  | 
|                                                                   | Three years later |         |        | 9,006   |  |         |        | 9,324      |  |            |        | 10,218     |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                   | Four years later  |         |        | 10,809  |  |         |        | 11,493     |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                   | Five years later  |         |        | 12,565  |  |         |        |            |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                   | Six years later   |         |        |         |  |         |        |            |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                   | Seven years later |         |        |         |  |         |        |            |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                   | Eight years later |         |        |         |  |         |        |            |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                   | Nine years later  |         |        |         |  |         |        |            |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                   | Ten years later   |         |        |         |  |         |        |            |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        |  | 
|Reserves reestimated as of                                         |                   |         |        |         |  |         |        |            |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        | 
|                                                                   | One year later    |         |        | 20,521  |  |         |        | 19,736     |  |            |        | 19,394     |  |   |        | 23,228 |  |   |        | 23,658 |  |   |        |  | 
|                                                                   | Two years later   |         |        | 20,172  |  |         |        | 19,600     |  |            |        | 22,233     |  |   |        | 24,083 |  |   |        |        |  |   |        |  | 
|                                                                   | Three years later |         |        | 19,975  |  |         |        | 22,302     |  |            |        | 22,778     |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                   | Four years later  |         |        | 22,489  |  |         |        | 22,612     |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                   | Five years later  |         |        | 22,593  |  |         |        |            |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                   | Six years later   |         |        |         |  |         |        |            |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                   | Seven years later |         |        |         |  |         |        |            |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                   | Eight years later |         |        |         |  |         |        |            |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                   | Nine years later  |         |        |         |  |         |        |            |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                   | Ten years later   |         |        |         |  |         |        |            |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        |  | 
|Cumulative deficiency(a)                                           |                   |         | 1,830  |         |  |         | 2,629  |            |  |            | 3,343  |            |  |   | 3,886  |        |  |   | 390    |        |  |   |        | 
|Gross liability  end of year                                      |                   | $       | 29,411 |         |  | $       | 28,854 |            |  | $          | 28,312 |            |  | $ | 30,617 |        |  | $ | 33,628 |        |  | $ | 34,474 | 
|Reinsurance recoverables                                           |                   |         | 8,648  |         |  |         | 8,871  |            |  |            | 8,877  |            |  |   | 10,420 |        |  |   | 10,360 |        |  |   | 10,419 | 
|                                                                   |                   |         |        |         |  |         |        |            |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        | 
|Net liability  end of year                                        |                   | $       | 20,763 |         |  | $       | 19,983 |            |  | $          | 19,435 |            |  | $ | 20,197 |        |  | $ | 23,268 |        |  | $ | 24,055 | 
|                                                                   |                   |         |        |         |  |         |        |            |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        | 
|Gross reestimated liability-latest                                 |                   | $       | 31,936 |         |  | $       | 32,560 |            |  | $          | 33,371 |            |  | $ | 35,949 |        |  | $ | 34,793 |        |  |   |        | 
|Reestimated reinsurance
recoverables-latest                        |                   |         | 9,343  |         |  |         | 9,948  |            |  |            | 10,593 |            |  |   | 11,866 |        |  |   | 11,135 |        |  |   |        | 
|                                                                   |                   |         |        |         |  |         |        |            |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        | 
|Net reestimated liability-latest                                   |                   | $       | 22,593 |         |  | $       | 22,612 |            |  | $          | 22,778 |            |  | $ | 24,083 |        |  | $ | 23,658 |        |  |   |        | 
|                                                                   |                   |         |        |         |  |         |        |            |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        | 
|Gross cumulative deficiency                                        |                   | $       | 2,525  |         |  | $       | 3,706  |            |  | $          | 5,059  |            |  | $ | 5,332  |        |  | $ | 1,165  |        |  |   |        | 
|                                                                   |                   |         |        |         |  |         |        |            |  |            |        |            |  |   |        |        |  |   |        |        |  |   |        | 



| | (a) |  | For years prior to 1996, excludes Aetna P&C reserves, which were acquired
on April 2, 1996. Accordingly, the reserve development (net reserves for loss
and loss adjustment expense recorded at the end of the year, as originally
estimated, less net reserves reestimated as of subsequent years) for years
prior to 1996 relates only to losses recorded by Travelers P&C and does not
include reserve development recorded by Aetna P&C. For 1996 and subsequent
years, includes Aetna P&C reserves and subsequent development recorded by Aetna
P&C. At December 31, 1996 Aetna P&C gross reserves were $16,775 million and
net reserves were $11,752 million.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Included in the cumulative deficiency by
year is the impact of unfavorable prior year reserve development, net of
reinsurance, related to asbestos claims and litigation, primarily due to $2,945
million of unfavorable development in 2002 and accretion of discount
of $24 million in 2003, as follows, in millions:                                                                                                                                                                                                                                                                                                                                            

|       |  |      |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       |  |  |   |       |  |  |   |    | 
|------ |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- |  |  | - | ----- |  |  | - | ----- |  |  | - | -- | 
|1993   |  | 1994 |       | 1995 |  | 1996 |       | 1997 |  | 1998 |       | 1999 |  | 2000 |       | 2001 |  | 2002
|       |  |      |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |     
|$1,666 |  | $    | 1,615 |      |  | $    | 1,572 |      |  | $    | 3,400 |      |  | $    | 3,331 |      |  | $    | 3,265 |  |  | $ | 3,208 |  |  | $ | 3,158 |  |  | $ | 2,969 |  |  | $ | 24 | 



| | (b) |  | Includes reserves of The Northland Company and its subsidiaries and
Associates Lloyds Insurance Company which were acquired from Citigroup on
October 1, 2001. Also includes reserves of Associates Insurance Company,
which was contributed to TPC by Citigroup on October 3, 2001. These net
reserves were $623 million at December 31, 2001.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19



---



##### Table of Contents



Asbestos and Environmental Claims

Asbestos and environmental claims are segregated from other claims and are
handled separately by the Companys Special Liability Group, a separate unit
staffed by dedicated legal, claim, finance and engineering professionals. For
additional information on asbestos and environmental claims, see Managements
Discussion and Analysis of Financial Conditions and Results of Operations.

INTERCOMPANY REINSURANCE POOLS

Most of the Companys insurance subsidiaries are members of intercompany
property and casualty reinsurance pooling arrangements. As of December 31,
2003, there were three intercompany pools, the Travelers Property Casualty
pool, the Gulf pool and the Northland pool. Each of these pools permits the
participating companies to rely on the capacity of the entire pools capital
and surplus rather than just on its own capital and surplus. Under the
arrangements of each pool, the members share substantially all insurance
business that is written, and allocate the combined premiums, losses and
expenses. Travelers Casualty and Surety Company of America (Travelers C&S of
America), which is dedicated to the Bond business, does not participate in any
of the pools. The Personal Lines single state companies and Associates and
affiliates (see Ratings below) are also not included in any of the pools.

In connection with the sale of a 24% ownership interest, on a fully diluted
basis, in CIRI to certain outside investors on August 1, 2002, Travelers
Indemnity Company provided certain members of the Gulf pool with three
reinsurance agreements and one retrocession agreement. These quota share and
excess of loss agreements indemnify the Gulf pool from adverse development on
certain lines of business written prior to January 1, 2002.

RATINGS

Ratings are an important factor in setting the Companys competitive position
in the insurance marketplace. The Company receives ratings from the following
major rating agencies: A.M. Best Co. (A.M. Best), Fitch Ratings (Fitch),
Moodys Investors Service (Moodys) and Standard & Poors Corp. (S&P). Rating
agencies typically issue two types of ratings: Claims-paying (or financial
strength) ratings which assess an insurers ability to meet its financial
obligations to policyholders and debt ratings which assess a companys
prospects for repaying its debts and assist lenders in setting interest rates
and terms for a companys short and long term borrowing needs. The system and
the number of rating categories can vary widely from rating agency to rating
agency. Customers usually focus on claims-paying ratings, while creditors
focus on debt ratings. Investors use both to evaluate a companys overall
financial strength. The ratings issued on the Company or its subsidiaries by
any of these agencies are announced publicly and are available on the Companys
website and from the agencies.

The Companys insurance operations could be negatively impacted by a downgrade
in one or more of the Companys financial strength ratings. If this were to
occur, there could be a reduced demand for certain products in certain markets.
Additionally, the Companys ability to access the capital markets could be
impacted and higher borrowing costs may be incurred.

In June 2003, A. M. Best lowered the claims-paying rating of the Companys Gulf
Insurance Pool to A from A+. On October 10, 2003, S&P assigned a rating of AA-
to Travelers Casualty and Surety Company of Europe, Limited (Travelers Europe)
based on Travelers Europes surety writings being supported by reinsurance with
Travelers Casualty and Surety Company of America which is also rated AA- by
S&P. The Companys other ratings remained unchanged during 2003.

20



---



##### Table of Contents



In January 2004, A.M. Best placed the financial strength rating of A of Gulf
Insurance Group (Gulf), a majority-owned subsidiary of the Company, under
review with developing implications and S&P indicated that its A+ counterparty
credit and financial strength ratings on members of the Gulf Insurance Group
are remaining on CreditWatch with negative implications, pending the completion
of a support arrangement between The Travelers Indemnity Company and Gulf.

Also in January 2004, A.M. Best downgraded the financial strength rating to A
from A+ of TNC Insurance Corp. Group (Northland), a wholly-owned subsidiary of
the Company, removed the rating from under review and assigned a stable
outlook.

In connection with the announcement of the merger, A.M. Best, Moodys, S&P and
Fitch announced the following rating actions with respect to the Company.



| |  |  | A.M. Best: Placed the financial strength and debt ratings under
review with negative implications and indicated that the ratings could
either be lowered or remain the same.                                                                                                                                       
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Moodys: Confirmed the financial strength rating and placed the
long-term debt rating on review for possible downgrade; confirmed stable
outlook for the financial strength rating and indicated that a more
traditional three-notch relationship between senior debt and financial
strength ratings could prevail.
|
| |  |  | S&P: Placed the financial strength and debt ratings on CreditWatch
with negative implications and indicated that the ratings could be
affirmed or lowered by one notch.                                                                                                                                            
|
| |  |  | Fitch: Placed the financial strength and debt ratings on Rating
Watch negative and indicated that the ratings could be affirmed or
downgraded by one notch.                                                                                                                                                        

Subsequent to these initial announcements regarding the merger, S&P and Fitch
announced the following rating actions with respect to the Company:



| |  |  | S&P: Indicated that subject to the completion of the merger, it
expects to lower all long-term ratings on the Company by one notch.
This would align the counterparty credit and financial strength ratings
on both the Company and St. Paul at A+ and align all holding-company
senior unsecured obligations at the Company and St. Paul at BBB+. S&P
further indicated that the post-merger outlook is expected to be stable.                                      
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Fitch: In conjunction with its downgrade of the long-term issuer and
senior debt ratios of St. Paul and within the context of the
consummation of the merger, Fitch views the likelihood of the Companys
debt ratings being affirmed as significantly minimized and the
likelihood of the ratings being downgraded as highly probable. In
regards to the Companys financial strength ratings, Fitch intends to
continue to evaluate managements integration plans.

The Company does not expect the rating actions taken or those anticipated to
have any significant impact on the operations of the Company, Gulf, or
Northland.

21



---



##### Table of Contents



The following table summarizes the current claims-paying and financial strength
ratings of the Companys property casualty insurance pools, Travelers C&S of
America, Travelers Europe and the Companys Personal Lines single state
companies, by A.M. Best, Fitch, Moodys and S&P. The table also presents the
position of each rating in the applicable agencys rating scale as of February
20, 2004.

|                                       |  |                    |   |                 |   |                  |   |                |   |                 |  |                |   |  |  | 
|-------------------------------------- |  | ------------------ | - | --------------- | - | ---------------- | - | -------------- | - | --------------- |  | -------------- | - |  |  | 
|                                       |  | A.M. Best          |   | Moodys         |   | S&P              |   | Fitch         
|                                       |  |                    |   |                 |   |                  |   |               
|Travelers Property Casualty pool(a)    |  | A++ (1st of 16)    |   | Aa3 (4th of 21) |   | AA- (4th of 21)  |   | AA (3rd of 24)
|Travelers C&S of America               |  | A++ (1st of 16)    |   | Aa3 (4th of 21) |   | AA- (4th of 21)  |   | AA (3rd of 24)
|Gulf pool(b)                           |  | A      (3rd of 16) |   | A2 (6th of 21)  |   | A+   (5th of 21) |   |                |  |                
|Northland pool(c)                      |  | A      (3rd of 16) |   |                 |  |                  |   |                |  |                 |  |                |  | 
|First Floridian Auto and Home Ins. Co. |  | A      (3rd of 16) |   |                 |  |                  |   |                |  |                 |  | AA (3rd of 24)
|First Trenton Indemnity Company        |  | A      (3rd of 16) |   |                 |  |                  |   |                |  |                 |  | AA (3rd of 24)
|The Premier Insurance Co. of MA        |  | A      (3rd of 16) |   |                 |  |                  |   |                |  |                 |  | AA (3rd of 24)
|Travelers Europe                       |  |                    |  |                 |   |                  |  |                |   | AA- (4th of 21) |  |                |  | 



|(a) |  | The Travelers Property Casualty pool consists of The Travelers Indemnity
Company, Travelers Casualty and Surety Company, The Phoenix Insurance
Company, The Standard Fire Insurance Company, Travelers Casualty Insurance
Company of America, (formerly Travelers Casualty and Surety Company of
Illinois), Farmington Casualty Company, The Travelers Indemnity Company of
Connecticut, The Automobile Insurance Company of Hartford, Connecticut,
The Charter Oak Fire Insurance Company, The Travelers Indemnity Company of
America, Travelers Commercial Casualty Company, Travelers Casualty Company
of Connecticut, Travelers Commercial Insurance Company, Travelers Property
Casualty Company of America, (formerly The Travelers Indemnity Company of
Illinois), Travelers Property Casualty Insurance Company, TravCo Insurance
Company, The Travelers Home and Marine Insurance Company, Travelers
Personal Security Insurance Company, Travelers Personal Insurance Company
(formerly Travelers Property Casualty Insurance Company of Illinois) and
Travelers Excess and Surplus Lines Company.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | The Gulf pool consists of Gulf Insurance Company, Gulf Underwriters
Insurance Company, Select Insurance Company and Atlantic Insurance
Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(c) |  | The Northland pool consists of Northland Insurance Company, Northfield
Insurance Company, Northland Casualty Company, Mendota Insurance Company,
Mendakota Insurance Company, American Equity Insurance Company, and
American Equity Specialty Insurance Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

Associates and affiliates consist of Associates Insurance Company, Commercial
Guaranty Insurance Company and Associates Lloyds Insurance Company. Commercial
Guaranty Insurance Company and Associates Lloyds are no longer writing new
business, A.M. Best no longer rates them, and Associates Lloyds has ceded all
of its business to Associates Insurance Company. Previously these entities
were rated A+ by A.M. Best.

INVESTMENTS

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

At December 31, 2003, the carrying value of the Companys investment portfolio
was $38.653 billion, of which 91% was invested in fixed maturity investments
and short-term investments (of which 44% was invested in federal, state or
municipal government obligations), 1% in mortgage loans and real estate held
for sale, 2% in common stocks and other equity securities and 6% in other
investments. The average duration of the fixed maturity portfolio, including
short-term investments, was 4.1 years at December 31, 2003. Non-investment
grade securities totaled approximately $2.057 billion, representing
approximately 6% of the Companys fixed maturity investment portfolio as of
December 31, 2003.

22



---



##### Table of Contents



The following table sets forth information regarding the Companys investments.
It reflects the average amount of investments, net investment income earned
and the yield thereon. See note 4 of notes to the Companys consolidated
financial statements for information regarding the Companys investment
portfolio.

|                                              |  |      |          |      |  |      |          |   |  |   |          |  
|--------------------------------------------- |  | ---- | -------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|(for the year ended December 31, in millions) |  | 2003 |          | 2002 |  | 2001
|                                              |  |      |          |      |  |     
|Average investments(a)                        |  | $    | 35,107.9 |      |  | $    | 32,505.0 |   |  | $ | 30,434.9 |  
|Net investment income                         |  | $    | 1,868.8  |      |  | $    | 1,880.5  |   |  | $ | 2,034.0  |  
|Average pretax yield(b)                       |  |      | 5.3      | %    |  |      | 6.0      | % |  |   | 6.9      | %
|Average pretax equivalent yield(b)            |  |      | 6.2      | %    |  |      | 6.8      | % |  |   | 7.7      | %
|Average aftertax yield(b)                     |  |      | 4.0      | %    |  |      | 4.4      | % |  |   | 5.0      | %



|(a) |  | Reduced by securities lending and adjusted for the impact of
unrealized investment gains and losses, receivables for investment sales and
payables on investment purchases.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Excluding net realized and unrealized investment gains and losses.                                                                                                         

DERIVATIVES

See note 14 of notes to the Companys consolidated financial statements for a
discussion of the policies and transactions related to the Companys derivative
financial instruments.

COMPETITION

The property and casualty insurance industry is highly competitive in the areas
of price, service, product offerings, agent relationships and method of
distribution, i.e., use of independent agents, exclusive agents and/or salaried
employees. According to A.M. Best, there are approximately 960 property
casualty organizations in the United States, comprising approximately 2,400
property casualty companies. Of those organizations, the top 150 accounted for
approximately 92% of the consolidated industrys total net written premiums in
2002. Several property and casualty insurers writing commercial lines of
business, including the Company, offer products for alternative forms of risk
protection in addition to traditional insurance products. These products,
including large deductible programs and various forms of self-insurance that
utilize captive insurance companies and risk retention groups, have been
instituted in reaction to the escalating cost of insurance caused in part by
increased costs from workers compensation cases and jury awards in third-party
liability cases.

Commercial Lines.The insurance industry is represented in the commercial
lines marketplace by many insurance companies of varying size as well as other
entities offering risk alternatives such as self-insured retentions or captive
programs. Market competition works within the insurance regulatory framework
to set the price charged for insurance products and the level of service
provided. Growth is driven by a companys ability to provide insurance and
services at a price that is reasonable and acceptable to the customer. In
addition, the marketplace is affected by available capacity of the insurance
industry as measured by policyholders surplus and the availability of
reinsurance. Surplus expands and contracts primarily in conjunction with
profit levels generated by the industry. Growth in premium and service
business is also measured by a companys ability to retain existing customers
and to attract new customers.

23



---



##### Table of Contents



National Accounts business is typically written through national brokers and,
to a lesser extent, regional brokers. Insurance companies compete in this
market based on price, product offerings, claim and loss prevention services,
managed care cost containment and risk management information systems.
National Accounts also offers a large nationwide network of localized claim
service centers which provide greater flexibility in claims adjusting and
allows the Company to more quickly respond to the needs of its customers. The
Companys residual market business also competes for state contracts to provide
claims and policy management services. These contracts, which generally have
three-year terms, are selected by state agencies through a bid process based on
the quality of service and price. The Company services approximately 35% of
the total workers compensation assigned risk market, making the Company one of
the largest servicing insurers in the industry.

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

Select Accounts business is typically written through independent agents and,
to a lesser extent, regional brokers. Both national and regional property
casualty insurance companies compete in the Select Accounts market which
generally comprises lower hazard, main street business customers. Risks are
underwritten and priced using standard industry practices and a combination of
proprietary and standard industry product offerings. Competition in this
market is primarily based on price, product offerings and response time in
policy services. The Company has established a strong marketing relationship
with its distribution network and has provided it with defined underwriting
policies, a broad array of products, competitive prices and one of the most
efficient automated environments in the industry. In addition, the Company has
established a centralized service center to help agents perform many service
functions, in return for a fee. The Companys overall service platform is one
of the strongest in the small business commercial market.

Bond competes in the highly competitive surety and executive liability
marketplaces. Bonds reputation for timely and consistent decision-making, a
nationwide network of local underwriting, claims and industry experts and
strong producer and customer relationships, as well as its ability to offer its
customers a full range of financial services products, enable it to compete
effectively. Bonds ability to cross-sell its products to customers of
Commercial Lines and Personal Lines provides further competitive advantages for
the Company.

The market in which Gulf competes includes small to mid-size niche companies
that target specific lines of insurance and larger, multi-line companies that
focus on various segments of the specialty accounts market. Gulfs business is
generally written through retail and wholesale agents and brokers throughout
the United States. It derives a competitive advantage through its underwriting
practices, claim-handling expertise and well-established relationships with its
agents and brokers.

24



---



##### Table of Contents



Personal Lines.Personal lines insurance is written by hundreds of insurance
companies of varying sizes. Although national companies write the majority of
the business, the Company also faces competition from local or regional
companies which often have a competitive advantage because of their knowledge
of the local marketplace and their relationship with local agents. The Company
believes that the principal competitive factors are price, service, perceived
stability of the insurer and name recognition. The Company competes for
business within each independent agency since these agencies also offer
policies of competing companies. At the agency level, competition is primarily
based on price and the level of service, including claims handling, as well as
the level of automation and the development of long-term relationships with
individual agents. The Company also competes with insurance companies that use
exclusive agents or salaried employees to sell their products. In addition to
its traditional independent agency distribution, Personal Lines has broadened
its distribution of Personal Lines products by marketing to sponsoring
organizations, including employee and affinity groups, and through joint
marketing arrangements with other insurers. The Company believes that its
continued focus on expense management practices and its underwriting and
pricing segmentation abilities enable the Company to price its products
competitively in all of its distribution channels.

REGULATION

State Regulation

The Companys insurance subsidiaries are subject to regulation in the various
states and jurisdictions in which they transact business. The extent of
regulation varies, but generally derives from statutes that delegate
regulatory, supervisory and administrative authority to a department of
insurance in each state. The regulation, supervision and administration
relate, among other things, to standards of solvency that must be met and
maintained, the licensing of insurers and their agents, the nature of and
limitations on investments, premium rates, restrictions on the size of risks
that may be insured under a single policy, reserves and provisions for unearned
premiums, losses and other obligations, deposits of securities for the benefit
of policyholders, approval of policy forms and the regulation of market
conduct, including the use of credit information in underwriting as well as
other underwriting and claims practices. In addition, many states have enacted
variations of competitive rate-making laws, which allow insurers to set certain
premium rates for certain classes of insurance without having to obtain the
prior approval of the state insurance department. State insurance departments
also conduct periodic examinations of the affairs of insurance companies and
require the filing of annual and other reports relating to the financial
condition of companies and other matters. Financial examinations completed in
the past three years have not resulted in any adjustments to statutory surplus,
and pending financial and market conduct examinations have not identified any
material findings to date. At the present time, the Companys insurance
subsidiaries are collectively licensed to transact insurance business in all
states, the District of Columbia, Guam, Puerto Rico, Bermuda, and the U.S.
Virgin Islands, as well as Australia, Canada, New Zealand, the Philippines, the
United Kingdom and Central and South America.

Insurance Holding Company Statutes

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

25



---



##### Table of Contents



Insurance Regulation Concerning Dividends

The Companys principal insurance subsidiaries are domiciled in the State of
Connecticut. The insurance holding company law of Connecticut applicable to
the Companys subsidiaries 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 10% of the insurers surplus as of the preceding
December 31, or the insurers net income for the twelve-month period ending the
preceding December 31, in each case determined in accordance with statutory
accounting practices. This declaration or payment is further limited by
adjusted unassigned surplus, as determined in accordance with statutory
accounting practices. The insurance holding company laws of other states in
which the Companys insurance subsidiaries are domiciled generally contain
similar, although in some instances somewhat more restrictive, limitations on
the payment of dividends.

Assessments for Guaranty Funds and Second-Injury Funds and Other Mandatory
Pooling Arrangements

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

Many states have laws that established second-injury funds to provide
compensation to injured employees for aggravation of a prior condition or
injury. Insurers writing workers compensation in those states having
second-injury funds are subject to the laws creating the funds, including the
various funding mechanisms that those states have adopted to fund the
second-injury funds. Several of the states having larger second-injury funds
utilize a premium surcharge that effectively passes the cost of the fund to
policyholders. Other states assess the insurer based on paid losses and allow
the insurer to recoup the assessment through future premium rates.

The Companys insurance subsidiaries are also required to participate in
various involuntary assigned risk pools, principally involving workers
compensation and automobile insurance, which provide various insurance
coverages to individuals or other entities that otherwise are unable to
purchase that coverage in the voluntary market. Participation in these pools
in most states is generally in proportion to voluntary writings of related
lines of business in that state. In the event that a member of that pool
becomes insolvent, the remaining members assume an additional pro rata share of
the liabilities of the pool. The underwriting results of these pools
traditionally have been unprofitable. Combined earned premiums related to such
pools and assigned risks for the Company were $159.9 million, $147.6 million
and $143.9 million in 2003, 2002 and 2001, respectively. The related combined
underwriting losses for the Company were $111.0 million, $38.5 million and
$47.8 million in 2003, 2002 and 2001, respectively.

Proposed legislation and regulatory changes have been introduced in the states
from time to time that would modify some of the laws and regulations affecting
the financial services industry, including the use of information. The
potential impact of that legislation on the Companys businesses cannot be
predicted at this time.

26



---



##### Table of Contents



Insurance Regulations Concerning Change of Control

Many state insurance regulatory laws intended primarily for the protection of
policyholders contain provisions that require advance approval by state
agencies of any change in control of an insurance company that is domiciled,
or, in some cases, having substantial business that it is deemed to be
commercially domiciled, in that state. The Company owns, directly or
indirectly, all of the shares of stock of property and casualty insurance
companies domiciled in the states of Arizona, California, Connecticut,
Delaware, Florida, Illinois, Indiana, Iowa, Massachusetts, Minnesota, New
Jersey and Texas. Control is generally presumed to exist through the
ownership of 10% (5% in the case of Florida) or more of the voting securities
of a domestic insurance company or of any company that controls a domestic
insurance company. Any purchaser of shares of common stock representing 10%
(5% in the case of Florida) or more of the voting power of the Companys
capital stock will be presumed to have acquired control of the Companys
domestic insurance subsidiaries unless, following application by that purchaser
in each insurance subsidiarys state of domicile, the relevant insurance
commissioner determines otherwise.

In addition to these filings, the laws of many states contain provisions
requiring pre-notification to state agencies prior to any change in control of
a non-domestic insurance company admitted to transact business in that state.
While these pre-notification statutes do not authorize the state agency to
disapprove the change of control, they do authorize issuance of cease and
desist orders with respect to the non-domestic insurer if it is determined that
some conditions, such as undue market concentration, would result from the
acquisition.

Any transactions that would constitute a change in control of any of the
Companys insurer subsidiaries would generally require prior approval by the
insurance departments of the states in which the Companys insurance
subsidiaries are domiciled or commercially domiciled and may require
preacquisition notification in those states that have adopted preacquisition
notification provisions and in which such insurance subsidiaries are admitted
to transact business.

One of the Companys insurance subsidiaries is domiciled in the United Kingdom.
Insurers in the United Kingdom are subject to change of control restrictions
in the Insurance Companies Act of 1982 including approval of the Financial
Services Authority.

Some of the Companys other insurance subsidiaries are domiciled in, or
authorized to conduct insurance business in, Canada. Authorized insurers in
Canada are subject to change of control restrictions in Section 407 of the
Insurance Companies Act, including approval of the Office of the Superintendent
of Financial Institutions.

These requirements may deter, delay or prevent transactions affecting the
control of or the ownership of common stock, including transactions that could
be advantageous to the Companys shareholders.

In conjunction with the proposed merger with St. Paul, filings are pending
for approval of the transaction under the holding company laws of the various
states and jurisdictions in which the Companys insurance subsidiaries are domiciled.

Insurance Regulatory Information System

The NAIC Insurance Regulatory Information System (IRIS) was developed to help
state regulators identify companies that may require special attention. The
IRIS system consists of a statistical phase and an analytical phase whereby
financial examiners review annual statements and financial ratios. The
statistical phase consists of twelve key financial ratios based on year-end
data that are generated from the NAIC database annually; each ratio has an
established usual range of results. These ratios assist state insurance
departments in executing their statutory mandate to oversee the financial
condition of insurance companies.

27



---



##### Table of Contents



A ratio result falling outside the usual range of IRIS ratios is not considered
a failing result; rather, unusual values are viewed as part of the regulatory
early monitoring system. Furthermore, in some years, it may not be unusual for
financially sound companies to have several ratios with results outside the
usual ranges. Generally, an insurance company will become subject to
regulatory scrutiny if it falls outside the usual ranges of four or more of the
ratios. As published by the NAIC, approximately 18.5% of the companies
included in the IRIS system have reported results outside the usual range on
four or more ratios in 2002.

In 2003, most of the Companys insurance subsidiaries in the Travelers Property
Casualty pool had results outside the usual range for the two year reserve
development to surplus ratio and the estimated current reserve deficiency to
surplus ratio ranging from 22% to 51%, which exceeded the usual range of 20% to
25%, primarily because of the pretax statutory income statement charges for
additions to asbestos reserves in 2002. In addition, one of the Companys
principal insurance companies had one other ratio outside the usual range. The
Travelers Indemnity Company had a liabilities to liquid assets ratio of 116%,
which exceeded the usual result of 105% due primarily to sizable subsidiary
investments that are excluded from the calculation of liquid assets and the
2002 increase in asbestos reserves that are included in liabilities. Also in
2003, the insurance companies in the Gulf pool had results for the one-year and two-year reserve development to surplus ratios
ranging from 75% to 112% and 88% to 120%, respectively, which exceeded the
usual result of 20% for both of these measures because of reserve additions related
primarily to the residual value business coupled with increases in core
business lines and the reserve for uncollectible reinsurance. The reserve
additions also resulted in the Gulf pool companies having two-year overall
operating ratios ranging from 128% to 134% which is in excess of the usual
value of 100%. In addition, the Gulf pool companies had an estimated current
reserve deficiency to surplus ratio ranging from 163% to 268% which exceeded
the usual result of 25% also due to these reserve additions. The Gulf pool
companies had investment yield ratios ranging from 2.7% to 3.4% which is below
the normal value of 4.5% reflecting a shortening of the duration of the fixed
maturity portfolio and a decline in interest rates on new investments. Gulf
Insurance Company had a liabilities to liquid assets ratio of 115% which
exceeded the usual result of 105% due primarily to increases in reinsurance
recoverables, a sizeable investment in subsidiaries that are excluded from the
calculation of liquid assets and the reserve additions noted above. Gulf
Underwriters Insurance Company also had a gross written premiums to surplus
ratio of 1065%, which exceeded the usual value of 900% due to increases in premiums
written on core specialty lines of business.

28



---



##### Table of Contents



In 2002, most of the Companys insurance subsidiaries in the Travelers Property
Casualty pool had results outside the usual range for the one year reserve
development to surplus ratio, the two year reserve development to surplus ratio
and the estimated current reserve deficiency to surplus ratio ranging from 21%
to 44%, which exceeded the usual range of 20% to 25%, primarily because of the
pretax statutory income statement charges for additions to asbestos reserves in
2002. In addition, three of the Companys principal insurance companies had
other ratios outside the usual range. The Travelers Indemnity Company and The
Standard Fire Insurance Company had investment yield ratios of 3.8% and 4.2%,
respectively, which were less than the usual results of 4.5%, reflecting the
decline in interest rates on new investments and lower dividends from
subsidiary equity investments. The Travelers Indemnity Company and Travelers
Casualty and Surety Company had liabilities to liquid assets ratios of 120% and
107%, respectively, which exceeded the usual result of 105% due primarily to
sizable subsidiary investments that are excluded from the calculation of liquid
assets and an increase in asbestos reserves that are included in liabilities.
The Travelers Casualty and Surety Company and the Standard Fire Insurance
Company each had a change in surplus ratio of -12%, which exceeded the usual
result of -10% due to a net loss resulting primarily from charges for additions
to asbestos reserves in 2002. Also in 2002, the insurance companies in the
Gulf pool had results for the two year reserve
development to surplus ratio ranging from 32% to 44%, which exceeded the usual
result of 20% because of reserve additions related to a run-off product line.
In addition, the Gulf pool companies had an estimated current reserve
deficiency to surplus ratio ranging from 46% to 84%, which exceeded the usual
result of 25% and a change in net writings ratio ranging from 223% to 403%,
which exceeded the usual result of 33% primarily due to the effect of their
removal from the Travelers Property Casualty pool and the reestablishment of
the Gulf pool. Gulf Insurance Company and Gulf Underwriters Insurance Company
had investment yield ratios of 4.3% and 3.9%, respectively, which were less
than the usual result of 4.5% reflecting a shortening of the duration of the
portfolio and a decline in interest rates on new investments. Gulf
Underwriters Insurance Company also had a gross written premiums to surplus
ratio of 1235%, which exceeded the usual result of 900% due to increases in
premiums written on core specialty lines and the effect of the companies
removal from the Travelers Property Casualty pool and the reestablishment of
the Gulf pool.

In 2001, two of the Companys principal subsidiaries had ratios outside the
usual ranges. The Travelers Indemnity Company had a liabilities to liquid
asset ratio of 110%, which exceeded the usual result of 105%. This resulted
from The Travelers Indemnity Companys acquisition of The Northland Company and
the contribution of Associates Insurance Company and affiliates, because these
entities are not liquid assets for the purposes of calculating this ratio.
Travelers Casualty and Surety Company has an estimated current reserve
deficiency to policyholders surplus ratio of 26% which exceeded the usual
result of 25%. The two factors which contributed to this result were the
combining of the Travelers Property Casualty and Gulf Insurance intercompany
reinsurance pools in 2001 and the decline in workers compensation business
volume in previous years.

In all of these instances in prior years, regulators have been satisfied upon
follow-up that no regulatory action was required. It is possible that similar
results could occur in the future. Management does not anticipate regulatory
action as a result of the 2003 IRIS ratio results. No regulatory action has
been taken by any state insurance department or the NAIC with respect to IRIS
ratios of any of the Companys insurance subsidiaries for the years ended
December 31, 2002.

29



---



##### Table of Contents



Risk-Based Capital (RBC) Requirements

In order to enhance the regulation of insurer solvency, the NAIC has adopted a
formula and model law to implement RBC requirements for most property and
casualty insurance companies, which is designed to determine minimum capital
requirements and to raise the level of protection that statutory surplus
provides for policyholder obligations. The RBC formula for property and
casualty insurance companies measures three major areas of risk facing property
and casualty insurers:



| |  |  | underwriting, which encompasses the risk of adverse loss developments and inadequate pricing;                                                                               
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | declines in asset values arising from market and/or credit risk; and                                                                                                        
|
| |  |  | off-balance sheet risk arising from adverse experience from
non-controlled assets, guarantees for affiliates or other contingent
liabilities and reserve and premium growth.

Under laws adopted by individual states, insurers having total adjusted capital
less than that required by the RBC calculation will be subject to varying
degrees of regulatory action, depending on the level of capital inadequacy.

The RBC law provides for four levels of regulatory action. The extent of
regulatory intervention and action increases as the level of surplus to RBC
falls. The first level, the company action level as defined by the NAIC,
requires an insurer to submit a plan of corrective actions to the regulator if
surplus falls below 200% of the RBC amount. The regulatory action level, as
defined by the NAIC, requires an insurer to submit a plan containing corrective
actions and requires the relevant insurance commissioner to perform an
examination or other analysis and issue a corrective order if surplus falls
below 150% of the RBC amount. The authorized control level, as defined by the
NAIC, authorizes the relevant insurance commissioner to take whatever
regulatory actions considered necessary to protect the best interest of the
policyholders and creditors of the insurer which may include the actions
necessary to cause the insurer to be placed under regulatory control, i.e.,
rehabilitation or liquidation, if surplus falls below 100% of the RBC amount.
The fourth action level is the mandatory control level as defined by the NAIC,
which requires the relevant insurance commissioner to place the insurer under
regulatory control if surplus falls below 70% of the RBC amount.

The formulas have not been designed to differentiate among adequately
capitalized companies that operate with higher levels of capital. Therefore,
it is inappropriate and ineffective to use the formulas to rate or to rank
these companies. At December 31, 2003, all of the Companys property and
casualty insurance subsidiaries had total adjusted capital in excess of amounts
requiring company or regulatory action at any prescribed RBC action level.

30



---



##### Table of Contents



OTHER INFORMATION

General Business Factors

In the opinion of the Companys management, no material part of the business of
the Company and its subsidiaries is dependent upon a single customer or group
of customers, the loss of any one of which would have a materially adverse
effect on the Company, and no one customer or group of affiliated customers
accounts for as much as 10% of the Companys consolidated revenues.

Employees

At December 31, 2003, the Company had 21,254 full-time and 814 part-time
employees. The Company believes that its employee relations are satisfactory.
None of the Companys employees are subject to collective bargaining
agreements.

Source of Funds

For a discussion of the Companys sources of funds and maturities of the
long-term debt of the Company, see Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources, and note 8 of notes to the Companys consolidated financial
statements.

Taxation

For a discussion of tax matters affecting the Company and its operations, see
note 9 of notes to the Companys consolidated financial statements.

Financial Information about Industry Segments

For financial information regarding industry segments of the Company, see Item
7, Managements Discussion and Analysis of Financial Condition and Results of
Operations, and note 3 of notes to the Companys consolidated financial
statements.

Recent Transactions

For information regarding recent transactions of the Company, see Item 7,
Managements Discussion and Analysis of Financial Condition and Results of
Operations, and note 1 of notes to the Companys consolidated financial
statements.

Company Website and Availability of SEC Filings

The Companys Internet website is www.travelers.com. Information on the
Companys website is not a part of this Form 10-K. The Company makes available
free of charge on its website, or provides a link to all of the Companys Forms
10-K, 10-Q and 8-K, and any amendments to these, that are filed with the SEC.
To access these filings, go to the Companys website and click on Investors,
then click on SEC Filings. This links directly to the SECs website where
all of the Companys SEC filings that are made electronically with the SEC may
be viewed.

31



---



##### Table of Contents



Glossary of Selected Insurance Terms

|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Accident year               |  | The annual calendar accounting period in which loss events occurred, regardless of when the
losses are actually reported, booked or paid.                                                                                                                                                                                                                                                                                                                                                                                               
|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Adjusted unassigned surplus |  | Unassigned surplus as of the most recent statutory annual report reduced by twenty-five
percent of that years unrealized appreciation in value or revaluation of assets or
unrealized profits on investments, as defined in that report.                                                                                                                                                                                                                                                                                               
|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Admitted insurer            |  | A company licensed to transact insurance business within a state.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Annuity                     |  | A contract that pays a periodic benefit for the life of a person (the annuitant), the lives
of two or more persons or for a specified period of time.                                                                                                                                                                                                                                                                                                                                                                                   
|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Assigned risk pools         |  | Reinsurance pools which cover risks for those unable to purchase insurance in the voluntary
market. Possible reasons for this inability include the risk being too great or the profit
being too small under the required insurance rate structure. The costs of the risks
associated with these pools are charged back to insurance carriers in proportion to their
direct writings.                                                                                                                                                   
|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Assumed reinsurance         |  | Insurance risks acquired from a ceding company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Broker                      |  | One who negotiates contracts of insurance or reinsurance on behalf of an insured party,
receiving a commission from the insurer or reinsurer for placement and other services
rendered.                                                                                                                                                                                                                                                                                                                                                 
|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Capacity                    |  | The percentage of surplus, or the dollar amount of exposure, that an insurer or reinsurer is
willing or able to place at risk. Capacity may apply to a single risk, a program, a line of
business or an entire book of business. Capacity may be constrained by legal restrictions,
corporate restrictions or indirect restrictions.                                                                                                                                                                                                    
|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Case reserves               |  | Loss reserves, established with respect to specific, individual reported claims.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Casualty insurance          |  | Insurance which is primarily concerned with the losses caused by injuries to third persons,
i.e., not the insured, and the legal liability imposed on the insured resulting therefrom.
It includes, but is not limited to, employers liability, workers compensation, public
liability, automobile liability, personal liability and aviation liability insurance. It
excludes certain types of losses that by law or custom are considered as being exclusively
within the scope of other types of insurance, such as fire or marine.
|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Catastrophe                 |  | A severe loss, resulting from natural and manmade events, including risks such as fire,
earthquake, windstorm, explosion, terrorism and other similar events. Each catastrophe has
unique characteristics. Catastrophes are not predictable as to timing or amount in advance,
and therefore their effects are not included in earnings or claims and claim adjustment
expense reserves prior to occurrence.                                                                                                                            

32



---



##### Table of Contents



|                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Catastrophe loss                             |  | Loss and directly identified loss adjustment expenses from catastrophes.                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Catastrophe reinsurance                      |  | A form of excess of loss reinsurance which, subject to a specified limit, indemnifies the
ceding company for the amount of loss in excess of a specified retention with respect to an
accumulation of losses resulting from a catastrophic event. The actual reinsurance document
is called a catastrophe cover. These reinsurance contracts are typically designed to
cover property insurance losses but can be written to cover casualty insurance losses such
as from workers compensation policies.
|                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Cede; ceding company                         |  | When an insurer reinsures its liability with another insurer or a cession, it cedes
business and is referred to as the ceding company.                                                                                                                                                                                                                                                                                                                                                               
|                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Ceded reinsurance                            |  | Insurance risks transferred to another company as reinsurance. See Reinsurance.                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Claim                                        |  | Request by an insured for indemnification by an insurance company for loss incurred from an
insured peril.                                                                                                                                                                                                                                                                                                                                                                                                 
|                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Claim adjustment expenses                    |  | See Loss adjustment expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Claims and claim adjustment
expenses         |  | See Loss and Loss adjustment expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Claims and claim adjustment
expense reserves |  | See Loss reserves.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Combined ratio                               |  | The sum of the loss and LAE ratio, the underwriting expense ratio and, where applicable,
the ratio of dividends to policyholders to net premiums earned. A combined ratio under 100%
generally indicates an underwriting profit. A combined ratio over 100% generally indicates
an underwriting loss.                                                                                                                                                                                                      
|                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Commercial lines                             |  | The various kinds of property and casualty insurance that are written for businesses.                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Commercial multi-peril policies              |  | Refers to policies which cover both property and third-party liability exposures.                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Commutation agreement                        |  | An agreement between a reinsurer and a ceding company whereby the reinsurer pays an agreed
upon amount in exchange for a complete discharge of all obligations, including future
obligations, between the parties for reinsurance losses incurred.                                                                                                                                                                                                                                                         
|                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Deductible                                   |  | The amount of loss that an insured retains.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Deferred acquisition costs                   |  | Primarily commissions and premium taxes that vary with and are primarily related to the
production of new contracts and are deferred and amortized to achieve a matching of
revenues and expenses when reported in financial statements prepared in accordance with
GAAP.                                                                                                                                                                                                                                  

33



---



##### Table of Contents



|                                          |  |                                                                                                                                                                                                                                                                                                                                                                                   
|----------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Direct written premiums                   |  | The amounts charged by an insurer to insureds in exchange for coverages provided in
accordance with the terms of an insurance contract. It excludes the impact of all
reinsurance premiums, either assumed or ceded.                                                                                                                                                              
|                                          |  |                                                                                                                                                                                                                                                                                                                                                                                   
|Earned premiums or premiums earned        |  | That portion of property casualty premiums written that applies to the expired portion of
the policy term. Earned premiums are recognized as revenues under both Statutory Accounting
Practices (SAP) and GAAP.                                                                                                                                                                   
|                                          |  |                                                                                                                                                                                                                                                                                                                                                                                   
|Excess liability                          |  | Additional casualty coverage above a layer of insurance exposures.                                                                                                                                                                                                                                                                                                                
|                                          |  |                                                                                                                                                                                                                                                                                                                                                                                   
|Excess of loss reinsurance                |  | Reinsurance that indemnifies the reinsured against all or a specified portion of losses over
a specified dollar amount or retention.                                                                                                                                                                                                                                            
|                                          |  |                                                                                                                                                                                                                                                                                                                                                                                   
|Expense ratio                             |  | See Underwriting expense ratio.                                                                                                                                                                                                                                                                                                                                                 
|                                          |  |                                                                                                                                                                                                                                                                                                                                                                                   
|Facultative reinsurance                   |  | The reinsurance of all or a portion of the insurance provided by a single policy. Each
policy reinsured is separately negotiated.                                                                                                                                                                                                                                                 
|                                          |  |                                                                                                                                                                                                                                                                                                                                                                                   
|Fidelity and surety programs              |  | Fidelity insurance coverage protects an insured for loss due to embezzlement or
misappropriation of funds by an employee. Surety is a three-party agreement in which the
insurer agrees to pay a second party or make complete an obligation in response to the
default, acts or omissions of an insured.                                                                         
|                                          |  |                                                                                                                                                                                                                                                                                                                                                                                   
|Guaranteed cost products                  |  | An insurance policy where the premiums charged will not be adjusted for actual loss
experience during the covered period.                                                                                                                                                                                                                                                         
|                                          |  |                                                                                                                                                                                                                                                                                                                                                                                   
|Guaranty fund                             |  | State-regulated mechanism which is financed by assessing insurers doing business in those
states. Should insolvencies occur, these funds are available to meet some or all of the
insolvent insurers obligations to policyholders.                                                                                                                                               
|                                          |  |                                                                                                                                                                                                                                                                                                                                                                                   
|Incurred but not reported
(IBNR) reserves |  | Reserves for estimated losses and LAE that have been incurred but not yet reported to the
insurer.                                                                                                                                                                                                                                                                                
|                                          |  |                                                                                                                                                                                                                                                                                                                                                                                   
|Inland marine                             |  | A broad type of insurance generally covering articles that may be transported from one place
to another, as well as bridges, tunnels and other instrumentalities of transportation. It
includes goods in transit, generally other than transoceanic, and may include policies for
movable objects such as personal effects, personal property, jewelry, furs, fine art and
others.
|                                          |  |                                                                                                                                                                                                                                                                                                                                                                                   
|IRIS ratios                               |  | Financial ratios calculated by the NAIC to assist state insurance departments in monitoring
the financial condition of insurance companies.                                                                                                                                                                                                                                       
|                                          |  |                                                                                                                                                                                                                                                                                                                                                                                   
|Large deductible policy                   |  | An insurance policy where the customer assumes at least $25,000 or more of each loss.
Typically, the insurer is responsible for paying the entire loss under those policies and
then seeks reimbursement from the insured for the deductible amount.                                                                                                                              

34



---



##### Table of Contents



|                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Loss                                                   |  | An occurrence that is the basis for submission and/or payment of a claim. Losses may be
covered, limited or excluded from coverage, depending on the terms of the policy.                                                                                                                                                                                                                                                               
|                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Loss adjustment expenses (LAE)                         |  | The expenses of settling claims, including legal and other fees and the portion of general
expenses allocated to claim settlement costs.                                                                                                                                                                                                                                                                                                
|                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Loss and LAE ratio                                     |  | For SAP it is the ratio of incurred losses and loss adjustment expenses to net earned
premiums. For GAAP it is the ratio of incurred losses and loss adjustment expenses reduced
by an allocation of fee income to net earned premiums.                                                                                                                                                                                                 
|                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Loss reserves                                          |  | Liabilities established by insurers and reinsurers to reflect the estimated cost of claims
incurred that the insurer or reinsurer will ultimately be required to pay in respect of
insurance or reinsurance it has written. Reserves are established for losses and for LAE,
and consist of case reserves and IBNR reserves. As the term is used in this document, loss
reserves is meant to include reserves for both losses and LAE.
|                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Loss reserve development                               |  | The increase or decrease in incurred claims and claim adjustment expenses as a result of the
re-estimation of claims and claim adjustment expense reserves at successive valuation dates
for a given group of claims. Loss reserve development may be related to prior year or
current year development.                                                                                                                                
|                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Losses incurred                                        |  | The total losses sustained by an insurance company under a policy or policies, whether paid
or unpaid. Incurred losses include a provision for IBNR.                                                                                                                                                                                                                                                                                    
|                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|National Association of Insurance
Commissioners (NAIC) |  | An organization of the insurance commissioners or directors of all 50 states and the
District of Columbia organized to promote consistency of regulatory practice and statutory
accounting standards throughout the United States.                                                                                                                                                                                                      
|                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Net written premiums                                   |  | Direct written premiums plus assumed reinsurance premiums less premiums ceded to reinsurers.                                                                                                                                                                                                                                                                                                                                            
|                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Operating income (loss)                                |  | Net income (loss) excluding the after-tax impact net realized investment gains (losses) and
cumulative effect of changes in accounting principles. For 2002 and prior, operating income
also excludes non-recurring restructuring changes related to periods prior to the spin-off
from Citigroup.                                                                                                                                      
|                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Personal lines                                         |  | Types of property and casualty insurance written for individuals or families, rather than
for businesses.                                                                                                                                                                                                                                                                                                                               
|                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Pool                                                   |  | An organization of insurers or reinsurers through which particular types of risks are
underwritten with premiums, losses and expenses being shared in agreed-upon percentages.                                                                                                                                                                                                                                                          
|                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Premiums                                               |  | The amount charged during the year on policies and contracts issued, renewed or reinsured by
an insurance company.                                                                                                                                                                                                                                                                                                                      

35



---



##### Table of Contents



|                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Producer                               |  | Contractual entity which directs insureds to the insurer for coverage. This term includes
agents and brokers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Property insurance                     |  | Insurance that provides coverage to a person with an insurable interest in tangible property
for that persons property loss, damage or loss of use.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Quota share reinsurance                |  | Reinsurance wherein the insurer cedes an agreed-upon fixed percentage of liabilities,
premiums and losses for each policy covered on a pro rata basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Rates                                  |  | Amounts charged per unit of insurance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Reinsurance                            |  | The practice whereby one insurer, called the reinsurer, in consideration of a premium paid
to that insurer, agrees to indemnify another insurer, called the ceding company, for part or
all of the liability of the ceding company under one or more policies or contracts of
insurance which it has issued.                                                                                                                                                                                                                                                                                                                                                                                 
|                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Reinsurance agreement                  |  | A contract specifying the terms of a reinsurance transaction.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Residual market (involuntary business) |  | Insurance market which provides coverage for risks unable to purchase insurance in the
voluntary market. Possible reasons for this inability include the risk being too great or
the profit potential too small under the required insurance rate structure. Residual
markets are frequently created by state legislation either because of lack of available
coverage such as property coverage in a windstorm prone area or protection of the accident
victim as in the case of workers compensation. The costs of the residual market are
usually charged back to the direct insurance carriers in proportion to the carriers
voluntary market shares for the type of coverage involved.
|                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Retention                              |  | The amount of exposure a policyholder company retains on any one risk or group of risks.
The term may apply to an insurance policy, where the policyholder is an individual, family
or business, or a reinsurance policy, where the policyholder is an insurance company.                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Retention ratio                        |  | Current period renewal accounts or policies as a percentage of total accounts or policies
available for renewal.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Retrospective premiums                 |  | Premiums related to retrospectively rated policies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Retrospective rating                   |  | A plan or method which permits adjustment of the final premium or commission on the basis of
actual loss experience, subject to certain minimum and maximum limits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

36



---



##### Table of Contents



|                                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                       
|------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Return on equity                     |  | The ratio of net income to average equity.                                                                                                                                                                                                                                                                                                                                                                            
|                                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                       
|Risk-based capital (RBC)             |  | A measure adopted by the NAIC and enacted by states for determining the minimum statutory
capital and surplus requirements of insurers. Insurers having total adjusted capital less
than that required by the RBC calculation will be subject to varying degrees of regulatory
action depending on the level of capital inadequacy.                                                                                   
|                                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                       
|Risk retention group                 |  | An alternative form of insurance in which members of a similar profession or business band
together to self insure their risks.                                                                                                                                                                                                                                                                                       
|                                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                       
|Run-off business                     |  | An operation which has been determined to be nonstrategic; includes non-renewals of inforce
policies and a cessation of writing new business, where allowed by law.                                                                                                                                                                                                                                                   
|                                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                       
|Salvage                              |  | The amount of money an insurer recovers through the sale of property transferred to the
insurer as a result of a loss payment.                                                                                                                                                                                                                                                                                        
|                                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                       
|Second-injury fund                   |  | The employer of an injured, impaired worker is responsible only for the workers
compensation benefit for the most recent injury; the second-injury fund would cover the cost
of any additional benefits for aggravation of a prior condition. The cost is shared by the
insurance industry and self-insureds, funded through assessments to insurance companies and
self-insureds based on either premiums or losses.
|                                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                       
|Self-insured retentions              |  | That portion of the risk retained by a person for its own account.                                                                                                                                                                                                                                                                                                                                                    
|                                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                       
|Servicing carrier                    |  | An insurance company that provides, for a fee, various services including policy issuance,
claims adjusting and customer service for insureds in a reinsurance pool.                                                                                                                                                                                                                                                  
|                                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                       
|Statutory accounting practices (SAP) |  | The practices and procedures prescribed or permitted by domiciliary state insurance
regulatory authorities in the United States for recording transactions and preparing
financial statements. Statutory accounting practices generally reflect a modified going
concern basis of accounting.                                                                                                                         
|                                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                       
|Statutory surplus                    |  | As determined under SAP, the amount remaining after all liabilities, including loss
reserves, are subtracted from all admitted assets. Admitted assets are assets of an insurer
prescribed or permitted by a state to be recognized on the statutory balance sheet.
Statutory surplus is also referred to as surplus or surplus as regards policyholders for
statutory accounting purposes.                       
|                                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                       
|Structured settlements               |  | Periodic payments to an injured person or survivor for a determined number of years or for
life, typically in settlement of a claim under a liability policy, usually funded through
the purchase of an annuity.                                                                                                                                                                                                      
|                                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                       
|Subrogation                          |  | A principle of law incorporated in insurance policies, which enables an insurance company,

after paying a claim under a policy, to recover the amount of the loss from another who is
legally liable for it.                                                                                                                                                                                                         

37



---



##### Table of Contents



|                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                           
|-------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Third-party liability      |  | A liability owed to a claimant (third-party) who is not one of the two parties to the
insurance contract. Insured liability claims are referred to as third-party claims.                                                                                                                                                                                                                                                 
|                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                           
|Treaty reinsurance         |  | The reinsurance of a specified type or category of risks defined in a reinsurance agreement
(a treaty) between a primary insurer or other reinsured and a reinsurer. Typically, in
treaty reinsurance, the primary insurer or reinsured is obligated to offer and the reinsurer
is obligated to accept a specified portion of all that type or category of risks originally
written by the primary insurer or reinsured.
|                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                           
|Umbrella coverage          |  | A form of insurance protection against losses in excess of amounts covered by other
liability insurance policies or amounts not covered by the usual liability policies.                                                                                                                                                                                                                                                  
|                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                           
|Unassigned surplus         |  | The undistributed and unappropriated amount of statutory surplus.                                                                                                                                                                                                                                                                                                                                                         
|                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                           
|Underwriter                |  | An employee of an insurance company who examines, accepts or rejects risks and classifies
accepted risks in order to charge an appropriate premium for each accepted risk. The
underwriter is expected to select business that will produce an average risk of loss no
greater than that anticipated for the class of business.                                                                                           
|                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                           
|Underwriting               |  | The insurers or reinsurers process of reviewing applications for insurance coverage, and
the decision whether to accept all or part of the coverage and determination of the
applicable premiums; also refers to the acceptance of that coverage.                                                                                                                                                                       
|                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                           
|Underwriting expense ratio |  | For SAP it is the ratio of underwriting expenses incurred to net written premiums. For GAAP
it is the ratio of underwriting expenses incurred reduced by an allocation of fee income to
net earned premiums.                                                                                                                                                                                                              
|                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                           
|Underwriting results       |  | The pre-tax profit or loss (also known as underwriting gain or loss) experienced by a
property casualty insurance company after deducting claims and claim adjustment expenses and
insurance-related expenses from net earned premiums and fee income. This profit or loss
calculation includes reinsurance assumed and ceded but excludes investment income.                                                             
|                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                           
|Unearned premium           |  | The portion of premiums written that is allocable to the unexpired portion of the policy
term.                                                                                                                                                                                                                                                                                                                            
|                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                           
|Voluntary market           |  | The market in which a person seeking insurance obtains coverage without the assistance of
residual market mechanisms.                                                                                                                                                                                                                                                                                                     
|                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                           
|Wholesale broker           |  | An independent or exclusive agent that represents both admitted and nonadmitted insurers in
market areas, which include standard, non-standard, specialty and excess and surplus lines
of insurance. The wholesaler does not deal directly with the insurance consumer. The
wholesaler deals with the retail agent or broker.                                                                                             
|                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                           
|Workers compensation      |  | A system (established under state and federal laws) under which employers provide insurance
for benefit payments to their employees for work-related injuries, deaths and diseases,
regardless of fault.                                                                                                                                                                                                                  

38



---



##### Table of Contents






Item 2. PROPERTIES

The Company currently owns six buildings in Hartford, Connecticut, which
comprises its headquarters. The Company currently occupies approximately
1,471,174 square feet of office space in such buildings. The Company also owns
other real property, which includes office buildings in Fall River,
Massachusetts and in Irving, Texas and a data center located in Norcross,
Georgia. In addition, the Company leases 134 field and claim offices totaling
approximately 3,393,749 square feet throughout the United States under leases
or subleases with third parties.

On September 1, 2001, the Company vacated the 50 Prospect Street complex in
Hartford, Connecticut in order to undertake a complete renovation. The Prospect
Street project, which involved 460,000 square feet, was completed by the end of
2003, approximately six months ahead of schedule. The Company had entered into
the various lease arrangements in Hartford, Connecticut to temporarily house
the displaced operations and which will also be used to provide additional
space for merger related activities.

In the opinion of the Companys management, the Companys properties are
adequate and suitable for its business as presently conducted and are
adequately maintained.




Item 3. LEGAL PROCEEDINGS

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

Asbestos and Environmental 
Related Proceedings

In the ordinary course of its insurance business, the Company receives claims
for insurance arising under policies issued by the Company asserting alleged
injuries and damages from asbestos and other hazardous waste and toxic
substances which are the subject of related coverage litigation, including,
among others, the litigation described below. The Company continues to be
subject to aggressive asbestos-related litigation. The conditions surrounding
the final resolution of these claims and the related litigation continue to
change.

The Company is involved in a bankruptcy and other proceedings relating to
ACandS, Inc. (ACandS), formerly a national installer of products containing
asbestos. The proceedings involve disputes as to whether and to what extent
any of ACandS potential liabilities for bodily injury asbestos claims were
covered by insurance policies issued by the Company. There were a number of
developments in the proceedings since the beginning of 2003, including two
decisions which were favorable to the Company. These developments and the
status of the various proceedings are described below.

One of the proceedings was an arbitration commenced in January 2001 to
determine whether and to what extent ACandS financial obligations for bodily
injury asbestos claims are subject to insurance policy aggregate limits. On
July 31, 2003, the arbitration panel ruled in the Companys favor that asbestos
bodily injury claims paid by ACandS on or after that decision date are subject
to the aggregate limits of the policies issued to ACandS, which have been
exhausted. In October 2003, ACandS commenced a lawsuit seeking to vacate
the arbitration award as beyond the panels scope of authority (ACandS, Inc. v.
Travelers Casualty and Surety Co.,U.S.D.Ct., E.D. Pa.). The Company has
filed its opposition to ACandS motion to vacate.

39



---



##### Table of Contents



ACandS filed for bankruptcy in September 2002 (In re: ACandS, Inc., pending in
the U.S. Bankruptcy Court for the District of Delaware). On January 26, 2004
the bankruptcy court issued a decision rejecting confirmation of ACandS
proposed plan of reorganization. The bankruptcy court found, consistent with
the Companys objections to ACandS proposed plan, that the proposed plan was
not fundamentally fair, was not proposed in good faith and did not comply with
Section 524(g) of the Bankruptcy Code. ACandS has filed a notice of appeal of
the bankruptcy courts decision and has filed objections to the bankruptcy
courts findings of fact and conclusions of law in the United States District
Court. The Company has moved to dismiss the appeal and objections and has also
filed an opposition to ACandS objections.

In its proposed plan of reorganization, ACandS sought to establish a trust to
pay asbestos bodily injury claims against it and sought to assign to the trust
its rights under the insurance policies issued by the Company. The proposed
plan and disclosure statement filed by ACandS claimed that ACandS had settled
the vast majority of asbestos-related bodily injury claims currently pending
against it for approximately $2.8 billion. ACandS asserts that based on a
prior agreement between the Company and ACandS and ACandS interpretation of
the July 31, 2003 arbitration panel ruling, the Company is liable for 45% of
the $2.8 billion. In August 2003, ACandS filed a new lawsuit against the
Company seeking to enforce this position (ACandS, Inc. v. Travelers Casualty
and Surety Co.,U.S.D.Ct., E.D. Pa.). The Company has not yet responded to the
complaint but intends to vigorously contest ACandS assertions and believes
that it has meritorious defenses.

In addition to the proceedings described above the Company and ACandS are also
involved in litigation (ACandS, Inc. v. Travelers Casualty and Surety Co.,
U.S.D.Ct., E.D. Pa.) commenced in September 2000. This litigation primarily
involves the extent to which the asbestos bodily injury claims against ACandS
are subject to occurrence limits under insurance policies issued by the
Company. The Company has filed a motion to dismiss this action based upon the
July 31, 2003 arbitration decision.

All three of the ongoing proceedings were stayed pending the bankruptcy courts
ruling on ACandS plan of reorganization. In light of the issuance of that
ruling, the Company is now evaluating its next steps in the proceedings. The
Company believes that the findings of the Bankruptcy Court support various of
the Companys assertions in the proceedings.

The Company believes that it has meritorious defenses in all these proceedings,
which it is vigorously asserting, including, among others, that the purported
settlements are not final, are unreasonable in amount and are not binding on
the Company; that any bankruptcy plan of reorganization which ACandS files is
defective to the extent it seeks to accelerate any of the Companys obligations
under policies issued to ACandS or to deprive the Company of its right to
litigate the claims against ACandS; that the arbitration award is valid and
binding on the parties and applies to claims purportedly settled by ACandS
during the pendency of the arbitration proceeding; and that the occurrence
limits in the policies substantially reduce or eliminate the Companys
obligations, if any, with respect to the purportedly settled claims.

40



---



##### Table of Contents



In October 2001 and April 2002, two purported class action suits (Wisev.
Travelers,and Meningerv. Travelers), were filed against the Company and other
insurers in state court in West Virginia. The plaintiffs in these cases, which
were subsequently consolidated into a single proceeding in Circuit Court of
Kanawha County, West Virginia, allege that the insurer defendants engaged in
unfair trade practices by inappropriately handling and settling asbestos
claims. The plaintiffs seek to reopen large numbers of settled asbestos claims
and to impose liability for damages, including punitive damages, directly on
insurers. Lawsuits similar to Wisehave been filed in Massachusetts (2002) and
Hawaii (filed in 2002, and served in May 2003) (these suits are collectively
referred to as the Statutory and Hawaii Actions). Also, in November 2001,
plaintiffs in consolidated asbestos actions pending before a mass tort panel of
judges in West Virginia state court moved to amend their complaint to name the
Company as a defendant, alleging that the Company and other insurers breached
alleged duties to certain users of asbestos products. In March 2002, the court
granted the motion to amend. Plaintiffs seek damages, including punitive
damages. Lawsuits seeking similar relief and raising allegations similar to
those presented in the West Virginia amended complaint are also pending against
the Company in Louisiana, Ohio and Texas state courts (these suits, together
with the West Virginia suit, are collectively referred to as the common law
claims).

All of the actions described in the preceding paragraph, other than the Hawaii
Actions, are currently subject to a temporary restraining order entered by the
federal bankruptcy court in New York, which had previously presided over and
approved the reorganization in bankruptcy of the Companys former policyholder
Johns Manville. In August 2002, the bankruptcy court conducted a hearing on
the Companys motion for a preliminary injunction prohibiting further
prosecution of the lawsuits pursuant to the reorganization plan and related
orders. At the conclusion of this hearing, the court ordered the parties to
mediation, appointed a mediator and continued the temporary restraining order.
During 2003, the same bankruptcy court extended the existing injunction to
apply to an additional set of cases filed in various state courts in Texas and
Ohio as well as to the attorneys who are prosecuting these cases. The order
also enjoins these attorneys and their respective law firms from commencing any
further lawsuits against the Company based upon these allegations without the
prior approval of the court. The parties have met with the mediator several
times, and on November 19, 2003, the parties advised the bankruptcy court that
a settlement in principle of the Statutory and Hawaii Actions had been reached.
This settlement in principle is subject to a number of significant
contingencies, including the execution of a definitive settlement
agreement. In addition, the bankruptcy court must issue an order approving the
settlement agreement and clarifying certain prior orders of the bankruptcy
court concerning the scope and breadth of the injunction previously entered by
that court in the Johns Manville proceeding. All of these orders must
become final and all appeals seeking to reverse these orders must
have been denied in order for the settlement to take effect. The bankruptcy court
will also hold hearings with respect to the Companys motion for
a permanent
injunction with respect to all of the pending common law claims. If the Company is successful in finalizing its settlement of the
Statutory and Hawaii Actions and obtains the permanent injunction
it is seeking with respect to the common law claims, then the
Statutory and Hawaii Actions will have been resolved and the pending common law
claims will have been enjoined. It is not possible to predict how the court
will rule on the motion for a permanent injunction with respect to the
common law claims or the motion to approve the
settlement of the Statutory and Hawaii Actions, even assuming that the
settlement in principle of these actions is finalized and reduced to an
executed, definitive settlement agreement. If all of the conditions of the
Statutory and Hawaii settlement in principle are not satisfied, or to the
extent that the bankruptcy court does not enter the permanent injunction sought
by the Company with respect to the common law claims, then the temporary
restraining order currently in effect will be lifted and the Company will again
be subject to the pending litigation and could be subject to additional
litigation based on similar theories of liability.

41



---



##### Table of Contents



The Company has numerous defenses in all of the direct action cases. Many of
these defenses have been raised in initial motions to dismiss filed by the
Company and other insurers. There have been favorable rulings during 2003 in
Texas on some of these motions filed by other insurers during the pendency of
the Johns Manville stay that dealt with statute of limitations and the validity
of the alleged causes of actions. The Companys defenses include the fact
that these novel theories have no basis in law; that they are directly at odds
with the well established law pertaining to the insured/insurer relationship;
that there is no generalized duty to warn as alleged by the plaintiffs; that to
the extent that they have not been released by virtue of prior settlement
agreements by the claimants with the Companys policyholders, all of these
claims were released by virtue of approved settlements and orders entered by
the Johns Manville bankruptcy court; and that the applicable statute of
limitation as to many of these claims has long since expired.

The Company is defending its asbestos and environmental-related litigation
vigorously and believes that it has meritorious defenses; however, the outcome
of these disputes is uncertain. In this regard, the Company employs dedicated
specialists and aggressive resolution strategies to manage asbestos and
environmental loss exposure, including settling litigation under appropriate
circumstances. For a discussion of recent settlement activity and other
information regarding the Companys asbestos and environmental exposure, see
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Asbestos Claims and Litigation,  Environmental Claims and
Litigation and  Uncertainty Regarding Adequacy of Asbestos and Environmental
Reserves.

Currently, it is not possible to predict legal outcomes and their impact on the
future development of claims and litigation relating to asbestos and
environmental claims. Any such development will be affected by future court
decisions and interpretations, as well as changes in applicable legislation.
Because of these uncertainties, additional liabilities may arise for amounts in
excess of the current reserves. In addition, the Companys estimate of
ultimate claims and claim adjustment expenses may change. These additional
liabilities or increases in estimates, or a range of either, cannot now be
reasonably estimated and could result in income statement charges that could be
material to the Companys results of operations and financial condition in
future periods.

Other Proceedings

Beginning in January 1997, various plaintiffs commenced a series of purported
class actions and one multi-party action in various courts against some of the
Companys subsidiaries, dozens of other insurers and the National Council on
Compensation Insurance, or the NCCI. The allegations in the actions are
substantially similar. The plaintiffs generally allege that the defendants
conspired to collect excessive or improper premiums on loss-sensitive workers
compensation insurance policies in violation of state insurance laws, antitrust
laws, and state unfair trade practices laws. Plaintiffs seek unspecified
monetary damages. After several voluntary dismissals, refilings and
consolidations, actions are, or until recently were, pending in the following
jurisdictions: Georgia (Melvin Simon & Associates, Inc., et al. v. Standard
Fire Insurance Company, et al.); Tennessee (Bristol Hotel Asset Company, et al.
v. The Aetna Casualty and Surety Company, et al.); Florida (Bristol Hotel Asset
Company, et al.v. Allianz Insurance Company, et al. and Bristol Hotel
Management Corporation, et al. v. Aetna Casualty & Surety Company, et al.); New
Jersey (Foodarama Supermarkets, Inc., et al.v. Allianz Insurance Company, et
al.); Illinois (CR/PL Management Co., et al.v. Allianz Insurance Company
Group, et al.); Pennsylvania (Foodarama Supermarkets, Inc.v. American
Insurance Company, et al.); Missouri (American Freightways Corporation, et al.
v. American Insurance Co., et al.); California (Bristol Hotels & Resorts, et
al. v. NCCI, et al.); Texas (Sandwich Chef of Texas, Inc., et al.v. Reliance
National Indemnity Insurance Company, et al.); Alabama (Alumax Inc., et al. v.
Allianz Insurance Company, et al.); Michigan (Alumax, Inc., et al. v. National
Surety Corp., et al.); Kentucky (Payless Cashways, Inc., et al. v. National
Surety Corp. et al.); New York (Burnham Service Corp.v. American Motorists
Insurance Company, et al.); and Arizona (Albany International Corp. v. American
Home Assurance Company, et al.).

42



---



##### Table of Contents



The trial courts ordered dismissal of the California, Pennsylvania and New York
cases, one of the two Florida cases (Bristol Hotel Asset Company, et al. v.
Allianz Insurance Company, et al.), and, in August 2003, the Kentucky case.In
addition, the trial courts have ordered partial dismissals of six other cases:
those pending in Tennessee, New Jersey, Illinois, Missouri, Alabama and
Arizona. The trial courts in Georgia, Texas, and Michigan denied defendants
motions to dismiss. The California appellate court reversed the trial court in
part and ordered reinstatement of most claims, while the New York appellate
court affirmed dismissal in part and allowed plaintiffs to dismiss their
remaining claims voluntarily. The Michigan, Pennsylvania and New Jersey courts
denied class certification. The New Jersey appellate court denied plaintiffs
request to appeal. After the rulings described above, the plaintiffs withdrew
the New York and Michigan cases. Although the trial court in Texas granted
class certification, the appellate court reversed that ruling in January 2003,
holding that class certification should not have been granted. In October
2003, the United States Supreme Court denied plaintiffs request for further
review of that appellate ruling. The Company is vigorously defending all of
the pending cases and the Companys management believes the Company has
meritorious defenses; however the outcome of these disputes is uncertain.

Gulf Insurance Company (Gulf), a majority-owned subsidiary of TPC, brought an
action on May 22, 2003, as amended on July 29, 2003, in the Supreme Court of
New York, County of New York (Gulf Insurance Company v. Transatlantic
Reinsurance Company, et al.), against Transatlantic Reinsurance Company
(Transatlantic), and three other reinsurance companies to recover amounts due
under reinsurance contracts issued to Gulf and related to Gulfs February 2003
settlement of a coverage dispute under a vehicle residual value protection
insurance policy. On May 22, 2003, as amended on September 5, 2003,
Transatlantic brought an action against Gulf regarding the same
dispute, which
has been consolidated with Gulfs action. Transatlantic seeks rescission of
its vehicle residual value reinsurance contracts issued to Gulf and unspecified
damages for breach of contract. XL Reinsurance America, Inc. (XL), Odyssey
America Reinsurance Corporation (Odyssey) and Employers Reinsurance Company
(Employers), the other defendant reinsurers, also filed answers and
counterclaims in the Gulf action asserting positions similar to Transatlantic,
including counter claims for rescission of vehicle residual value reinsurance
contracts issued to Gulf. On October 1, 2003, Gulf entered into a final
settlement agreement with Employers, and all claims and counterclaims with
respect to Employers have been dismissed. After the settlement, the Gulf
action now seeks from the remaining three defendants a total of $90.9 million
currently due under the reinsurance contracts, a declaration that $11.6 million
will be payable under a second installment due in 2004, and consequential and
punitive damages. Gulf denies the reinsurers allegations, believes that it
has a strong legal basis to collect the amounts due under the reinsurance
contracts, and intends to vigorously pursue the action.

TPC and its board of directors have been named as defendants in three purported
class action lawsuits brought by four of TPCs shareholders seeking injunctive
relief as well as unspecified monetary damages. The actions are captioned
Henzel, et al. v. Travelers Property Casualty Corp., et al.(Jud. Dist. of
Waterbury, CT Nov. 17, 2003); Vozzolo v. Travelers Property Casualty Corp., et
al.(Jud. Dist. of Waterbury, CT Nov. 17, 2003); and Farina v. Travelers
Property Casualty Corp., et al.(Jud. Dist. of Hartford, CT December 15,
2003). The Henzeland Vozzoloactions were consolidated and transferred to the
complex litigation docket in Waterbury, Connecticut; the Farinaaction is
pending in Hartford, Connecticut.

All the complaints allege that TPC and its board of directors breached their
fiduciary duties to TPCs shareholders in connection with the adoption of the
merger and the merger agreement with St. Paul. According to the plaintiffs,
the merger enriches TPC management to the detriment of TPCs shareholders. The
plaintiffs further claim that the defendants failed to adequately investigate
alternatives to the merger. The Farinacomplaint also names St. Paul and Adams
Acquisition Corp, a wholly-owned subsidiary of St. Paul, as defendants,
alleging that they aided and abetted the alleged breach of fiduciary duty. TPC
believes the suits are wholly without merit and intends to vigorously defend
against the suits.

43



---



##### Table of Contents



In addition to those described above, the Company is involved in numerous
lawsuits, not involving asbestos and environmental claims, arising mostly in
the ordinary course of business operations either as a liability insurer
defending third-party claims brought against policyholders or as an insurer
defending coverage claims brought against it. While the ultimate resolution of
these legal proceedings could be significant to the Companys results of
operations in a future quarter, in the opinion of the Companys management it
would not be likely to have a material adverse effect on the Companys results
of operations for a calendar year or on the Companys financial condition or
liquidity.




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

NONE

44



---



##### Table of Contents






PART II




Item 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

In connection with the IPO, on March 22, 2002, the Companys class A common
stock began trading on the New York Stock Exchange (NYSE) under the symbol
TAP.A. Prior to March 22, 2002, there was no established public trading
market for the Companys class A common stock as Citigroup was the sole holder
of record of the Companys class A common stock. In connection with the
Citigroup Distribution, the Companys class B common stock began regular way
trading on the NYSE on August 21, 2002 under the symbol TAP.B. Prior to
August 21, 2002, there was no established public trading market for the
Companys class B common stock as Citigroup was the sole holder of record of
the Companys class B common stock.

The high and low closing prices on the NYSE of class A and class B common stock
for each quarter in 2003 and 2002 in which each class of common stock was
trading were as follows:

|                                                 |      |   |             |       |             |   |             |       |             |   |      |       |  |   |      |       | 
|------------------------------------------------ | ---- | - | ----------- | ----- | ----------- | - | ----------- | ----- | ----------- | - | ---- | ----- |  | - | ---- | ----- | 
|                                                 |      |   | 2003       
|                                                 |      |   |            
|                                                 |      |   | 1st Quarter |       | 2nd Quarter |   | 3rd Quarter |       | 4th Quarter
|                                                 |      |   |             |       |             |   |             |       |            
|Class A common stock price:                      |      |   |             |       |             |   |             |       |             |   |      |       |  |   |      |      
|                                                 | High |   | $           | 16.56 |             |   | $           | 17.21 |             |   | $    | 16.75 |  |   | $    | 16.80 | 
|                                                 | Low  |   | $           | 13.26 |             |   | $           | 14.19 |             |   | $    | 15.25 |  |   | $    | 14.90 | 
|Cash dividends per share of
class A common stock |      | $ | 0.06        |       |             | $ | 0.06        |       |             | $ | 0.08 |       |  | $ | 0.08 |      
|Class B common stock price:                      |      |   |             |       |             |   |             |       |             |   |      |       |  |   |      |      
|                                                 | High |   | $           | 16.50 |             |   | $           | 17.13 |             |   | $    | 16.73 |  |   | $    | 16.97 | 
|                                                 | Low  |   | $           | 13.40 |             |   | $           | 14.33 |             |   | $    | 15.33 |  |   | $    | 14.82 | 
|Cash dividends per share of
class B common stock |      | $ | 0.06        |       |             | $ | 0.06        |       |             | $ | 0.08 |       |  | $ | 0.08 |      

|                            |      |  |                |       |             |  |                |       |             |  |   |       |  |  |   |       | 
|--------------------------- | ---- |  | -------------- | ----- | ----------- |  | -------------- | ----- | ----------- |  | - | ----- |  |  | - | ----- | 
|                            |      |  | 2002(3)       
|                            |      |  |               
|                            |      |  | 1st Quarter(1) |       | 2nd Quarter |  | 3rd Quarter(2) |       | 4th Quarter
|                            |      |  |                |       |             |  |                |       |            
|Class A common stock price: |      |  |                |       |             |  |                |       |             |  |   |       |  |  |   |      
|                            | High |  | $              | 20.00 |             |  | $              | 20.97 |             |  | $ | 17.25 |  |  | $ | 15.95 | 
|                            | Low  |  | $              | 19.56 |             |  | $              | 16.04 |             |  | $ | 12.38 |  |  | $ | 12.78 | 
|Class B common stock price: |      |  |                |       |             |  |                |       |             |  |   |       |  |  |   |      
|                            | High |  |                | N/A   |             |  |                | N/A   |             |  | $ | 17.59 |  |  | $ | 16.00 | 
|                            | Low  |  |                | N/A   |             |  |                | N/A   |             |  | $ | 12.50 |  |  | $ | 13.09 | 



|(1) |  | Since March 22, 2002 for class A common stock.                                                                                                                                                                                                        
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Since August 21, 2002 for class B common stock.                                                                                                                                                                                                       
|   
|(3) |  | During the first quarter of 2002, the Company paid dividends of $5.253
billion to Citigroup, its then sole shareholder, primarily in the form of
notes payable. The Company began to pay regular quarterly dividends
during the first quarter of 2003.

45



---



##### Table of Contents



In 2003, cash dividends paid on the class A and class B common stock were $0.28
per share. Future dividend decisions will be based on and affected by a number
of factors, including the operating results and financial requirements of the
Company and the impact of dividend restrictions. For information on dividends,
including dividend restrictions in certain long-term loan or credit agreements
of the Company and its subsidiaries, as well as restrictions on the ability of
certain of the Companys subsidiaries to transfer funds to the Company in the
form of cash dividends or otherwise, see Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources. In addition, if the merger with St. Paul is consummated, dividend
decisions will be those of the Board of Directors of the combined St. Paul
Travelers Companies Inc. (St. Paul Travelers). Dividends would be paid by St.
Paul Travelers only if declared by its Board of Directors out of funds legally
available, and subject to any other restrictions that may be applicable to St.
Paul Travelers. Subject to the foregoing, it is anticipated that St. Paul
Travelers will pay a regular quarterly dividend of $0.22 per share, after
adjustments for the conversion of Company shares pursuant to the .4334 exchange
ratio in the merger.

As of February 20, 2004, the Company had approximately 105 thousand and 119
thousand holders of record of its class A common stock and class B common
stock, respectively. These figures do not represent the actual number of
beneficial owners of common stock because shares are frequently held in street
name by securities brokers and others for the benefit of individual owners who
may vote or dispose of the shares.

46



---



##### Table of Contents






Item 6. SELECTED FINANCIAL DATA

|                                                                                                                                   |  |      |          |      |  |      |          |      |  |      |          |  |  |   |          |  |  |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -------- | ---- |  | ---- | -------- | ---- |  | ---- | -------- |  |  | - | -------- |  |  | - | -------- | -
|(at and for the year ended December 31,(1)                                                                                         |  |      |          |      |  |      |          |      |  |      |          |  |  |   |          |  |  |   |          |  
|in millions, except per share amounts)                                                                                             |  | 2003 |          | 2002 |  | 2001 |          | 2000 |  | 1999
|                                                                                                                                   |  |      |          |      |  |      |          |      |  |     
|Total revenues                                                                                                                     |  | $    | 15,139.2 |      |  | $    | 14,269.7 |      |  | $    | 12,230.5 |  |  | $ | 11,071.0 |  |  | $ | 10,573.0 |  
|                                                                                                                                   |  |      |          |      |  |      |          |      |  |      |          |  |  |   |          |  |  |   |          |  
|Income before cumulative effect of changes in
accounting principles                                                                |  | $    | 1,696.0  |      |  | $    | 215.6    |      |  | $    | 1,062.2  |  |  | $ | 1,312.2  |  |  | $ | 1,136.4  |  
|Cumulative effect of changes in accounting
principles, net of tax(2)                                                               |  |      |         |      |  |      | (242.6   | )    |  |      | 3.2      |  |  |   |         |  |  |   | (112.1   | )
|                                                                                                                                   |  |      |          |      |  |      |          |      |  |      |          |  |  |   |          |  |  |   |          |  
|Net income (loss)                                                                                                                  |  | $    | 1,696.0  |      |  | $    | (27.0    | )    |  | $    | 1,065.4  |  |  | $ | 1,312.2  |  |  | $ | 1,024.3  |  
|                                                                                                                                   |  |      |          |      |  |      |          |      |  |      |          |  |  |   |          |  |  |   |          |  
|Total investments                                                                                                                  |  | $    | 38,652.9 |      |  | $    | 38,425.2 |      |  | $    | 32,618.6 |  |  | $ | 30,754.3 |  |  | $ | 29,842.6 |  
|Total assets                                                                                                                       |  |      | 64,872.0 |      |  |      | 64,137.5 |      |  |      | 57,777.8 |  |  |   | 53,850.4 |  |  |   | 50,795.1 |  
|Claims and claim adjustment expense reserves                                                                                       |  |      | 34,572.6 |      |  |      | 33,736.0 |      |  |      | 30,736.6 |  |  |   | 28,442.4 |  |  |   | 29,002.9 |  
|Total debt                                                                                                                         |  |      | 2,674.5  |      |  |      | 2,543.7  |      |  |      | 2,077.5  |  |  |   | 3,005.3  |  |  |   | 2,147.8  |  
|Total liabilities(3)                                                                                                               |  |      | 52,885.3 |      |  |      | 53,100.2 |      |  |      | 46,191.5 |  |  |   | 43,736.4 |  |  |   | 43,455.5 |  
|TIGHI-obligated mandatorily redeemable
securities
of subsidiary trusts holding solely junior
subordinated debt securities of TIGHI |  |      |         |      |  |      | 900.0    |      |  |      | 900.0    |  |  |   | 900.0    |  |  |   | 900.0    |  
|Shareholders equity                                                                                                               |  |      | 11,986.7 |      |  |      | 10,137.3 |      |  |      | 10,686.3 |  |  |   | 9,214.0  |  |  |   | 6,439.6  |  
|Basic earnings per share:                                                                                                          |  |      |          |      |  |      |          |      |  |      |          |  |  |   |          |  |  |   |          |  
|Income before cumulative effect of changes in
accounting principles                                                                |  | $    | 1.69     |      |  | $    | 0.23     |      |  | $    | 1.38     |  |  | $ | 1.71     |  |  | $ | 1.48     |  
|Cumulative effect of changes in accounting
principles, net of tax                                                                  |  |      |         |      |  |      | (0.26    | )    |  |      | 0.01     |  |  |   |         |  |  |   | (0.15    | )
|                                                                                                                                   |  |      |          |      |  |      |          |      |  |      |          |  |  |   |          |  |  |   |          |  
|Reported net income (loss)                                                                                                         |  |      | 1.69     |      |  |      | (0.03    | )    |  |      | 1.39     |  |  |   | 1.71     |  |  |   | 1.33     |  
|Goodwill amortization                                                                                                              |  |      |         |      |  |      |         |      |  |      | 0.09     |  |  |   | 0.08     |  |  |   | 0.06     |  
|                                                                                                                                   |  |      |          |      |  |      |          |      |  |      |          |  |  |   |          |  |  |   |          |  
|Adjusted earnings (loss) per share                                                                                                 |  | $    | 1.69     |      |  | $    | (0.03    | )    |  | $    | 1.48     |  |  | $ | 1.79     |  |  | $ | 1.39     |  
|                                                                                                                                   |  |      |          |      |  |      |          |      |  |      |          |  |  |   |          |  |  |   |          |  
|Diluted earnings per share:                                                                                                        |  |      |          |      |  |      |          |      |  |      |          |  |  |   |          |  |  |   |          |  
|Income before cumulative effect of changes in
accounting principles                                                                |  | $    | 1.68     |      |  | $    | 0.23     |      |  | $    | 1.38     |  |  | $ | 1.71     |  |  | $ | 1.48     |  
|Cumulative effect of changes in accounting
principles, net of tax                                                                  |  |      |         |      |  |      | (0.26    | )    |  |      | 0.01     |  |  |   |         |  |  |   | (0.15    | )
|                                                                                                                                   |  |      |          |      |  |      |          |      |  |      |          |  |  |   |          |  |  |   |          |  
|Reported net income (loss)                                                                                                         |  |      | 1.68     |      |  |      | (0.03    | )    |  |      | 1.39     |  |  |   | 1.71     |  |  |   | 1.33     |  
|Goodwill amortization                                                                                                              |  |      |         |      |  |      |         |      |  |      | 0.09     |  |  |   | 0.08     |  |  |   | 0.06     |  
|                                                                                                                                   |  |      |          |      |  |      |          |      |  |      |          |  |  |   |          |  |  |   |          |  
|Adjusted earnings (loss) per share                                                                                                 |  | $    | 1.68     |      |  | $    | (0.03    | )    |  | $    | 1.48     |  |  | $ | 1.79     |  |  | $ | 1.39     |  
|                                                                                                                                   |  |      |          |      |  |      |          |      |  |      |          |  |  |   |          |  |  |   |          |  
|Year-end common shares outstanding(4)                                                                                              |  |      | 1,005.5  |      |  |      | 1,003.9  |      |  |      | 769.0    |  |  |   | 769.0    |  |  |   | 769.0    |  
|Per common share data:                                                                                                             |  |      |          |      |  |      |          |      |  |      |          |  |  |   |          |  |  |   |          |  
|Cash dividends(5)                                                                                                                  |  | $    | 0.28     |      |  | $    | 5.23     |      |  | $    | 0.53     |  |  | $ |         |  |  | $ |         |  
|Book value                                                                                                                         |  | $    | 11.92    |      |  | $    | 10.10    |      |  | $    | 13.90    |  |  | $ | 11.98    |  |  | $ | 8.37     |  

47



---



##### Table of Contents





|(1) |  | On October 1, 2001, the Company purchased The Northland Company and its
subsidiaries (Northland) from Citigroup. On October 3, 2001, Citigroup
contributed the capital stock of Associates Insurance Company (Associates)
to the Company. During April 2000, TPC completed a cash tender offer and
acquired all of Travelers Insurance Group Holdings Inc.s (TIGHI)
outstanding shares of common stock that were not already owned by TPC for
approximately $2.413 billion financed by a loan from Citigroup. On May
31, 2000, the Company acquired the surety business of Reliance Group
Holdings, Inc. (Reliance Surety). Includes amounts related to Northland,
Associates, the remainder of TIGHI and Reliance Surety from their dates of
acquisition.                                               
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Cumulative effect of changes in accounting principles, net of tax (1) for
the year ended December 31, 2002 consists of a loss of $242.6 million as a
result of a change in accounting for goodwill and other intangible assets; (2)
for the year ended December 31, 2001 includes a gain of $4.5 million as a
result of a change in accounting for derivative instruments and hedging
activities and a loss of $1.3 million as a result of a change in accounting for
securitized financial assets; and (3) for the year ended December 31, 1999
includes a loss of $135.0 million as a result of a change in accounting for
insurance- related assessments and a gain of $22.9 million as a result of a
change in accounting for insurance and reinsurance contracts that do not
transfer insurance risk.
|   
|(3) |  | Total liabilities include minority interest liabilities of $104.6 million,
$87.0 million and $1.368 billion at December 31, 2003, 2002 and 1999,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(4) |  | In March 2002, the Company issued common stock through its Initial Public
Offering (IPO). See note 1 to the Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(5) |  | Dividends per common share reflect the recapitalization effected as part of
the Companys corporate reorganization. See note 1 to the Consolidated
Financial Statements. During 2002, the Company paid dividends of $5.095
billion in the form of a note payable and $158.0 million in cash to Citigroup,
its then sole shareholder. During 2001, the Company paid dividends of $526.0
million to Citigroup, its then sole shareholder.                                                                                                                                                                                                                                                                                                                                                                   

48



---



##### Table of Contents






Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of Travelers Property Casualty Corp. (TPC) and subsidiaries (collectively, the Company) financial condition and results of operations should be read in conjunction with the consolidated financial statements of the
Company and related notes included elsewhere in this Form 10-K. These financial statements retroactively reflect TPCs 2002 corporate reorganization for all periods presented.

EXECUTIVE SUMMARY

2003 Consolidated Results of Operations



| |  |  | Net income of $1.696 billion or $1.69 per share basic and $1.68 per share diluted                                                                             
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Continuing favorable, but moderating, rate environment in excess of loss trends                                                                               
|
| |  |  | Higher catastrophe losses; however, improvement in non-catastrophe-related claim frequency                                                                    
|
| |  |  | No asbestos charges in 2003
compared to 2002 charges of $1.394 billion, net of reinsurance,
taxes and the benefit from the Citigroup indemnification agreement
|
| |  |  | Higher non-asbestos prior year
reserve charges primarily related to business lines placed in runoff                                                           

2003 Financial Condition



| |  |  | Total assets of $64.9 billion, up $0.7 billion from the prior year                                                                                      
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Total investments of $38.7 billion; fixed maturities and short-term securities comprise 91% of total investments which is consistent with the prior year
|
| |  |  | Net unrealized gains on fixed maturities and equities securities of $1.6 billion, up $0.5 billion from the prior year                                   
|
| |  |  | Shareholders equity of $12.0 billion, up $1.8 billion from the prior year                                                                              
|
| |  |  | Total debt reduced to $2.7 billion from $3.4 billion (including mandatorily redeemable securities)                                                      
|
| |  |  | Cash flow provided from operations of $3.8 billion, up from $2.9 billion in the prior year                                                              

Other 2003 Highlights



| |  |  | Proposed Merger with St. Paul
| | - |  | -----------------------------



| |  |  | The Company entered into an agreement and plan of merger with The St. Paul Companies, Inc. (St. Paul). Each share of the TPC class A and class B common stock will be exchanged for 0.4334 of a share (the exchange ratio) of St. Paul
common stock. The transaction is expected to close in the second quarter of 2004. A special meeting of the Companys shareholders will be held on March 19, 2004 to consider and to vote upon this proposed
transaction.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Renewal Rights Transactions
| | - |  | ---------------------------



| |  |  | Royal & SunAlliance - purchased renewal rights to its commercial lines national accounts, middle market and marine businesses, and standard and preferred personal lines businesses
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Atlantic Mutual  purchased renewal rights to the majority of commercial lines inland marine and ocean cargo businesses written by its Marine Division                             



| |  |  | Debt Refinancing
| | - |  | ----------------



| |  |  | Issued $1.4 billion of senior notes comprising $400.0 million of 3.75% senior notes, $500.0 million of 5.00% senior notes and $500.0 million of 6.375% senior notes                                                                                                                                                                                                         
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The net proceeds from the sale of these notes were used to prepay and refinance $500.0 million of 3.60% indebtedness to Citigroup and to redeem $900.0 million aggregate principal amount of 8.00% to 8.08% junior subordinated debt
securities held by subsidiary trusts. These trusts, in turn, used these funds to redeem $900.0 million of preferred capital securities.

49



---



##### Table of Contents



Proposed Merger

On November 16, 2003, the Company entered into an agreement and plan of merger (the merger) with The St. Paul Companies, Inc. The transaction will be treated as a purchase business combination by the Company of St. Paul under accounting principles
generally accepted in the United States of America. In this merger, the acquired entity (St. Paul) will issue the equity interests and this business combination meets the criteria of a reverse acquisition. Each share of TPC class A and class B common
stock will be exchanged for 0.4334 of a share of St. Paul common stock. The transaction is subject to customary closing conditions, including the approval by the shareholders of both companies as well as certain regulatory approvals. A special
shareholder meeting to consider and to vote upon the merger has been scheduled for March 19, 2004. The transaction is expected to close in the second quarter of 2004.

TPC 2003 Debt Offering

On March 11, 2003, TPC issued $1.4 billion of senior notes comprising $400.0 million of 3.75% senior notes due March 15, 2008, $500.0 million of 5.00% senior notes due March 15, 2013 and $500.0 million of 6.375% senior notes due March 15, 2033. The
notes pay interest semi-annually on March 15 and September 15 of each year, beginning September 15, 2003, are senior unsecured obligations and rank equally with all of TPCs other senior unsecured indebtedness. TPC may redeem some or all of the notes
prior to maturity by paying a make-whole premium based on U.S. Treasury rates. The net proceeds from the sale of these notes were contributed to TPCs primary subsidiary, Travelers Insurance Group Holdings Inc. (TIGHI), so that TIGHI could prepay and
refinance $500.0 million of 3.60% indebtedness to Citigroup and to redeem $900.0 million aggregate principal amount of TIGHIs 8.00% to 8.08% junior subordinated debt securities held by subsidiary trusts. These trusts, in turn, used these funds to
redeem $900.0 million of preferred capital securities on April 9, 2003.

TPC 2002 Corporate Reorganization, Initial Public Offering and Concurrent Convertible Junior Subordinated Notes Offering

In connection with the 2002 offerings described below, TPC effected a corporate reorganization under which:



| |  | TPC transferred substantially all of its assets to affiliates of Citigroup Inc. (together with its consolidated subsidiaries, Citigroup), other than the capital stock of TIGHI;                                                                                    
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Citigroup assumed all of TPCs third-party liabilities, other than liabilities relating to TIGHI and TIGHIs active employees;                                                                                                                                      
| 
| |  | TPC effected a recapitalization whereby the previously outstanding shares of its common stock (1,500 shares), all of which were owned by Citigroup, were changed into 269.0 million shares of class A common stock and 500.0 million shares
of class B common stock;
| 
| |  | TPC amended and restated its certificate of incorporation and bylaws.                                                                                                                                                                                               

As a result of these transactions, TIGHI and its property and casualty insurance subsidiaries became TPCs principal asset.

50



---



##### Table of Contents



On March 21, 2002, TPC issued 231.0 million shares of its class A common stock in an initial public offering (IPO), representing approximately 23% of TPCs common equity. After the IPO, Citigroup beneficially owned all of the 500.0 million shares of
TPCs outstanding class B common stock, each share of which is entitled to seven votes, and 269.0 million shares of TPCs class A common stock, each share of which is entitled to one vote, representing at the time 94% of the combined voting power of all
classes of TPCs voting securities and 77% of the equity interest in TPC. Concurrent with the IPO, TPC issued $892.5 million aggregate principal amount of 4.5% convertible junior subordinated notes which mature on April 15, 2032. The IPO and the
offering of the convertible notes are collectively referred to as the offerings.

Citigroup Distribution of Ownership Interest in TPC

On August 20, 2002, Citigroup made a tax-free distribution to its stockholders (the Citigroup Distribution), of a portion of its ownership interest in TPC, which, together with the shares issued in the IPO, represented more than 90% of TPCs common
equity and more than 90% of the combined voting power of TPCs outstanding voting securities. For each 100 shares of Citigroup outstanding common stock, approximately 4.32 shares of TPC class A common stock and 8.88 shares of TPC class B common stock
were distributed. At December 31, 2003 and 2002, Citigroup held for their own account 9.87% and 9.95%, respectively, of TPCs common equity and 9.87% and 9.98%, respectively, of the combined voting power of TPCs outstanding voting securities.
Citigroup received a private letter ruling from the Internal Revenue Service that the Citigroup Distribution was tax-free to Citigroup, its stockholders and TPC. As part of the ruling process, Citigroup agreed to vote the shares it continues to hold
following the Citigroup Distribution pro rata with the shares held by the public and to divest the remaining shares it holds within five years following the Citigroup Distribution.

On August 20, 2002, in connection with the Citigroup Distribution, stock-based awards held by Company employees on that date under Citigroups various incentive plans were cancelled and replaced by awards under the Companys own incentive programs (see
note 10 of notes to the Companys consolidated financial statements for a further discussion), which awards were granted on substantially the same terms, including vesting, as the former Citigroup awards.

Other TPC Corporate Reorganization, Offerings and Citigroup Distribution Transactions

The following transactions were completed in conjunction with the 2002 corporate reorganization, offerings and Citigroup Distribution:

In February 2002, the Company paid a dividend of $1.000 billion to Citigroup in the form of a non-interest bearing note payable on December 31, 2002. The Company repaid this note on December 31, 2002. Also in February 2002, the Company paid an
additional dividend of $3.700 billion to Citigroup in the form of a note payable in two installments. This note was substantially prepaid following the offerings. The balance of $150.0 million was due on May 9, 2004. The remaining portion of this note
was prepaid on May 8, 2002. In March 2002, the Company paid a dividend of $395.0 million to Citigroup in the form of a note. This note was prepaid following the offerings.

At December 31, 2001, TPC had a note payable to Citigroup in the amount of $1.198 billion, in conjunction with its purchase of TIGHIs outstanding shares in April 2000. On February 7, 2002, this note agreement was replaced by a new note agreement.
Under the terms of the new note agreement, interest accrued on the aggregate principal amount outstanding at the commercial paper rate (the then current short-term rate) plus 10 basis points per annum. Interest was compounded monthly. This note was
prepaid following the offerings.

51



---



##### Table of Contents



During March 2002, the Company entered into an agreement with Citigroup (the Citigroup indemnification agreement) which provided that in any year in which the Company recorded additional asbestos-related income statement charges in excess of $150.0
million, net of any reinsurance, Citigroup would pay to the Company
the amount of any such excess up to a cumulative aggregate of $800.0 million, reduced by the tax effect of the highest applicable federal income tax rate. During 2002, the Company
recorded $2.945 billion of asbestos incurred losses, net of reinsurance, and accordingly fully utilized in 2002 the total benefit available under the agreement. For the year ended December 31, 2002, revenues include $520.0 million from Citigroup under
this agreement. Included in federal income taxes in the consolidated statement of income is a tax benefit of $280.0 million related to the asbestos charge covered by the agreement. For additional information see    Asbestos Claims and Litigation.

On February 28, 2002, the Company sold CitiInsurance to other Citigroup affiliated companies for $402.6 million, its net book value. The Company applied $137.8 million of the proceeds from this sale to repay intercompany indebtedness to Citigroup. In
addition, the Company purchased from Citigroup affiliated companies the premises located at One Tower Square, Hartford, Connecticut and other properties for $68.2 million. Additionally, certain liabilities relating to employee benefit plans and lease
obligations were assigned and assumed by Citigroup affiliated companies. In connection with these assignments, the Company transferred $172.4 million and $87.8 million, respectively, to Citigroup affiliated companies.

Prior to the 2002 Citigroup Distribution, the Company provided and purchased services to and from Citigroup affiliated companies, including facilities management, banking and financial functions, benefit coverages, data processing services and short-term
investment pool management services. Charges for these shared services were allocated at cost. In connection with the Citigroup Distribution, the Company and Citigroup and its affiliates entered into a transition services agreement for the provision of
certain of these services, tradename and trademark and similar agreements related to the use of trademarks, logos and tradenames in an amendment to the March 26, 2002 Intercompany Agreement with Citigroup. During the first quarter of 2002, Citigroup
provided investment advisory services on an allocated cost basis, consistent with prior years. On August 6, 2002, the Company entered into an investment management agreement, which has been applied retroactive to April 1, 2002, with an affiliate of
Citigroup whereby the affiliate of Citigroup is providing investment advisory and administrative services to the Company with respect to its entire investment portfolio for a period of two years and at fees mutually agreed upon, including a component
based on performance. Charges incurred related to this agreement were $59.7 million for 2003 and $47.2 million for the period from April 1, 2002 through December 31, 2002. This agreement terminates on March 31, 2004. The Company intends to arrange an
orderly transition of the investment management and the associated accounting and administrative services to St. Paul Travelers following the merger with St. Paul. The Company and Citigroup also agreed upon the allocation or transfer of certain other
liabilities and assets, and rights and obligations in furtherance of the separation of operations and ownership as a result of the Citigroup Distribution. The net effect of these allocations and transfers, in the opinion of management, were not
significant to the Companys results of operations or financial condition.

Other Transactions

During the third quarter of 2003, the Company purchased from Royal & SunAlliance USA (RSA), an unaffiliated insurer, the renewal rights to RSAs commercial lines national accounts, middle market and marine businesses, and standard and preferred personal
lines businesses. Also during the third quarter of 2003, the Company purchased from Atlantic Mutual, an unaffiliated insurer, the renewal rights to the majority of Atlantic Mutuals commercial lines inland marine and ocean cargo businesses written by
Atlantic Mutuals Marine Division. The minimum purchase price for both transactions, which has been paid, was $48.0 million. The final purchase price, which is currently estimated to be $84.5 million, is dependent on the level of business renewed by
the Company.

52



---



##### Table of Contents



On August 1, 2002, Commercial Insurance Resources, Inc. (CIRI), a subsidiary of the Company and the holding company for the Gulf Insurance Group (Gulf), completed its previously announced transaction with a group of outside investors and senior employees
of Gulf. Capital investments made by the investors and employees included 9.7 million shares of mandatorily convertible preferred stock for a purchase price of $8.83 per share, $49.7 million of convertible notes and .4 million common shares for a
purchase price of $8.83 per share, representing a 24% ownership interest of CIRI, on a fully diluted basis. The dividend rate on the preferred stock is 6.0%. The interest rate on the notes is 6.0% payable on an interest-only basis. The notes mature on
December 31, 2032. Trident II, L.P., Marsh & McLennan Capital Professionals Fund, L.P., Marsh & McLennan Employees Securities Company, L.P. and Trident Gulf Holding, LLC (collectively Trident) invested $125.0 million, and a group of approximately 75
senior employees of Gulf invested $14.2 million. Fifty percent of the Gulf senior employees investment was financed by CIRI. This financing is collateralized by the CIRI securities purchased and is forgivable if Trident achieves certain investment
returns. The applicable agreements provide for registration rights and transfer rights and restrictions and other matters customarily addressed in agreements with minority investors. Gulfs results, net of minority interest, are included in the
Commercial Lines segment.

On October 1, 2001, the Company paid $329.5 million to Citigroup for The Northland Company and its subsidiaries (Northland) and Associates Lloyds Insurance Company. In addition, on October 3, 2001, the capital stock of Associates Insurance Company
(Associates), with a net book value of $356.5 million, was contributed to the Company by Citigroup. These companies are principally engaged in Commercial Lines specialty and transportation businesses and Personal Lines nonstandard automobile business.

CONSOLIDATED OVERVIEW

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

Consolidated Results of Operations

|                                                                                             |  |      |         |      |  |      |        |   |  |   |         | 
|-------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------ | - |  | - | ------- | 
|(for the year ended December 31, in millions, except per share data)                         |  | 2003 |         | 2002 |  | 2001
|                                                                                             |  |      |         |      |  |     
|Income before minority interest and cumulative effect of changes in
in accounting principles |  | $    | 1,696.0 |      |  | $    | 215.6  |   |  | $ | 1,062.2 | 
|Cumulative effect of changes in accounting principles, net of tax                            |  |      |        |      |  |      | (242.6 | ) |  |   | 3.2     | 
|                                                                                             |  |      |         |      |  |      |        |   |  |   |         | 
|Net income (loss)                                                                            |  | $    | 1,696.0 |      |  | $    | (27.0  | ) |  | $ | 1,065.4 | 
|                                                                                             |  |      |         |      |  |      |        |   |  |   |         | 
|Basic earnings per share:                                                                    |  |      |         |      |  |      |        |   |  |   |         | 
|Income before minority interest and cumulative effect of changes
in accounting principles    |  | $    | 1.69    |      |  | $    | 0.23   |   |  | $ | 1.38    | 
|Cumulative effect of changes in accounting principles, net of tax                            |  |      |        |      |  |      | (0.26  | ) |  |   | 0.01    | 
|                                                                                             |  |      |         |      |  |      |        |   |  |   |         | 
|Net income (loss)                                                                            |  | $    | 1.69    |      |  | $    | (0.03  | ) |  | $ | 1.39    | 
|                                                                                             |  |      |         |      |  |      |        |   |  |   |         | 
|Diluted earnings per share:                                                                  |  |      |         |      |  |      |        |   |  |   |         | 
|Income before minority interest and cumulative effect of changes
in accounting principles    |  | $    | 1.68    |      |  | $    | 0.23   |   |  | $ | 1.38    | 
|Cumulative effect of changes in accounting principles, net of tax                            |  |      |        |      |  |      | (0.26  | ) |  |   | 0.01    | 
|                                                                                             |  |      |         |      |  |      |        |   |  |   |         | 
|Net income (loss)                                                                            |  | $    | 1.68    |      |  | $    | (0.03  | ) |  | $ | 1.39    | 
|                                                                                             |  |      |         |      |  |      |        |   |  |   |         | 
|Weighted average number of common shares outstanding (basic)                                 |  |      | 1,002.0 |      |  |      | 949.5  |   |  |   | 769.0   | 
|Weighted average number of common shares outstanding
and common stock equivalents (diluted)  |  |      | 1,007.3 |      |  |      | 951.2  |   |  |   | 769.0   | 

53



---



##### Table of Contents



The Companys discussions related to all items, other than net income (loss), are presented on a pretax basis, unless otherwise noted.

Net income of $1.696 billion or $1.69 per share basic and $1.68 per share diluted in 2003 compared to a net loss of $(27.0) million or $(0.03) per share, basic and diluted in 2002. Net income for 2003 reflected the continuing favorable, but moderating,
rate environment in excess of loss cost trends and lower unfavorable prior year reserve development, partially offset by higher weather-related catastrophe losses in 2003. Catastrophe losses of $229.0 million, net of reinsurance and after tax, in 2003
compared to $54.7 million in 2002. Net unfavorable prior year reserve development in 2003 of $309.4 million, which included $338.7 of charges related to reserve strengthening at Gulf, compared to $1.487 billion of unfavorable prior year reserve
development in 2002, which included $1.394 billion of charges related to asbestos reserve strengthening. In December 2002, the Company strengthened its asbestos reserves to $3.404 billion, after reinsurance recoverables, and fully utilized the $800.0
million pretax benefit under the Citigroup indemnification agreement. For additional information see -Asbestos Claims and Litigation. After tax net investment income increased $12.7 million from 2002 due to higher average invested assets resulting
from strong cash flows from operations in 2003, partially offset by the lower interest rate environment and the shortening of the fixed maturity portfolio duration. Net income included $20.7 million of net realized investment gains compared to $99.0
million of net realized investment gains in 2002. Net loss for 2002 included a charge for the cumulative effect of a change in accounting principle of $242.6 million due to the adoption of Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (FAS 142).

Net loss of $(27.0) million in 2002 or $(0.03) per share, basic and diluted, compared to net income of $1.065 billion or $1.39 per share, basic and diluted, in 2001. Results in 2002 benefited from the favorable rate environment that was significantly in
excess of loss cost trends and lower weather-related catastrophe losses of $54.7 million compared to $67.1 million in 2001. The comparison to 2001 also benefited from the inclusion in 2001 of losses of $489.5 million related to the terrorist attack on
September 11th. Results in 2002 reflected unfavorable prior year reserve development of $1.487 billion, which included the asbestos charge discussed above, compared to $38.7 million of favorable prior year reserve development in 2001. After tax net
investment income decreased $89.4 million or 6% in 2002 due to reduced returns in the Companys public equity investments and the lower interest rate environment. Net income in 2002 was favorably impacted by the elimination of goodwill amortization and
lower interest expense. Net realized investment gains were $99.0 million and $209.9 million in 2002 and 2001, respectively, and the net loss for 2002 included a charge of $242.6 million due to the adoption of FAS 142.

Consolidated revenues were as follows:

|                                              |  |      |          |      |  |      |          |  |  |   |          | 
|--------------------------------------------- |  | ---- | -------- | ---- |  | ---- | -------- |  |  | - | -------- | 
|(for the year ended December 31, in millions) |  | 2003 |          | 2002 |  | 2001
|                                              |  |      |          |      |  |     
|Earned premiums                               |  | $    | 12,545.4 |      |  | $    | 11,155.3 |  |  | $ | 9,410.9  | 
|Net investment income                         |  |      | 1,868.8  |      |  |      | 1,880.5  |  |  |   | 2,034.0  | 
|Fee income                                    |  |      | 560.0    |      |  |      | 454.9    |  |  |   | 347.4    | 
|Net realized investment gains                 |  |      | 38.0     |      |  |      | 146.7    |  |  |   | 322.5    | 
|Recoveries from former affiliate              |  |      |         |      |  |      | 520.0    |  |  |   |         | 
|Other revenues                                |  |      | 127.0    |      |  |      | 112.3    |  |  |   | 115.7    | 
|                                              |  |      |          |      |  |      |          |  |  |   |          | 
|Consolidated revenues                         |  | $    | 15,139.2 |      |  | $    | 14,269.7 |  |  | $ | 12,230.5 | 
|                                              |  |      |          |      |  |      |          |  |  |   |          | 

54



---



##### Table of Contents



Revenues increased $869.5 million or 6% in 2003 and $2.039 billion or 17% in 2002.

Earned premiums increased $1.390 billion or 12% in 2003 due to rate increases on renewal business, growth in targeted new business and strong customer retention in both Commercial and Personal Lines. Commercial Lines earned premiums increased $921.6
million or 14% in 2003, despite a planned reduction of business volume at Northland and Associates. Personal Lines earned premiums increased $468.5 million or 11% in 2003. In 2002, earned premiums increased $1.744 billion or 19% over 2001 due to rate
increases on renewal business in both Commercial and Personal Lines and the full-year inclusion of Northland and Associates in 2002.

Net investment income decreased $11.7 million or less than 1% in 2003, despite higher average invested assets resulting from strong cash flows from operations. The decline resulted from a reduction in investment yields to 5.3% in 2003 from 6.0% in 2002.
The decrease in yields reflected the lower interest rate environment, the shortening of the average effective duration of the fixed maturity portfolio, a higher proportion of tax exempt investments and reduced returns in the Companys private equity
investments, partially offset by higher returns in arbitrage fund investments. Pretax net investment income decreased $153.5 million or 8% in 2002. The decline resulted from a reduction in investment yields to 6.0% in 2002 from 6.9% in 2001. The
decrease in yields reflected reduced returns in the Companys public equity investments and the lower interest rate environment. The impact of lower yields was partially offset by the rise in average invested assets due to the Northland and Associates
acquisitions and increased cash flow from operations. Net investment income related to Northland and Associates was $91.5 million in 2002, an increase of $68.4 million over 2001 which only included the fourth quarter.

Fee income increased $105.1 million or 23% in 2003 and $107.5 million or 31% in 2002. Fees rose as both new business and pricing levels in the Companys National Accounts business increased and more workers compensation business was written by state
residual market pools that are serviced by National Accounts.

Net realized investment gains were $38.0 million in 2003 compared to $146.7 million in 2002. Net realized investment gains included $90.2 million of impairment charges in 2003 compared to $284.1 million in 2002. These impairment charges were mostly
related to corporate bonds in the healthcare, communications, aviation and energy sectors. Net realized investment gains in 2003 also included losses of $26.6 million related to U.S. Treasury futures contracts which are settled daily. Net realized
investment gains of $322.5 million in 2001 included impairment charges of $146.2 million mostly related to the telecommunications and energy sectors.

Recoveries of $520.0 million in 2002, under the Citigroup indemnification agreement, have been included in revenues as Recoveries from former affiliate.

Other revenues principally include premium installment charges.

Consolidated net written premiums were as follows:

|                                              |  |      |          |      |  |      |          |  |  |   |         | 
|--------------------------------------------- |  | ---- | -------- | ---- |  | ---- | -------- |  |  | - | ------- | 
|(for the year ended December 31, in millions) |  | 2003 |          | 2002 |  | 2001
|                                              |  |      |          |      |  |     
|Commercial Lines                              |  | $    | 8,119.4  |      |  | $    | 7,369.5  |  |  | $ | 5,737.6 | 
|Personal Lines                                |  |      | 5,081.4  |      |  |      | 4,575.0  |  |  |   | 4,107.9 | 
|                                              |  |      |          |      |  |      |          |  |  |   |         | 
|Total net written premiums                    |  | $    | 13,200.8 |      |  | $    | 11,944.5 |  |  | $ | 9,845.5 | 
|                                              |  |      |          |      |  |      |          |  |  |   |         | 

55



---



##### Table of Contents



Net written premiums increased $1.256 billion or 11% in 2003. The 2003 increase was primarily due to higher but moderating rate increases, new business growth in favorable markets and strong retention across all major lines of business, partially offset
by the withdrawal in 2002 of business at American Equity Insurance Company, a subsidiary of Northland (American Equity) and Associates and a one-time additional $115.0 million of net written premiums in 2002 due to the termination of certain reinsurance
contracts by Northland. Net written premiums for Northland and Associates were $546.8 million in 2003 and $824.8 million in 2002, a decrease of 34% from 2002. Commercial Lines net written premiums, excluding business written in Northland and
Associates, increased $1.028 billion or 16% in 2003. Personal Lines net written premiums increased $506.4 million or 11% in 2003.

Net written premiums increased $2.099 billion or 21% in 2002. The increase in net written premiums in 2002 was due to rate increases and strong retention in both Commercial and Personal Lines and the full year inclusion of Northland and Associates in
2002. Net written premiums for Northland and Associates were $935.8 million in 2002, an increase of $743.1 million over 2001 which only included the fourth quarter of 2001. Commercial Lines net written premiums, excluding business written in Northland
and Associates, increased $974.5 million or 17% in 2002. Personal Lines net written premiums increased $467.1 million or 11% in 2002.

Consolidated claims and expenses were as follows:

|                                              |  |      |          |      |  |      |          |  |  |   |          | 
|--------------------------------------------- |  | ---- | -------- | ---- |  | ---- | -------- |  |  | - | -------- | 
|(for the year ended December 31, in millions) |  | 2003 |          | 2002 |  | 2001
|                                              |  |      |          |      |  |     
|Claims and claim adjustment expenses          |  | $    | 9,118.4  |      |  | $    | 11,138.5 |  |  | $ | 7,764.7  | 
|Amortization of deferred acquisition costs    |  |      | 1,983.7  |      |  |      | 1,810.2  |  |  |   | 1,538.7  | 
|Interest expense                              |  |      | 166.4    |      |  |      | 156.8    |  |  |   | 204.9    | 
|General and administrative expenses           |  |      | 1,641.3  |      |  |      | 1,424.0  |  |  |   | 1,333.2  | 
|                                              |  |      |          |      |  |      |          |  |  |   |          | 
|Consolidated claims and expenses              |  | $    | 12,909.8 |      |  | $    | 14,529.5 |  |  | $ | 10,841.5 | 
|                                              |  |      |          |      |  |      |          |  |  |   |          | 

Total claims and expenses decreased $1.620 billion or 11% in 2003 and increased $3.688 billion or 34% in 2002.

Claims and claim adjustment expenses decreased $2.020 billion or 18% in 2003 primarily due to lower unfavorable prior year reserve development in 2003 partially offset by increased loss costs, growth in business volume and higher catastrophe losses.
Catastrophe losses, net of reinsurance, were $352.4 million in 2003 compared to $84.1 million in 2002. Unfavorable prior year reserve development included in claims and claim adjustment expenses was $476.0 million for 2003 compared to $3.088 billion in
2002. Unfavorable prior year reserve development in 2002 included
$2.945 billion of asbestos incurred losses (prior to the benefit related to recoveries under the Citigroup indemnification agreement), compared to no asbestos incurrals in
2003. Commercial Lines had a non-asbestos related prior year reserve development charge of $688.0 million in 2003 compared to a $172.7 million charge in 2002. The most significant component of the 2003 Commercial Lines prior year reserve development
charge was $521.1 million related to reserve strengthening at Gulf. Personal Lines favorable prior year reserve development was $212.0 million in 2003 compared to $29.9 million in 2002. See - Results of Operations by Segment for additional discussion
of prior year reserve development.

Claims and claim adjustment expenses increased $3.374 billion or 43% in 2002 primarily due to the asbestos charge taken in the fourth quarter of 2002, the full year inclusion in 2002 of Northland and Associates, and increased loss cost trends, partially
offset by the $704.0 million impact in 2001 of the terrorist attack on September 11. Weather-related catastrophe losses of $84.1 million in 2002 compared to $103.3 million in 2001. Unfavorable prior year reserve development in 2002 was $3.088 billion
compared to favorable prior year reserve development of $59.5 million in 2001. Asbestos-related prior year reserve development in 2002 was $2.945
billion (prior to the benefit related to recoveries under the Citigroup indemnification agreement), a $2.756 billion increase over 2001. For additional information see    Asbestos Claims and Litigation.

Amortization of deferred acquisition costs increased $173.5 million or 10% in 2003 and $271.5 million or 18% in 2002. These increases reflect higher commission and premium taxes associated with the increases in earned premiums previously described.

56



---



##### Table of Contents



Interest expense increased
$9.6 million or 6% in 2003 due to certain one time costs
associated with the first and second quarter refinancing activities
that lowered average interest costs and higher levels of temporary debt. Interest expense decreased $48.1 million or 23% in 2002 due to lower average interest-bearing debt levels
primarily related to the repayment of debt obligations to Citigroup in the 2002 first quarter.

General and administrative expenses increased $217.3 million or 15% in 2003 and $90.8 million or 7% in 2002. These increases related to business growth and higher contingent commissions that resulted from improved underwriting results. In addition,
the 2002 comparison to 2001 reflects the elimination of goodwill amortization due to the adoption of FAS 142.

The Companys effective tax rate was 24.1%, (183.4)% and 23.5% in 2003, 2002 and 2001, respectively. The 2003 increase in the effective rate reflected a higher level of pretax income associated with improved underwriting performance primarily related to
the impact of the 2002 fourth quarter asbestos charge previously discussed and the impact of non-taxable recoveries of $520.0 million related to the Citigroup indemnification agreement in 2002, partially offset by a higher level of non-taxable investment
income in 2003. The 2002 decrease in the effective rate reflected lower pretax income and the impact of the non-taxable recoveries from Citigroup as discussed above, in addition to a higher level of non-taxable net investment income in 2002 compared to
2001.

The GAAP combined ratios before policyholder dividends were as follows:

|                                  |                                                  |      |      |      |   |      |       |      |   |  |       |      |  
|--------------------------------- | ------------------------------------------------ | ---- | ---- | ---- | - | ---- | ----- | ---- | - |  | ----- | ---- | -
|(for the year ended December 31,) |                                                  | 2003 |      | 2002 |   | 2001
|                                  |                                                  |      |      |      |   |     
|                                  | Loss and loss adjustment expense (LAE) ratio (1) |      |      | 70.7 | % |      |       | 90.5 | % |  |       | 80.4 | %
|                                  | Underwriting expense ratio                       |      |      | 26.2 |   |      |       | 26.9 |   |  |       | 28.5 |  
|                                  |                                                  |      |      |      |   |      |       |      |   |  |       |      |  
|Consolidated GAAP combined ratio  |                                                  |      | 96.9 | %    |   |      | 117.4 | %    |   |  | 108.9 | %   
|                                  |                                                  |      |      |      |   |      |       |      |   |  |       |      |  

(1)  Excludes losses recovered under the Citigroup indemnification agreement in 2002.

The 20.5 point improvement in the 2003 GAAP combined ratio before policyholder dividends resulted from lower unfavorable prior year reserve development, primarily due to having no asbestos charges in 2003 compared to asbestos charges in 2002 that added
19.2 points. The benefit from premium rate increases that exceeded loss costs trends were mostly offset by higher catastrophe losses.

The deterioration in the 2002 GAAP combined ratio before policyholder dividends resulted from the impact of higher prior year reserve development that primarily resulted from the asbestos-related charges in 2002, partially offset by lower catastrophe
losses in 2002 compared to 2001 (which included the impact of the September 11, 2001 terrorist attack), the elimination of goodwill amortization and rate increases that exceeded loss cost trends.

RESULTS OF OPERATIONS BY SEGMENT

Commercial Lines

Commercial Lines operating income (loss) was as follows:

|                                              |  |      |         |      |  |      |        |   |  |   |       | 
|--------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------ | - |  | - | ----- | 
|(for the year ended December 31, in millions) |  | 2003 |         | 2002 |  | 2001
|                                              |  |      |         |      |  |     
|Operating income (loss)                       |  | $    | 1,295.0 |      |  | $    | (125.8 | ) |  | $ | 752.2 | 

The 2003 operating income of $1.295 billion compared to an operating loss of $(125.8) million in 2002. The 2003 operating income reflected the continuing favorable, but moderating, rate environment in excess of loss cost trends and increased business
volumes. Catastrophe losses of $67.4 million, net of reinsurance and after tax, compared to no catastrophes in 2002. The 2003 operating income contained no asbestos charges compared to $1.394 billion of unfavorable prior year reserve development related
to asbestos in 2002, net of the benefit from the Citigroup
indemnification agreement. Commercial Lines had a non-asbestos-related prior year reserve development charge of $447.2 million ($688.0 pretax) in 2003 compared to a $112.2 million charge ($172.7
million pretax) in 2002. The

57



---



##### Table of Contents



most significant component of the 2003 prior year reserve development charge was $338.7 million of charges ($521.1 million pretax) related to reserve strengthening at Gulf. Reserve strengthening at Gulf primarily related to
a line of business that insured the residual values of leased vehicles and that was placed in runoff in late 2001 and the resolution of a residual value claim dispute. Reserves for certain other business lines at Gulf were also strengthened as was its
allowance for uncollectible reinsurance recoverables. In addition to these Gulf charges, there was additional other Commercial Lines net unfavorable prior year reserve development of $108.5 million which included a $74.8 million charge associated with
American Equity and a $38.9 million increase in environmental
reserves. Net investment income of $1.152 billion in 2003 was $28.6 million higher than 2002 due to higher average invested assets from strong operating cash flows along with higher returns
in the Companys arbitrage fund investments, partially offset by slightly lower returns in private equity investments and the impact of shortening the fixed maturity portfolio duration.

Operating loss of $(125.8) million for 2002 compared to operating income of $752.2 million in 2001. The 2002 operating loss reflected the benefit of the favorable premium rate environment in excess of loss cost trends and increased business volumes.
Operating loss in 2002 was favorably impacted by no catastrophe losses compared to $470.5 million of catastrophe losses in 2001, including $447.9 million related to the terrorist attack on September 11, 2001. The 2002 prior year reserve development
included the $1.394 billion charge related to asbestos discussed
above compared to an asbestos-related charge of $122.7 million
in 2001. Commercial Lines also had a non-asbestos-related prior year reserve development charge of $112.2 million ($172.7
pretax) in 2002 compared to a $141.2 million benefit ($217.2 million pretax) in 2001. Despite the benefit of higher average invested assets resulting from strong cash flows from underwriting, net investment income of $1.123 billion was $69.5 million
lower than 2001 due to reduced returns in the Companys public equity investments and the lower interest rate environment. The 2002 operating loss also reflects the elimination of goodwill amortization.

Commercial Lines revenues were as follows:

|                                              |  |      |         |      |  |      |         |  |  |   |         | 
|--------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|(for the year ended December 31, in millions) |  | 2003 |         | 2002 |  | 2001
|                                              |  |      |         |      |  |     
|Earned premiums                               |  | $    | 7,722.8 |      |  | $    | 6,801.2 |  |  | $ | 5,447.0 | 
|Net investment income                         |  |      | 1,506.9 |      |  |      | 1,495.3 |  |  |   | 1,616.3 | 
|Fee income                                    |  |      | 560.0   |      |  |      | 454.9   |  |  |   | 347.4   | 
|Recoveries from former affiliate              |  |      |        |      |  |      | 520.0   |  |  |   |        | 
|Other revenues                                |  |      | 40.7    |      |  |      | 32.1    |  |  |   | 41.4    | 
|                                              |  |      |         |      |  |      |         |  |  |   |         | 
|Commercial Lines revenues                     |  | $    | 9,830.4 |      |  | $    | 9,303.5 |  |  | $ | 7,452.1 | 
|                                              |  |      |         |      |  |      |         |  |  |   |         | 

Revenues increased $526.9 million or 6% in 2003 and $1.851 billion or 25% in 2002.

Earned premiums increased $921.6 million or 14% in 2003 primarily due to premium rate increases, growth in targeted new business and strong customer retention. Earned premiums included Northland and Associates which decreased $213.8 million or 25% in
2003 due to the withdrawal in 2002 of business at American Equity and Associates. Earned premiums increased $1.354 billion or 25% in 2002 primarily due to premium rate increases and the full-year inclusion of Northland and Associates in 2002. Earned
premiums for Northland and Associates were $846.1 million in 2002, an increase of $642.9 million over 2001 which only included the fourth quarter of 2001.

Net investment income increased $11.6 million in 2003 due to higher average invested assets resulting from strong cash flows from operations partially offset by the reduction in investment yields to 5.3% in 2003 from 6.0% in 2002. The decrease in yields
reflected the lower interest rate environment, the shortening of the
average effective duration of the fixed maturity portfolio, a higher proportion of tax-exempt investments and reduced returns in the Companys private equity investments; partially
offset by higher returns in arbitrage fund investments. Net investment income decreased $121.0 million in 2002. The decline resulted from a reduction in investment yields to 6.0% in 2002 from 6.9% in 2001. The decrease in yields reflected reduced
returns in the Companys public equity investments and the lower interest rate environment. The impact of lower yields was partially offset by the rise in average invested assets due to the Northland and Associates acquisitions and increased cash flow
from operations. Net investment income related to Northland and Associates was $88.2 million in 2002, an increase of $65.8 million over 2001 which only included the fourth quarter.

58



---



##### Table of Contents



Fee income increased $105.1 million or 23% in 2003 and $107.5 million or 31% in 2002. National Accounts is the primary source of fee income due to its service businesses, which include claim and loss prevention services to large companies that choose to
self-insure a portion of their insurance risks, and claims and policy management services to workers compensation residual market pools, automobile assigned risk plans and to self-insurance pools. Fees rose reflecting new business levels, price
increases and more workers compensation business being written by state residual market pools.

Commercial Lines net written premiums by market were as follows:

|                                              |                     |                 |         |         |         |      |         |         |         |   |         |         |         | 
|--------------------------------------------- | ------------------- | --------------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|(for the year ended December 31, in millions) |                     | 2003            |         | 2002    |         | 2001
|                                              |                     |                 |         |         |         |     
|Core                                          |                     |                 |         |         |         |      |         |         |         |   |         |        
|                                              | National Accounts   |                 | $       | 902.8   |         |      | $       | 734.6   |         |   | $       | 418.9   |        
|                                              | Commercial Accounts |                 |         | 3,725.7 |         |      |         | 3,556.1 |         |   |         | 2,407.1 |        
|                                              | Select Accounts     |                 |         | 2,047.6 |         |      |         | 1,869.5 |         |   |         | 1,713.2 |        
|                                              |                     |                 |         |         |         |      |         |         |         |   |         |         |        
|                                              |                     | Total Core      |         |         | 6,676.1 |      |         |         | 6,160.2 |   |         |         | 4,539.2 | 
|Specialty                                     |                     |                 |         |         |         |      |         |         |         |   |         |        
|                                              | Bond                |                 |         | 780.5   |         |      |         | 629.9   |         |   |         | 590.2   |        
|                                              | Gulf                |                 |         | 662.8   |         |      |         | 579.4   |         |   |         | 608.2   |        
|                                              |                     |                 |         |         |         |      |         |         |         |   |         |         |        
|                                              |                     | Total Specialty |         |         | 1,443.3 |      |         |         | 1,209.3 |   |         |         | 1,198.4 | 
|                                              |                     |                 |         |         |         |      |         |         |         |   |         |         |        
|Total net written premiums                    |                     | $               | 8,119.4 |         |         | $    | 7,369.5 |         |         | $ | 5,737.6 |        
|                                              |                     |                 |         |         |         |      |         |         |         |   |         |         |        

Commercial Lines net written premiums increased $749.9 million or 10% in 2003. The strong but moderating rate environment, growth in targeted new business, and strong customer retention across all major lines of business combined to drive premium
growth. This premium growth was partially offset by the decrease in net written premiums at Northland and Associates due to the withdrawal in 2002 of business at American Equity and Associates and a one-time additional $115.0 million of net written
premium in 2002 related to the termination of certain reinsurance
contracts. Net written premiums for Northland and Associates were $546.8 million in 2003 compared to $824.8 million in 2002. The Commercial Lines business of Northland and Associates is
included with Commercial Accounts.

Commercial Lines net written premiums in 2002 increased $1.632 billion or 28%. The 2002 increase reflected premium rate increases and the full-year inclusion of Northland and Associates. The inclusion of Northland and Associates contributed $657.4
million to the increase. Net written premiums for Northland and Associates were $824.8 million in 2002 compared to $167.4 million in 2001 which only included the fourth quarter of 2001.

In addition to fee based products, National Accounts works with national and regional brokers to provide tailored insurance coverages and programs, mainly to large corporations, and participates in state mandated residual market workers compensation and
automobile assigned risk plans. National Accounts net written premiums increased $168.2 million or 23% in 2003 and $315.7 million or 75% in 2002. These increases in net written premiums were due to the continued benefit from rate increases, higher new
business levels that, in part, resulted from the Companys third quarter 2003 renewal rights transaction with Royal & SunAlliance and higher business volume in residual market pools.

59



---



##### Table of Contents



Commercial Accounts primarily serves mid-sized businesses for casualty products and large, mid-sized and small businesses for property products through a network of independent agents and brokers. Commercial Accounts net written premiums, excluding
Northland and Associates, increased 16% to $3.179 billion in 2003 primarily due to renewal price change increases that averaged 10% for 2003 (down from 22% in 2002), new business growth in targeted markets and strong retention across all major product
lines. The lower level of renewal price changes resulted mostly from moderation in rates, primarily in the property lines. Renewal price change represents the estimated average change in premium on policies that renew, including rate and exposure
changes, versus the average premium on those same policies for their prior term. New business premiums in Commercial Accounts for 2003 were $809.5 million, a 12% increase from 2002. The business retention ratio for 2003 was 81% up from 76% in 2002.
Retention represents the estimated percentage of premium available for renewal which renewed in the current period. This renewal price change, new business and retention information excludes the Companys Northland and Associates operations. Net
written premiums associated with Northland and Associates declined to $546.8 million in 2003 from $824.8 million in 2002 due to the withdrawal in 2002 of business at American Equity and Associates and the $115.0 million one-time impact from the
termination of certain reinsurance contracts as previously discussed.
Commercial Accounts net written premiums increased $1.149 billion or 48% in 2002. The increase was significantly impacted by the inclusion in 2002 of the full-year results of
Northland and Associates. Net written premiums related to Northland and Associates were $824.8 million and $167.4 million in 2002 and 2001, respectively. Excluding the impact of Northland and Associates, net written premiums increased 22% or $491.6
million for 2002, primarily driven by renewal price changes averaging 22% for 2002 and strong growth in new business. All major product lines  commercial automobile, property and general liability  contributed to the rise in renewal pricing. The one
area not showing adequate rate improvement, however, was the workers compensation line and, accordingly, Commercial Accounts did not grow this business. New business premiums in Commercial Accounts for 2002 were $725.4 million, a 43% increase. The
business retention ratio for 2002 was 76%, up from 71% for 2001.

Select Accounts serves small businesses through a network of independent agents. Select Accounts net written premiums increased $178.1 million or 10% in 2003. The increase in Select Accounts net written premiums primarily reflected renewal price change
increases averaging 14% for 2003 compared to 17% for 2002, increased new business and strong retention. New business premiums in Select Accounts for 2003 were $367.8 million compared to $305.3 million in 2002. New business growth was especially strong
in property, general liability and commercial multi-peril lines of business. The business retention ratio for 2003, which remained strong at 83%, compared to 80% for 2002. Selects retention remains strongest for small commercial business handled
through the Companys Service Centers, while premium growth has been greatest in the commercial multi-peril and property product lines. Select Account net written premiums increased $156.3 million or 9% in 2002. The increase in Select Accounts net
written premiums primarily reflected renewal price changes averaging 17% for 2002 compared to 14% in 2001. New business premiums in Select Accounts for 2002 were $305.3 million compared to $275.8 million in 2001. The business retention ratio for 2002,
which was 80%, was consistent with 2001.

Bond provides a variety of fidelity and surety bonds and executive liability coverages to clients of all sizes through independent agents and brokers. Bond net written premiums increased $150.6 million or 24% in 2003. This increase reflected a
favorable premium rate environment and strong new business, principally in executive liability product lines, which target middle and small market private accounts, partially offset by higher reinsurance costs. In addition, the surety product lines
benefited from higher premium rates in 2003. Bond net written premiums increased $39.7 million or 7% in 2002. The 2002 amount was reduced by $17.5 million due to a change in the Bond Executive Liability excess of loss reinsurance treaty that was
effective January 1, 2002. Excluding this reinsurance adjustment, Bond net written premiums increased $133.1 million or 21% during 2003. In addition, the 2001 amount was increased by $34.1 million due to the termination of the Master Bond Liability
reinsurance treaty effective January 1, 2001. Excluding both reinsurance adjustments, Bond net written premiums increased $91.3 million during 2002. This increase reflected a favorable premium rate environment and strong production growth in executive
liability product lines. In addition, the surety product lines benefited from higher premium rates in 2002.

60



---



##### Table of Contents



Gulf markets products to national, mid-sized and small customers and distributes them through both wholesale brokers and retail agents and brokers throughout the United States with particular emphasis on management and professional liability coverages
and excess and surplus lines of insurance. Gulf net written premiums increased $83.4 million or 14% in 2003 as a result of significant rate increases across all classes of management liability products. Gulf net written premiums decreased $28.8 million
in 2002 due to Gulfs decision to exit non-core businesses, including assumed reinsurance, transportation, residual value and property, partially offset by increases in Gulfs core specialty lines.

Commercial Lines claims and expenses were as follows:

|                                              |  |      |         |      |  |      |          |  |  |   |         | 
|--------------------------------------------- |  | ---- | ------- | ---- |  | ---- | -------- |  |  | - | ------- | 
|(for the year ended December 31, in millions) |  | 2003 |         | 2002 |  | 2001
|                                              |  |      |         |      |  |     
|Claims and claim adjustment expenses          |  | $    | 5,784.0 |      |  | $    | 7,932.1  |  |  | $ | 4,711.7 | 
|Amortization of deferred acquisition costs    |  |      | 1,182.9 |      |  |      | 1,072.8  |  |  |   | 864.9   | 
|Interest expense                              |  |      | 5.0     |      |  |      | 3.5      |  |  |   |        | 
|General and administrative expenses           |  |      | 1,207.4 |      |  |      | 1,031.0  |  |  |   | 932.2   | 
|                                              |  |      |         |      |  |      |          |  |  |   |         | 
|Commercial Lines claims and expenses          |  | $    | 8,179.3 |      |  | $    | 10,039.4 |  |  | $ | 6,508.8 | 
|                                              |  |      |         |      |  |      |          |  |  |   |         | 

Total claims and expenses decreased $1.860 billion or 19% in 2003 and increased $3.531 billion or 54% in 2002.

Claims and claim adjustment expenses decreased $2.148 billion or 27% in 2003 primarily due to lower unfavorable prior year reserve development, partially offset by increased loss costs, growth in business volume and higher weather related catastrophe
losses. Catastrophe losses, net of reinsurance, were $103.8 million in 2003 compared to no catastrophe losses in 2002. The 2003 catastrophe losses were primarily due to a severe winter storm in Colorado in the first quarter, severe storms in the second
quarter in a number of Southern and Midwestern states and Hurricane Isabel in the third quarter. Unfavorable prior year reserve development included in claims and claim adjustment expenses was $688.0 million in 2003 compared to $3.118 billion
in 2002. The most significant component of 2003 prior year development was Gulf reserve strengthening of $521.1 million. Reserve strengthening at Gulf
primarily related to a line of business that insured the residual values of leased vehicles and that was placed in runoff in late 2001 and the resolution of a residual value claim dispute. Reserves for certain other business lines at Gulf were also
strengthened as was its allowance for uncollectible reinsurance recoverables. In addition to these Gulf charges, there was additional other Commercial Lines net unfavorable prior year reserve development of $166.9 million which included a $115.0 million
charge associated with American Equity and a $59.8 million
increase in environmental reserves. Unfavorable prior year reserve
development in 2002 included $2.945 billion of asbestos-related
charges (prior to the benefit related to recoveries
under the Citigroup indemnification agreement), compared to no asbestos incurrals in 2003. For additional information see    Asbestos Claims and Litigation.

Claims and claim adjustment expenses increased $3.220 billion or 68% in 2002 primarily due to higher prior year reserve development, the inclusion in 2002 of the full-year results of Northland and Associates and increased loss cost trends, partially
offset by no catastrophe losses. Catastrophe losses, net of reinsurance, were $723.8 million in 2001 and were primarily due to the $644.0 million of losses attributed to the terrorist attack on September 11 as well as the Seattle earthquake and Tropical
Storm Allison. Included in claims and claim adjustment expenses in 2002 was unfavorable prior year reserve development of $3.118 billion compared to
2001 favorable prior year reserve development of $28.4 million. As discussed above, the most significant component in 2002 prior year reserve development was asbestos-related charges which increased $2.756 billion over 2001. Separately, the Company
strengthened its environmental reserves in the 2002 fourth quarter by $100.0 million and reduced its reserves for other general liability exposures $94.8 million. These actions were taken as a result of recent payment and settlement experience. In
addition, in 2003 the Company strengthened prior year reserves for
certain run-off lines of business, including assumed reinsurance, and experienced favorable development in certain on-going businesses.

61



---



##### Table of Contents



Amortization of deferred acquisition costs increased $110.1 million or 10% in 2003 and $207.9 million or 24% in 2002. These increases reflect higher commission and premium taxes associated with the increases in earned premiums previously described.

General and administrative expenses increased $176.4 million or 17% in 2003 and $98.8 million or 11% in 2002. These increases are related to business growth and higher contingent commissions that resulted from improved underwriting results. In
addition, 2002 comparison to 2001 reflects the elimination of goodwill amortization due to the adoption of FAS 142.

GAAP combined ratios before policyholder dividends for Commercial Lines were as follows:

|                                     |                            |      |      |      |   |      |       |       |   |  |       |      |  
|------------------------------------ | -------------------------- | ---- | ---- | ---- | - | ---- | ----- | ----- | - |  | ----- | ---- | -
|(for the year ended December 31,)    |                            | 2003 |      | 2002 |   | 2001
|                                     |                            |      |      |      |   |     
|                                     | Loss and LAE ratio (1)     |      |      | 71.7 | % |      |       | 101.3 | % |  |       | 82.9 | %
|                                     | Underwriting expense ratio |      |      | 26.7 |   |      |       | 27.6  |   |  |       | 29.7 |  
|                                     |                            |      |      |      |   |      |       |       |   |  |       |      |  
|Commercial Lines GAAP combined ratio |                            |      | 98.4 | %    |   |      | 128.9 | %     |   |  | 112.6 | %   
|                                     |                            |      |      |      |   |      |       |       |   |  |       |      |  

(1)  Excludes losses recovered under the Citigroup indemnification agreement in 2002.

The 30.5 point improvement in the 2003 GAAP combined ratio before policyholder dividends reflected an improvement in both the loss and LAE ratio and the underwriting expense ratio. The improvement in the loss and LAE ratio resulted from lower
unfavorable prior year reserve development, primarily due to no asbestos-related charges in 2003 compared to the 2002 asbestos-related charges discussed above that added 31.5 points to the 2002 combined ratio. The impact of premium rate increases that
exceeded loss cost trends was mostly offset by the catastrophe losses that occurred in 2003 compared to no catastrophe losses in 2002. The decrease in the underwriting expense ratio was primarily due to the benefits of the favorable rate environment and
higher fee income, partially offset by higher contingent commissions that result from improved underwriting performance.

The deterioration in the 2002 GAAP combined ratio before policyholder dividends reflected a deterioration in the loss and LAE ratio and an improvement in the underwriting expense ratio. The deterioration in the loss and LAE ratio was primarily due to
the impact of higher prior year reserve development, primarily due to the asbestos-related charges discussed above, partially offset by no catastrophe losses in 2002 compared to the impact of the terrorist attack on September 11, 2001 and rate increases
that exceeded loss cost trends. The improvement in the underwriting expense ratio was primarily attributed to the benefit of premium rate increases and the elimination of goodwill amortization.

Personal Lines

Personal Lines operating income was as follows:

|                                              |  |      |       |      |  |      |       |  |  |   |       | 
|--------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|(for the year ended December 31, in millions) |  | 2003 |       | 2002 |  | 2001
|                                              |  |      |       |      |  |     
|Operating income                              |  | $    | 492.5 |      |  | $    | 346.9 |  |  | $ | 241.0 | 

The 2003 operating income increased $145.6 million or 42%. Operating income benefited from the favorable but moderating premium rate environment in both automobile and property, increased business volumes and a continued moderation in the increase in
loss costs. Operating income in 2003 included catastrophe losses of $161.6 million compared to $54.7 million in 2002. Also impacting operating income was favorable prior year reserve development in 2003 of $137.8 million ($212.0 million pretax)
compared to $19.4 million ($29.9 million pretax) in 2002. Favorable prior year reserve development in 2003 resulted from improvement in non-catastrophe-related claim frequency for both homeowners and non-bodily-injury automobile businesses and a $32.5
million ($50.0 million pretax) reduction in the reserves held related to the terrorist attack on September 11 also due to lower than expected claim frequency. Despite the benefit of higher average invested assets resulting from strong cash flows from
operations, 2003 after tax net investment income of $262.7 million was $16.1 million lower than 2002 reflecting the lower interest rate environment, slightly lower returns in the Companys private equity investments and the impact of shortening the fixed
maturity portfolio duration.

62



---



##### Table of Contents



Operating income in 2002 increased $105.9 million or 44%. The 2002 operating income reflected an improved premium rate environment in both auto and property and a moderation in the increase in loss costs. Operating income in 2001 reflected the $41.6
million impact of the terrorist attack on September 11, 2001. Weather-related catastrophe losses of $54.7 million in 2002 compared to $44.5 million in 2001. Favorable reserve development of $19.4 million ($29.9 million pretax) in 2002 primarily related
to the moderation in loss cost trends in automobile. Despite the benefit of higher average invested assets resulting from strong cash flows from operations, 2002 after tax net investment income of $278.8 million was $15.4 million lower than 2001
reflecting reduced returns in the Companys public equity investments and the lower interest rate environment. The elimination of goodwill amortization also contributed to the increase in 2002 operating income.

Personal Lines revenues were as follows:

|                                              |  |      |         |      |  |      |         |  |  |   |         | 
|--------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|(for the year ended December 31, in millions) |  | 2003 |         | 2002 |  | 2001
|                                              |  |      |         |      |  |     
|Earned premiums                               |  | $    | 4,822.6 |      |  | $    | 4,354.1 |  |  | $ | 3,963.9 | 
|Net investment income                         |  |      | 361.1   |      |  |      | 384.7   |  |  |   | 410.2   | 
|Other revenues                                |  |      | 85.2    |      |  |      | 80.1    |  |  |   | 73.3    | 
|                                              |  |      |         |      |  |      |         |  |  |   |         | 
|Personal Lines revenues                       |  | $    | 5,268.9 |      |  | $    | 4,818.9 |  |  | $ | 4,447.4 | 
|                                              |  |      |         |      |  |      |         |  |  |   |         | 

Revenues increased $450.0 million or 9% in 2003 and $371.5 million or 8% in 2002.

Earned premiums increased $468.5 million or 11% in 2003 primarily due to higher rates as well as increased new business volumes and strong retention. Earned premiums in 2002 increased $390.2 million or 10% primarily due to rate increases in all product
lines and the full-year inclusion of Northland. Earned premiums for Northland were $112.1 million in 2002, an increase of $91.2 million over 2001 which only included the fourth quarter.

Net investment income decreased $23.6 million in 2003 and $25.5 million in 2002 despite higher average invested assets resulting from strong cash flows from operations. The decline resulted from a reduction in investment yields to 5.3% in 2003 from 6.0%
in 2002. The decrease in yields reflected the lower interest rate
environment, the shortening of the average effective duration of the fixed maturity portfolio and a higher proportion of tax-exempt investments. The 2002 decline resulted from a reduction
in investment yields to 6.0% from 6.9% in 2001. The decrease in yields reflected reduced returns in the Companys public equity investments and the lower interest rate environment.

Personal Lines net written premiums by product line were as follows:

|                                              |  |      |         |      |  |      |         |  |  |   |         | 
|--------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|(for the year ended December 31, in millions) |  | 2003 |         | 2002 |  | 2001
|                                              |  |      |         |      |  |     
|Automobile                                    |  | $    | 3,053.3 |      |  | $    | 2,842.9 |  |  | $ | 2,590.7 | 
|Homeowners and other                          |  |      | 2,028.1 |      |  |      | 1,732.1 |  |  |   | 1,517.2 | 
|                                              |  |      |         |      |  |      |         |  |  |   |         | 
|Total net written premiums                    |  | $    | 5,081.4 |      |  | $    | 4,575.0 |  |  | $ | 4,107.9 | 
|                                              |  |      |         |      |  |      |         |  |  |   |         | 

Personal Lines net written premiums increased $506.4 million or 11% in 2003 due to renewal price increases and higher business volumes in both the Automobile and Homeowners and Other lines of business. Net written premiums in 2002 increased $467.1
million or 11% due to renewal price increases in both the Automobile and Homeowners and Other lines of business and the full-year inclusion of Northland. Net written premiums for Northland were $111.0 million in 2002, an increase of $85.7 million over
2001 which only included the fourth quarter.

Automobile net written premiums increased $210.4 million or 7% in 2003 due to higher business volumes and renewal price increases. Renewal price change increases for standard voluntary business averaged 6% in 2003, two percentage points below 2002.
Renewal price change for Personal Lines products represents the estimated average change in premium on policies that renew, including rate and exposure changes, versus the average premium on those same policies for their prior term. Policies in force
increased 4% in 2003. Policy retention levels for standard

63



---



##### Table of Contents



voluntary business remained favorable and averaged 81%, up one percentage point from 2002. Retention for Personal Lines products represents the estimated percentage of policies from the prior
year period renewed in the current period. Automobile net written premiums in 2002 increased $252.2 million or 10%. Excluding the impact of Northland, which contributed $97.5 million and $23.7 million to 2002 and 2001, respectively, Automobile net
written premiums increased 7% to $2.745 billion. Renewal price changes for standard voluntary business averaged 8% for 2002, up one percentage point from 2001. Policies in force increased 2% in 2002. Policy retention levels for standard voluntary
business in 2002 remained favorable and averaged 80%, up one percentage point from 2001.

Homeowners and Other net written premiums increased $296.0 million or 17% in 2003 due to higher business volumes and renewal price increases. Renewal price change increases averaged 11% in 2003 compared to 15% for 2002. The higher level of renewal
price change increases in 2002 was mostly attributable to rate increases in Texas. Policies in force increased 6% in 2003. Retention levels also remained favorable and averaged 81%, up one percentage point from 2002. Homeowners and Other net written
premiums increased $214.9 million or 14% in 2002. Excluding the impact of Northland, which contributed $13.5 million and $1.6 million to 2002 and 2001, respectively, Homeowners and Other net written premiums increased 13% to $1.719 billion. Renewal
price changes averaged 15% for 2002, up 5 percentage points from 2001. Policies in force were flat in 2002. Retention levels also remained favorable and averaged 80% in both 2002 and 2001.

Production through the Companys independent agents in Personal Lines, which represented over 81% of Personal Lines total net written premiums in 2003, was up $423.6 million or 11% to $4.159 billion. Production through other channels, which include
affinity and joint marketing arrangements, was up $82.8 million or 10% to $922.2 million. Production through the Companys independent agents in 2002 was up $427.7 million or 13% to $3.736 billion for 2002, including the impact of Northland. Net
written premiums through channels other than independent agents was up $39.4 million or 5% to $839.4 million for 2002 as the favorable impact of renewal price changes was offset in part by a reduction in policies in force due to underwriting actions
taken to eliminate marginally profitable businesses.

Personal Lines had approximately 5.8 million, 5.5 million and 5.4 million policies in force at December 31, 2003, 2002 and 2001, respectively.

Personal Lines claims and expenses were as follows:

|                                              |  |      |         |      |  |      |         |  |  |   |         | 
|--------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|(for the year ended December 31, in millions) |  | 2003 |         | 2002 |  | 2001
|                                              |  |      |         |      |  |     
|Claims and claim adjustment expenses          |  | $    | 3,334.4 |      |  | $    | 3,206.4 |  |  | $ | 3,053.0 | 
|Amortization of deferred acquisition costs    |  |      | 800.8   |      |  |      | 737.4   |  |  |   | 673.8   | 
|General and administrative expenses           |  |      | 420.0   |      |  |      | 385.1   |  |  |   | 382.9   | 
|                                              |  |      |         |      |  |      |         |  |  |   |         | 
|Personal Lines claims and expenses            |  | $    | 4,555.2 |      |  | $    | 4,328.9 |  |  | $ | 4,109.7 | 
|                                              |  |      |         |      |  |      |         |  |  |   |         | 

Total claims and expenses increased $226.3 million or 5% in 2003 and $219.2 million or 5% in 2002.

Claims and claim adjustment expenses increased $128.0 million or 4% in 2003 primarily due to increased loss costs, growth in business volume and higher catastrophe losses, partially offset by favorable prior year reserve development. Catastrophe losses
were $248.6 million in 2003 compared to $84.1 million in 2002. Favorable prior year reserve development was $212.0 million in 2003 compared to $29.9 million in 2002. As discussed above, favorable prior year reserve development in 2003 primarily related
to property business written in 2002 and to a lesser degree automobile business written in prior years and also included a $50.0 million reduction in the reserves held related to the terrorist attack on September 11, 2001.

Claims and claim adjustment expenses increased $153.4 million or 5% in 2002 primarily due to the inclusion in 2002 of the full-year results of Northland, increased loss cost trends and higher natural catastrophe losses partially offset by the $60.0
million impact of the terrorist attack on September 11, 2001. Natural catastrophe losses were $84.1 million in 2002 compared to $72.5 million in 2001. Favorable prior year reserve development was $29.9 million in 2002 compared to $31.0 million in 2001.

64



---



##### Table of Contents



Catastrophe losses, net of reinsurance, were $248.6 million, $84.1 million and $132.5 million in 2003, 2002 and 2001, respectively. Catastrophe losses in 2003 were primarily due to winter storms in the Mid-Atlantic states, the Northeast and Colorado in
the first quarter and hail, ice storms and tornados in the second quarter. Catastrophes in the third quarter were primarily due to Hurricane Isabel and in the fourth quarter were due to the California wildfires and wind, hail and tornados in the Midwest
and East. Catastrophe losses in 2002 were primarily due to winter
storms in the Midwest and New York in the first quarter, wind and
hailstorms in the Mid-Atlantic region in the second and third quarters, and Tropical Storm Lili and wind, hail and ice
storms in the Southeast in the fourth quarter. Catastrophe losses in 2001 were primarily due to the terrorist attack on September 11, Tropical Storm Allison and wind and hailstorms in the Midwest and Texas in the second quarter.

Amortization of deferred acquisition costs increased $63.4 million or 9% in 2003 and $63.6 million or 9% in 2002 due to higher commission and premium taxes associated with the increases in earned premium previously described.

General and administrative expenses increased $34.9 million or 9% in 2003 and $2.2 million or 1% in 2002. These increases are related to business growth and higher contingent commissions that resulted from improved underwriting results. In addition,
2002 comparison to 2001 reflects the elimination of goodwill amortization due to the adoption of FAS 142.

GAAP combined ratios for Personal Lines were as follows:

|                                   |                            |      |      |      |   |      |      |      |   |  |       |      |  
|---------------------------------- | -------------------------- | ---- | ---- | ---- | - | ---- | ---- | ---- | - |  | ----- | ---- | -
|(for the year ended December 31,)  |                            | 2003 |      | 2002 |   | 2001
|                                   |                            |      |      |      |   |     
|                                   | Loss and LAE ratio         |      |      | 69.1 | % |      |      | 73.6 | % |  |       | 77.0 | %
|                                   | Underwriting expense ratio |      |      | 25.3 |   |      |      | 25.8 |   |  |       | 26.8 |  
|                                   |                            |      |      |      |   |      |      |      |   |  |       |      |  
|Personal Lines GAAP combined ratio |                            |      | 94.4 | %    |   |      | 99.4 | %    |   |  | 103.8 | %   
|                                   |                            |      |      |      |   |      |      |      |   |  |       |      |  

The 5.0 point improvement in the 2003 GAAP combined ratio reflected an improvement in both the loss and LAE ratio and in the underwriting expense ratio. The improvement in the loss and LAE ratio was due to renewal price increases that exceeded loss cost
trends, continued reduced levels of non-catastrophe property claim frequency and higher favorable prior year reserve development, partially offset by higher catastrophes. The improvement in the underwriting expense ratio was primarily due to the
benefits of the favorable rate environment and further expense leverage.

The 4.4 point improvement in the 2002
GAAP combined ratio reflected an improvement in both the loss and LAE
ratio and the underwriting expense ratio. The improvement in the loss
and LAE ratio was primarily attributed to renewal price increases that
exceeded loss cost trends, slightly higher natural catastrophes in 2002, the impact in 2001 of the terrorist attack on September 11, and slightly lower favorable prior year reserve development. The improvement in the underwriting expense ratio was
primarily attributed to the benefit of premium rate increases and the elimination of goodwill amortization. An increase in contingent commissions, resulting from the improved underwriting performance, offset an overall reduction in other expenses.

65



---



##### Table of Contents



Interest Expense and Other

|                                              |  |      |        |      |  |      |        |   |  |   |        |  
|--------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|(for the year ended December 31, in millions) |  | 2003 |        | 2002 |  | 2001
|                                              |  |      |        |      |  |     
|Revenues                                      |  | $    | 1.9    |      |  | $    | 0.6    |   |  | $ | 8.5    |  
|                                              |  |      |        |      |  |      |        |   |  |   |        |  
|Interest Expense and Other, net               |  | $    | (112.2 | )    |  | $    | (102.9 | ) |  | $ | (137.5 | )
|                                              |  |      |        |      |  |      |        |   |  |   |        |  

Interest Expense and Other in 2003 increased $9.3 million, after tax, primarily due to higher interest costs. After tax interest expense was $104.9 million in 2003 compared to $99.6 million in 2002. The increase in interest expense in 2003 was
primarily due to certain one time costs associated with the first and second quarter refinancing activities that lowered average interest costs and higher levels of temporary debt. Temporary financing included $550.0 million first obtained in December
2002 in connection with the fourth quarter 2002 asbestos reserve strengthening and $1.400 billion of senior notes issued on March 11, 2003. The proceeds from the issuance of these senior notes were used to prepay and refinance a $500.0 million note to
Citigroup on March 11, 2003, and to redeem $900.0 million of trust preferred securities on April 9, 2003. For additional information see Liquidity and Capital Resources.

After tax interest expense of $99.6 million in 2002 decreased $33.6 million from $133.2 million in 2001 due to lower average interest-bearing debt levels primarily related to the repayment of debt obligations to Citigroup in the 2002 first quarter.
Included in 2001 net expense was the after tax benefit of a $5.7 million dividend from an investment that was sold to Citigroup in 2002.

ASBESTOS CLAIMS AND LITIGATION

The Company believes that the property
and casualty insurance industry has suffered from court decisions and
other trends that have attempted to expand insurance coverage for asbestos claims, far beyond the intent of insurers and policyholders. As a
result, the Company continues to experience an increase in the number of asbestos claims being tendered to the Company by the Companys policyholders (which includes others seeking coverage under a policy) including claims against the Companys
policyholders by individuals who do not appear to be impaired by asbestos exposure. Factors underlying these increases include more intensive advertising by lawyers seeking asbestos claimants, the increasing focus by plaintiffs on new and previously
peripheral defendants and entities seeking bankruptcy protection as a result of asbestos-related liabilities. In addition to contributing to the increase in claims, bankruptcy proceedings may increase the volatility of asbestos-related losses by
initially delaying the reporting of claims and later by significantly accelerating and increasing loss payments by insurers, including the Company. The Company is currently involved in coverage litigation concerning a number of policyholders who have
filed for bankruptcy, including, among others, ACandS, Inc., who in some instances, have asserted that all or a portion of their asbestos-related claims are not subject to aggregate limits on coverage as described generally in the next paragraph. (Also
see -Legal Proceedings.) Particularly during the last few months of 2001 and continuing through 2002, the trends described above both accelerated and became more apparent. As expected, these trends continued into 2003. As a result of the trends
described above, there is a high degree of uncertainty with respect to future exposure from asbestos claims.

In some instances, policyholders continue to assert that their claims for asbestos-related insurance are not subject to aggregate limits on coverage and that each individual bodily injury claim should be treated as a separate occurrence under the
policy. It is difficult to predict whether these policyholders will be successful on both issues or whether the Company will be successful in asserting additional defenses. To the extent both issues are resolved in policyholders favor and other
additional Company defenses are not successful, the Companys coverage obligations under the policies at issue would be materially increased and bounded only by the applicable per occurrence limits and the number of asbestos bodily injury claims against
the policyholders. Accordingly, it is difficult to predict the ultimate size of the claims for coverage not subject to aggregate limits.

66



---



##### Table of Contents



Many coverage disputes with policyholders are only resolved through settlement agreements. Because many policyholders make exaggerated demands, it is difficult to predict the outcome of settlement negotiations. Settlements involving bankrupt
policyholders may include extensive releases which are favorable to
the Company but which could result in settlements for larger amounts than originally anticipated. As in the past, the Company will continue to pursue settlement opportunities.

In addition, proceedings have been launched directly against insurers, including the Company, challenging insurers conduct in respect of asbestos claims, including in some cases with respect to previous settlements. The Company anticipates the filing
of other direct actions against insurers, including the Company, in the future. Particularly in light of jurisdictional issues, it is difficult to predict the outcome of these proceedings, including whether the plaintiffs will be able to sustain these
actions against insurers based on novel legal theories of liability. (Also see -Legal Proceedings.)

Because each policyholder presents different liability and coverage issues, the Company generally evaluates the exposure presented by each policyholder on a policyholder-by-policyholder basis. In the course of this evaluation, the Company considers:
available insurance coverage, including the role of any umbrella or excess insurance the Company has issued to the policyholder; limits and deductibles; an analysis of each policyholders potential liability; the jurisdictions involved; past and
anticipated future claim activity and loss development on pending claims; past settlement values of similar claims; allocated claim adjustment expense; potential role of other insurance; the role, if any, of non-asbestos claims or potential non-asbestos
claims in any resolution process; and applicable coverage defenses or determinations, if any, including the determination as to whether or not an asbestos claim is a products/completed operation claim subject to an aggregate limit and the available
coverage, if any, for that claim. When the gross ultimate exposure for indemnity and related claim adjustment expense is determined for a policyholder, the Company calculates, by each policy year, a ceded reinsurance projection based on any applicable
facultative and treaty reinsurance, as well as past ceded experience. Adjustments to the ceded projections also occur due to actual ceded claim experience and reinsurance collections. Conventional actuarial methods are not utilized to establish
asbestos reserves. The Companys evaluations have not resulted in any data from which a meaningful average asbestos defense or indemnity payment may be determined.

The Company also compares its historical direct and net loss and expense paid experience, year-by-year, to assess any emerging trends, fluctuations or characteristics suggested by the aggregate paid activity. As anticipated, losses paid have increased
in 2003 compared to prior years. There has been acceleration in the amount of payments, including those from prior settlements of coverage disputes entered into between the Company and certain of its policyholders. Approximately 57% in 2003 and 54% in
2002 of total paid losses relate to policyholders with whom the Company previously entered into settlement agreements that limit the Companys liability. Net asbestos losses paid were $451.8 million for 2003 compared to $361.1 million for 2002,
reflective of the items previously described.

At December 31, 2003, asbestos reserves were $2.977 billion compared to $3.404 billion as of December 31, 2002. The decrease is reflective of the $451.8 million of payments made during the course of 2003, partly offset by accretion of discounts of $24.2
million on reserves for certain policyholders with structured agreements. Other than accretion of discounts, there were no additions to asbestos reserves in 2003 compared to an addition of $2.945 billion in 2002.

67



---



##### Table of Contents



The Company categorizes its asbestos reserves as follows:

|                                                       |                     |      |               |      |                |      |              |      |  |      |       |       |          |   |       |       |  |   |         |       |  |   |         |       | 
|------------------------------------------------------ | ------------------- | ---- | ------------- | ---- | -------------- | ---- | ------------ | ---- |  | ---- | ----- | ----- | -------- | - | ----- | ----- |  | - | ------- | ----- |  | - | ------- | ----- | 
|                                                       |                     |      | Number of     |      |                |      |              |      |  |      |       |       | Asbestos
|                                                       |                     |      | Policyholders |      | Total Paid (1) |      | Reserves (2)
|                                                       |                     |      |               |      |                |      |             
|(at and for the year ended December 31, $ in millions) |                     | 2003 |               | 2002 |                | 2003 |              | 2002 |  | 2003 |       | 2002 
|                                                       |                     |      |               |      |                |      |              |      |  |      |       |      
|Policyholders with settlement agreements               |                     |      | 23            |      |                |      | 26           |      |  | $    | 257.0 |       |          | $ | 196.1 |       |  | $ | 825.9   |       |  | $ | 942.1   |      
|Other policyholders with active claims:                |                     |      |               |      |                |      |              |      |  |      |       |       |          |   |       |       |  |   |         |       |  |   |         |      
|                                                       | Home office review  |      |               | 312  |                |      |              | 264  |  |      |       | 172.3 |          |   |       | 143.6 |  |   |         | 668.3 |  |   |         | 809.4 | 
|                                                       | Field office review |      |               | 880  |                |      |              | 807  |  |      |       | 7.6   |          |   |       | 4.9   |  |   |         | 102.4 |  |   |         | 110.0 | 
|Assumed reinsurance                                    |                     |      |               |      |                |      |              |      |  |      | 14.9  |       |          |   | 16.5  |       |  |   | 229.9   |       |  |   | 242.8   |      
|Unallocated IBNR                                       |                     |      |               |      |                |      |              |      |  |      |       |       |          |   |       |       |  |   | 1,150.2 |       |  |   | 1,300.0 |      
|                                                       |                     |      |               |      |                |      |              |      |  |      |       |       |          |   |       |       |  |   |         |       |  |   |         |      
|Total                                                  |                     |      | 1,215         |      |                |      | 1,097        |      |  | $    | 451.8 |       |          | $ | 361.1 |       |  | $ | 2,976.7 |       |  | $ | 3,404.3 |      
|                                                       |                     |      |               |      |                |      |              |      |  |      |       |       |          |   |       |       |  |   |         |       |  |   |         |      



|(1) |  | Net of reinsurance recoveries. 
|--- |  | -------------------------------
|   
|(2) |  | Net of reinsurance recoverable.

Policyholders with settlement agreements include structured agreements, coverage in place arrangements and Wellington accounts. Reserves are based on the expected payout for each policyholder under the applicable agreement. Structured agreements are
arrangements under which policyholders and/or plaintiffs agree to fixed financial amounts to be paid at scheduled times. Structured agreements include the Companys obligations related to PPG Industries, Inc. (PPG). In May 2002, the Company agreed with
approximately three dozen other insurers and PPG on key terms to settle asbestos-related coverage litigation under insurance policies issued to PPG. While there remain a number of contingencies, including the final execution of documents, court approval
over possible opposition and possible appeal, the Company believes that the completion of the settlement pursuant to the terms announced in May 2002 is likely. The Companys single payment contribution to the proposed settlement is approximately $388.8
million after reinsurance. Coverage in place arrangements represent agreements with major policyholders on specified amounts of coverage to be provided. Payment obligations may be subject to annual maximums and are only made when valid claims are
presented. Wellington accounts refer to the 35 defendants that are
parties to a 1985 agreement settling certain disputes concerning
insurance coverage for their asbestos claims. Many of the aspects of
the Wellington agreement are similar to those of coverage in place
arrangements in which the parties have agreed on specific amounts of
coverage and the terms under which the coverage can be accessed.
During the course of 2003, the Company made final payments to three
policyholders with settlement agreements. No new policyholders were added to this category during 2003.

Other policyholders with active claims are identified as home office review or field office review policyholders. Policyholders are identified for home office review based upon, among other factors: aggregate payments in excess of a specified
threshold (currently $100,000), perceived level of exposure, number of reported claims, products/completed operations and potential non-product exposures, size of policyholder and geographic distribution of products or services sold by the
policyholder. During 2003, an additional 48 policyholders, previously
part of the field office review, were included in the home office
review. Paid losses for policyholders in the home office review category increased by $28.7 million during the year,
due to an acceleration in expected payments coupled with the inclusion of the additional policyholders in this category. Accounts under field office review increased by 73 policyholders from 2002, as additional peripheral defendants continue to be named in
suits.

Assumed reinsurance exposure primarily consists of reinsurance of excess coverage, including various pool participations.

68



---



##### Table of Contents



In addition to incurred but not
reported, or IBNR, amounts contained in the reserves for specific policyholders or groups of policyholders
described above, the Company has established an unallocated IBNR
reserve for further adverse
development related to existing
policyholders, new claims from policyholders reporting claims for the
first time, policyholders for
which there is, or may be litigation and direct actions against the Company.
During 2003, $117.0 million and $31.2 million of reserves were
recategorized from unallocated IBNR to policyholders with settlement
agreements and other policyholders subject to home
office review, respectively, due to additional settlements and
further development consistent with Company expectations for potential development.
This follows the analysis conducted during the Companys annual ground
up review of asbestos policyholders that was completed during the fourth quarter of 2003.

The following table displays activity for asbestos losses and
loss expenses and reserves:

|                                                     |            |      |   |         |   |      |   |         |   |  |   |         |  
|---------------------------------------------------- | ---------- | ---- | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|(at and for the year ended December 31, in millions) |            | 2003 |   | 2002    |   | 2001
|                                                     |            |      |   |         |   |     
|Beginning reserves:                                  |            |      |   |         |   |      |   |         |   |  |   |        
|                                                     | Direct     |      | $ | 4,287.1 |   |      | $ | 1,046.0 |   |  | $ | 1,005.4 |  
|                                                     | Ceded      |      |   | (882.8  | ) |      |   | (225.6  | ) |  |   | (199.0  | )
|                                                     |            |      |   |         |   |      |   |         |   |  |   |         |  
|                                                     | Net        |      |   | 3,404.3 |   |      |   | 820.4   |   |  |   | 806.4   |  
|Incurred losses and loss expenses:                   |            |      |   |         |   |      |   |         |   |  |   |        
|                                                     | Direct (1) |      |   |        |   |      |   | 3,660.2 |   |  |   | 282.7   |  
|                                                     | Ceded      |      |   |        |   |      |   | (715.2  | ) |  |   | (93.9   | )
|Accretion of discount:                               |            |      |   |         |   |      |   |         |   |  |   |        
|                                                     | Direct     |      |   | 24.6    |   |      |   |        |   |  |   |        |  
|                                                     | Ceded      |      |   | (0.4    | ) |      |   |        |   |  |   |        |  
|Losses paid:                                         |            |      |   |         |   |      |   |         |   |  |   |        
|                                                     | Direct     |      |   | 529.8   |   |      |   | 419.1   |   |  |   | 242.1   |  
|                                                     | Ceded      |      |   | (78.0   | ) |      |   | (58.0   | ) |  |   | (67.3   | )
|                                                     |            |      |   |         |   |      |   |         |   |  |   |         |  
|Ending reserves:                                     |            |      |   |         |   |      |   |         |   |  |   |        
|                                                     | Direct     |      |   | 3,781.9 |   |      |   | 4,287.1 |   |  |   | 1,046.0 |  
|                                                     | Ceded      |      |   | (805.2  | ) |      |   | (882.8  | ) |  |   | (225.6  | )
|                                                     |            |      |   |         |   |      |   |         |   |  |   |         |  
|                                                     | Net        |      | $ | 2,976.7 |   |      | $ | 3,404.3 |   |  | $ | 820.4   |  
|                                                     |            |      |   |         |   |      |   |         |   |  |   |         |  



|(1) |  | Includes $800.0 million related to asbestos incurrals subject to the Citigroup indemnification agreement in 2002.
|--- |  | -----------------------------------------------------------------------------------------------------------------

See -Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves.

ENVIRONMENTAL CLAIMS AND LITIGATION

The Company continues to receive claims from policyholders who allege that they are liable for injury or damage arising out of their alleged disposition of toxic substances. Mostly, these claims are due to various legislative as well as regulatory
efforts aimed at environmental remediation. For instance, the Comprehensive Environmental Response, Compensation and Liability Act, or 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 the recovery of response costs from some liable parties and may require liable parties to undertake their own remedial action. Liability under
CERCLA may be joint and several with other responsible parties.

The Company has been, and continues to be, involved in litigation involving insurance coverage issues pertaining to environmental claims. The Company believes that some court decisions have interpreted the insurance coverage to be broader than the
original intent of the insurers and policyholders. These decisions often pertain to insurance policies that were issued by the Company prior to the mid-1970s. These decisions continue to be inconsistent and vary from jurisdiction to jurisdiction.
Environmental claims when submitted rarely indicate the monetary amount being sought by the claimant from the policyholder, and the Company does not keep track of the monetary amount being sought in those few claims which indicate a monetary amount.

69



---



##### Table of Contents



The Companys reserves for environmental claims are not established on a claim-by-claim basis. The Company carries an aggregate bulk reserve for all of the Companys environmental claims that are in dispute 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 those claims. At December 31, 2003, approximately 82% of the net environmental reserve (approximately $236.5
million) is carried in a bulk reserve and includes unresolved and incurred but not reported environmental claims for which the Company has not received any specific claims as well as for the anticipated cost of coverage litigation disputes relating to
these claims. The balance, approximately 18% of the net environmental reserve (approximately $53.6 million), consists of case reserves for resolved claims.

The Companys reserving methodology is preferable to one based on identified claims because the resolution of environmental exposures by the Company generally occurs by settlement on a policyholder-by-policyholder basis as opposed to a claim-by-claim
basis. Generally, the settlement between the Company and the policyholder extinguishes any obligation the Company may have under any policy issued to the policyholder for past, present and future environmental liabilities and extinguishes any pending
coverage litigation dispute with the policyholder. This form of settlement is commonly referred to as a buy-back of policies for future environmental liability. In addition, many of the agreements have also extinguished any insurance obligation which
the Company may have for other claims, including but not limited to asbestos and other cumulative injury claims. The Company and its policyholders may also agree to settlements which extinguish any future liability arising from known specified sites or
claims. Provisions of these agreements also include appropriate indemnities and hold harmless provisions to protect the Company. The Companys general purpose in executing these agreements is to reduce the Companys potential environmental exposure and
eliminate the risks presented by coverage litigation with the policyholder and related costs.

In establishing environmental reserves, the Company evaluates the exposure presented by each policyholder and the anticipated cost of resolution, if any. In the course of this analysis, the Company considers the probable liability, available coverage,
relevant judicial interpretations and historical value of similar exposures. In addition, the Company considers the many variables presented, such as the nature of the alleged activities of the policyholder at each site; the allegations of environmental
harm at each site; the number of sites; the total number of potentially responsible parties at each site; the nature of environmental harm and the corresponding remedy at each site; the nature of government enforcement activities at each site; the
ownership and general use of each site; the overall nature of the insurance relationship between the Company and the policyholder, including the role of any umbrella or excess insurance the Company has issued to the policyholder; the involvement of other
insurers; the potential for other available coverage, including the number of years of coverage; the role, if any, of non-environmental claims or potential non-environmental claims, in any resolution process; and the applicable law in each jurisdiction.
Conventional actuarial techniques are not used to estimate these reserves.

The duration of the Companys investigation and review of these 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 policyholder in providing claim information, the pace of underlying litigation or claim processes, the pace of coverage litigation between the policyholder and the Company
and the willingness of the policyholder and the Company to negotiate, if appropriate, a resolution of any dispute pertaining to these claims. Because these factors vary from claim-to-claim and policyholder-by-policyholder, the Company cannot provide a
meaningful average of the duration of an environmental claim. However, based upon the Companys experience in resolving these claims, the duration may vary from months to several years.

Over the past three years, the Company has experienced a significant reduction in the number of policyholders with pending coverage litigation disputes and a continued reduction in the number of policyholders tendering for the first time an environmental
remediation-type claim to the Company. While there continues to be a reduction in the number of policyholders with active environmental claims, the recent decline is not as dramatic as it had been in the past.

70



---



##### Table of Contents



In 2003, there were 103 policyholders tendering an environmental remediation-type claim to the Company for the first time. This compares to 110 policyholders doing so in 2002 and 134 policyholders in 2001. The Companys review of policyholders
tendering claims for the first time has indicated that they are fewer in number and lower in severity. In addition, these policyholders generally present smaller exposures, have fewer sites and are lower tier defendants. Further, regulatory agencies are
utilizing risk-based analysis and more efficient clean-up technologies.

As of December 31, 2003, the number of policyholders with pending coverage litigation disputes pertaining to environmental claims was 189, approximately 8% less than the number pending as of December 31, 2002, and approximately 12% less than the number
pending as of December 31, 2001. The Company has resolved, for approximately $2.025 billion (before reinsurance), the environmental liabilities presented by 5,904, or 92%, of the total 6,436 policyholders who have tendered environmental claims to the
Company through December 31, 2003. The Company generally has been successful in resolving the Companys coverage litigation disputes and continues to reduce the Companys potential exposure through settlements with some policyholders. However,
continued increases in settlement amounts have led the Company to add $59.8 million to its environmental reserves in the fourth quarter of 2003.

The following table displays activity for environmental losses and loss expenses and reserves:

|                                                     |        |      |   |       |   |      |   |       |   |  |   |        |  
|---------------------------------------------------- | ------ | ---- | - | ----- | - | ---- | - | ----- | - |  | - | ------ | -
|(at and for the year ended December 31, in millions) |        | 2003 |   | 2002  |   | 2001
|                                                     |        |      |   |       |   |     
|Beginning reserves:                                  |        |      |   |       |   |      |   |       |   |  |   |       
|                                                     | Direct |      | $ | 447.8 |   |      | $ | 478.8 |   |  | $ | 668.8  |  
|                                                     | Ceded  |      |   | (62.3 | ) |      |   | (82.8 | ) |  |   | (110.9 | )
|                                                     |        |      |   |       |   |      |   |       |   |  |   |        |  
|                                                     | Net    |      |   | 385.5 |   |      |   | 396.0 |   |  |   | 557.9  |  
|Incurred losses and loss expenses:                   |        |      |   |       |   |      |   |       |   |  |   |       
|                                                     | Direct |      |   | 59.8  |   |      |   | 153.9 |   |  |   | 57.8   |  
|                                                     | Ceded  |      |   |      |   |      |   | (3.8  | ) |  |   | (12.1  | )
|Losses paid:                                         |        |      |   |       |   |      |   |       |   |  |   |       
|                                                     | Direct |      |   | 176.3 |   |      |   | 184.9 |   |  |   | 247.8  |  
|                                                     | Ceded  |      |   | (21.1 | ) |      |   | (24.3 | ) |  |   | (40.2  | )
|                                                     |        |      |   |       |   |      |   |       |   |  |   |        |  
|Ending reserves:                                     |        |      |   |       |   |      |   |       |   |  |   |       
|                                                     | Direct |      |   | 331.3 |   |      |   | 447.8 |   |  |   | 478.8  |  
|                                                     | Ceded  |      |   | (41.2 | ) |      |   | (62.3 | ) |  |   | (82.8  | )
|                                                     |        |      |   |       |   |      |   |       |   |  |   |        |  
|                                                     | Net    |      | $ | 290.1 |   |      | $ | 385.5 |   |  | $ | 396.0  |  
|                                                     |        |      |   |       |   |      |   |       |   |  |   |        |  

71



---



##### Table of Contents



UNCERTAINTY REGARDING ADEQUACY OF ASBESTOS AND ENVIRONMENTAL RESERVES

As a result of the processes and procedures described above, management believes that the reserves carried for asbestos and environmental claims at December 31, 2003 are appropriately established based upon known facts, current law and managements
judgment. However, the uncertainties surrounding the final resolution of these claims continue, and it is presently not possible to estimate the ultimate exposure for asbestos and environmental claims and related litigation. As a result, the reserve is
subject to revision as new information becomes available. The continuing uncertainties include, without limitation, the risks and lack of predictability inherent in major litigation, any impact from the bankruptcy protection sought by various asbestos
producers and other asbestos defendants, a further increase or decrease in asbestos and environmental claims which cannot now be anticipated, the role of any umbrella or excess policies the Company has issued, the resolution or adjudication of some
disputes pertaining to the amount of available coverage for asbestos claims in a manner inconsistent with the Companys previous assessment of these claims, the number and outcome of direct actions against the Company and future developments pertaining
to the Companys ability to recover reinsurance for asbestos and environmental claims. It is also not possible to predict changes in the legal and legislative environment and their impact on the future development of asbestos and environmental claims.
This development will be affected by future court decisions and interpretations, as well as changes in applicable legislation. It is also difficult to predict the ultimate outcome of large coverage disputes until settlement negotiations near completion
and significant legal questions are resolved or, failing settlement, until the dispute is adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations often involve a large number of claimants and other parties and
require court approval to be effective. Also see -Legal Proceedings.

Because of the uncertainties set forth above, additional liabilities may arise for amounts in excess of the current related reserves. In addition, the Companys estimate of ultimate claims and claim adjustment expenses may change. These additional
liabilities or increases in estimates, or a range of either, cannot now be reasonably estimated and could result in income statement charges that could be material to the Companys operating results and financial condition in future periods.

INVESTMENT PORTFOLIO

The Companys invested assets at December 31, 2003 totaled $38.653 billion, including $348.8 million of securities in process of settlement, of which 91% was invested in fixed maturity and short-term investments, 2% in common stocks and other equity
securities, 1% in mortgage loans and real estate held for sale and 6% in other investments. Excluding the impact of securities lending, unrealized investment gains and losses, receivables for investment sales and payables on investment purchases, the
pretax average yield was 5.3%, 6.0% and 6.9% for the years ended
December 31, 2003, 2002 and 2001, respectively, and the after tax average yield was 4.0%, 4.4% and 5.0% for the years ended December 31, 2003, 2002 and 2001, 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, 2003 totaled
$33.046 billion, comprising $32.563
billion of publicly traded fixed maturities and $482.8 million 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, 2003 were Aa2
and Baa1, respectively. Included in the fixed maturity portfolio at that date was approximately
$2.057 billion of below investment grade securities. During 2003, holdings of tax-exempt
securities were increased to $15.391 billion to take advantage of
their relatively high credit quality and attractive after-tax yields. The average effective
duration of the fixed maturity portfolio, including short-term investments, was 4.1 years
as of December 31, 2003 (4.3 years excluding short-term investments),
as compared to 5.0 years at December 31, 2002.

72



---



##### Table of Contents



The following table sets forth the Companys combined fixed
maturity investment portfolio classified by Moodys Investors Service Inc.
ratings:

|                                    |                                 |       |          |                |                  |  |  |       |  
|----------------------------------- | ------------------------------- | ----- | -------- | -------------- | ---------------- |  |  | ----- | -
|                                    |                                 |       | Carrying |                | Percent of Total
|(at December 31, 2003, in millions) |                                 | Value |          | Carrying Value
|                                    |                                 |       |          |               
|Quality Rating:                     |                                 |       |          |                |                  |  |  |      
|                                    | Aaa                             |       | $        | 19,586.0       |                  |  |  | 59.3  | %
|                                    | Aa                              |       |          | 6,002.1        |                  |  |  | 18.2  |  
|                                    | A                               |       |          | 2,510.1        |                  |  |  | 7.6   |  
|                                    | Baa                             |       |          | 2,890.8        |                  |  |  | 8.7   |  
|                                    |                                 |       |          |                |                  |  |  |       |  
|                                    | Total investment grade          |       |          | 30,989.0       |                  |  |  | 93.8  |  
|                                    | Non-investment grade            |       |          | 2,056.5        |                  |  |  | 6.2   |  
|                                    |                                 |       |          |                |                  |  |  |       |  
|                                    | Total fixed maturity investment |       | $        | 33,045.5       |                  |  |  | 100.0 | %
|                                    |                                 |       |          |                |                  |  |  |       |  

The Company makes investments in collateralized mortgage obligations, or 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 offer the most favorable return given the risks involved. One
significant risk evaluated is prepayment sensitivity. This drives the
investment process to generally favor prepayment protected CMO tranches
including planned amortization classes and last cash flow tranches. The
Company does not purchase residual interests in CMOs.

At December 31, 2003, the Company held CMOs with a fair value of $3.932
billion. Approximately 46% of CMO holdings were fully collateralized by GNMA,
FNMA or FHLMC securities at that date, and the balance was fully collateralized
by portfolios of individual mortgage loans. In addition, the Company held
$3.802 billion of GNMA, FNMA, FHLMC or FHA mortgage-backed pass-through
securities at December 31, 2003. Virtually all of these securities are rated
Aaa.

The Companys equity investments are primarily through private equity,
arbitrage and real estate partnerships, which are subject to more volatility
than the Companys fixed income investments, but historically have provided a
higher return. At December 31, 2003, the carrying value of the Companys
investments in private equity, arbitrage and real estate partnerships was
$2.449 billion.

OUTLOOK

As previously discussed, the Company announced the proposed merger with St.
Paul. The following discussion does not reflect the impact, if any, of the
proposed merger including the integration of the Companys business with that
of St. Paul.

The 2003 year continued to see a significant increase in the number of
downgrades by rating agencies for property casualty insurance companies. Many
competitors are experiencing pressure on their capitalization levels due to
underperforming investment portfolios and the need to strengthen prior year
reserves, especially for asbestos liabilities. This pressure has caused many
competitors to sell, discontinue or shrink certain books of business.

A variety of other factors continue to affect the property and casualty
insurance market and the Companys core business outlook, including continued
price increases in the commercial lines marketplace, although at a moderating
level, a continuing highly competitive personal lines marketplace, inflationary
pressures on loss cost trends, including medical inflation and auto loss costs,
asbestos-related developments and rising reinsurance and litigation costs.

The Companys strategic objective is to enhance its position as a consistently
profitable market leader and a cost-effective provider of property and casualty
insurance in the United States.

73



---



##### Table of Contents



Changes in the general interest rate environment affect the returns available
on new investments. While a rising interest rate environment enhances the
returns available on new fixed income investments, it reduces the market value
of existing fixed maturity investments and the availability of gains on
disposition. A decline in interest rates reduces the returns available on new
investments, but increases the market value of existing investments and the
availability of realized investment gains on disposition. In 2003, interest
rates remained near their lowest levels since the 1950s. Consequently, yields
available on new investments remain below the existing portfolios average book
yield. The continuation of this trend will create downward pressure on the
average book yield of fixed income holdings.

As required by various state laws and regulations, the Companys insurance
subsidiaries are subject to assessments from state-administered guaranty
associations, second-injury funds and similar associations. In the opinion of
the Companys management, these assessments will not have a material impact on
the Companys results of operations.

Some 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 some 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.

On November 26, 2002, the Terrorism Risk Insurance Act of 2002 (the Terrorism
Act) was enacted into Federal law and established a temporary Federal program
in the Department of the Treasury that provides for a system of shared public
and private compensation for insured losses resulting from acts of terrorism
committed by or on behalf of a foreign interest. In order for a loss to be
covered under the Terrorism Act (i.e., subject losses), the loss must be the
result of an event that is certified as an act of terrorism by the U.S.
Secretary of Treasury. In the case of a war declared by Congress, only
workers compensation losses are covered by the Terrorism Act. The Terrorism
Insurance Program (the Program) generally requires that all commercial
property/casualty insurers licensed in the U.S. participate in the Program.
The Program became effective upon enactment and terminates on December 31,
2005. The amount of compensation paid to participating insurers under the
Program is 90% of subject losses, after an insurer deductible, subject to an
annual cap. The deductible under the Program was 7% for 2003, and is 10% for
2004 and 15% for 2005. In each case, the deductible percentage is applied to
the insurers direct earned premiums from the calendar year immediately
preceding the applicable year. The Program also contains an annual cap that
limits the amount of subject losses to $100 billion aggregate during a program
year. Once subject losses have reached the $100 billion aggregate during a
program year, there is no additional reimbursement from the U.S. Treasury and
an insurer that has met its deductible for the program year is not liable for
any losses (or portion thereof) that exceed the $100 billion cap. The
Companys deductible under this Federal program is $927.7 million for 2004.
Due to the high level of the deductible, in the opinion of the Companys
management, the bill will have little impact on the price or availability of
terrorism coverage in the marketplace. The Company had no terrorism-related
losses in 2003.

While the Terrorism Act provides a Federally-funded backstop for commercial
property casualty insurers, it also requires that insurers immediately begin
offering coverage for insured losses caused by acts of terrorism. The majority
of the Companys Commercial Lines policies already included such coverage,
although exclusions were added to higher-risk policyholders after September 11,
2001. For those risks considered higher-risk, such as landmark buildings or
high concentrations of employees in one location, the Company will continue to
either decline to offer a renewal or will offer coverage for losses caused by
acts of terrorism on a limited basis, with an explicit charge for the coverage.

74



---



##### Table of Contents



Commercial Lines

In 2003, the trend of higher rates continued in Commercial Lines, although at a
moderated level over 2002, and some of the increases varied significantly by
region, business segment and line of business. These increases were necessary
to offset the impact of rising loss cost trends, reduction in investment yields
and the decline in profitability from the competitive pressures of the last
decade. Since the terrorist attack on September 11, 2001, there has been
greater concern over the availability, terms and conditions, and pricing of
reinsurance. As a result, the primary insurance market is expected to continue
to see rate increases, although at moderated levels from the past two years,
and continued restrictive terms and conditions for certain coverages where
adequate pricing cannot be achieved.

In National Accounts, where programs include risk management services, such as
claims settlement, loss control and risk management information services,
generally offered in connection with a large deductible or self-insured
program, and risk transfer, typically provided through a retrospectively rated
or guaranteed cost insurance policy, new business levels increased in 2003 due
to a significant renewal rights transaction and to a reduction in the number of
competitors in the marketplace. Customer retention has remained consistent
with prior periods. The Company has benefited from higher rates and believes
that pricing will continue to stay firm into 2004. However, the Company will
still continue to selectively reject business that is not expected to produce
acceptable returns. The Company anticipates that the premium and fee income
growth experienced in 2003 will continue into 2004. Included in National
Accounts is service fee income for policy and claim administration of various
states Workers Compensation Residual Market pools. After several years of
depopulation, these pools began to repopulate in 2000 and grow significantly.
Premium that the Company services for these pools grew 24% in 2003 and is
expected to modestly grow in 2004.

Commercial Accounts achieved price increases on renewal business of 10%, 22%
and 19% during 2003, 2002 and 2001, respectively, improving the overall profit
margin in this business, more than offsetting the impacts of rising loss cost,
reinsurance costs and lower investment yields. The 2003 price increases began
moderating compared to the 2002 price increases. New business levels also
increased during 2003 across most products where Commercial Accounts benefited
from the Companys underwriting specialization, financial strength and limits
capacity. In 2004, the Company will continue to seek increased new business
levels on products producing acceptable returns, higher retention rates on its
existing business and overall rate increases, although the rate of increase may
vary by line of business and, on an overall basis, may moderate compared to
2003.

Also in Commercial Accounts, during 2002 the operations of American Equity and
Associates were determined to be non-strategic. Accordingly, these operations
were placed in run-off during the first and fourth quarters of 2002,
respectively, which included non-renewals of inforce policies and a cessation
of writing new business, where allowed by law. These operations were acquired
in the fourth quarter of 2001 from Citigroup as part of the Northland and
Associates acquisitions previously discussed. Net written premium for these
combined operations was $1.0 million and $86.8 million in 2003 and 2002,
respectively.

Select Accounts also achieved price increases on renewal business of 14%, 17%
and 14% in 2003, 2002 and 2001, respectively, improving the overall profit
margin in this business, more than offsetting the impact of rising loss cost
and lower investment yields. Price increases varied significantly by region,
industry and product. However, the ability of Select Accounts to achieve
future rate increases is subject to regulatory constraints in some
jurisdictions. Select will continue to seek rate increases in 2004, but the
amount of increase may continue to decline as compared to the past year.
Customer retention levels increased in 2003 over 2002 and loss cost trends in
Select Accounts remained stable due to the Companys continued disciplined
approach to underwriting and risk selection. The Company will continue to
pursue business based on the Companys ability to achieve acceptable returns.

75



---



##### Table of Contents



Bond achieved significant growth in 2003 in both the surety and executive
liability markets. A decrease in capacity in the surety industry, driven by an
increase in claim frequency and severity in accident years 1999 through 2001
for the surety industry, enabled Bond to increase prices for all surety
products. In 2004, Bond expects surety price increases to moderate
compared to 2003 price increases. In the executive liability market for middle and small
private accounts and not-for-profit accounts, Bonds expanding array of
products and recognized local expertise enabled it to further enhance its
product and customer diversification, as well as profit opportunities, while
realizing significant price increases. Bonds focus remains on selective
underwriting, selling its products to customers that provide the greatest
opportunities for profit. Bond is also focused on the Companys efforts to
cross-sell its expanding array of products to existing customers of Commercial
Lines and Personal Lines.

In Gulf, rate increases began in most lines of business in 2001 and accelerated
significantly in 2002. Rate increases continued in 2003, but at a slower pace
than in 2002. Although specific increases varied by region, industry and
product, improvement was consistent across all product lines, with increases
averaging well above loss cost trends. During 2003, Gulf significantly
strengthened its reserve position, due to adverse development from prior
accident years in both residual value and core specialty lines.

There are currently various state and federal legislative and judicial
proposals to require asbestos claimants to demonstrate an asbestos illness. At
this time it is not possible to predict the likelihood or timing of such
proposals being enacted or the effect if they are enacted. The Companys
ongoing analysis of its asbestos reserves did not assume the adoption of any
asbestos reforms.

For information about the outlook with respect to asbestos-related claims and
liabilities see   Asbestos Claims and Litigation and   Uncertainty
Regarding Adequacy of Asbestos and Environmental Reserves.

Personal Lines

Personal Lines strategy is to profitably grow its customer base in the
independent agent and additional distribution channels. The core factors
underlying the business are controlling operating expenses, sophisticated
pricing segmentation, providing responsive and fair claim settlement practices
and providing an efficient sales platform for our distributors.

During 2003, the personal auto market continued to increase rates in an effort
to obtain profitability targets. These increases, along with maintaining
underwriting discipline and focusing on risk segmentation has made significant
progress towards rate adequacy. Personal Lines automobile rates are expected
to increase in 2004, moderating slightly from 2003 levels.

Personal Lines reported strong property underwriting results in 2003 as market
conditions for property insurance improved in 2003. Significant rate increases
were earned and the effects of increased underwriting discipline and product
modification were recognized. Catastrophe losses in the year were above average
while non-catastrophe claim frequencies remained below historical averages.
Property rate increases are expected to moderate in 2004 but should continue to
offset increases in loss costs.

76



---



##### Table of Contents



TRANSACTIONS WITH FORMER AFFILIATES

Prior to the 2002 Citigroup Distribution, the Company provided and purchased
services to and from Citigroup affiliated companies, including facilities
management, banking and financial functions, benefit coverages, data processing
services, and short-term investment pool management services. Charges for
these shared services were allocated at cost. In connection with the Citigroup
Distribution, the Company and Citigroup and its affiliates entered into a
transition services agreement for the provision of certain of these services,
tradename and trademark and similar agreements related to the use of
trademarks, logos and tradenames and an amendment to the March 26, 2002
Intercompany Agreement with Citigroup. During the first quarter of 2002,
Citigroup provided investment advisory services on an allocated cost basis,
consistent with prior years. On August 6, 2002, the Company entered into an
investment management agreement, which has been applied retroactively to April 1,
2002, with an affiliate of Citigroup whereby the affiliate of Citigroup is
providing investment advisory and administrative services to the Company with
respect to its entire investment portfolio for a period of two years and at
fees mutually agreed upon, including a component based on performance. Charges
incurred related to this agreement were $59.7 million for 2003 and $47.2
million for the period from April 1, 2002 through December 31, 2002. This
agreement terminates on March 31, 2004. The Company intends to arrange an
orderly transition of the investment management and the associated accounting
and administrative services to St. Paul Travelers following the merger with St.
Paul. The Company and Citigroup also agreed upon the allocation or transfer of
certain other liabilities and assets, and rights and obligations in furtherance
of the separation of operations and ownership as a result of the Citigroup
Distribution. The net effect of these allocations and transfers, in the
opinion of management, was not significant to the Companys results of
operations or financial condition.

See note 16 of notes to the Companys consolidated financial statements for a
description of these and other intercompany arrangements and transactions
between the Company and Citigroup.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measure of a companys ability to generate sufficient cash flows
to meet the short and long-term cash requirements of its business operations.
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. The timing and amount of reinsurance
recoveries may be affected by reinsurer solvency and increasingly by
reinsurance coverage disputes. Additionally, recent increases in
asbestos-related claim payments, as well as potential judgments and settlements
arising out of litigation, may also result in increased liquidity requirements.
In the opinion of the Companys management, the Companys future liquidity
needs will be met from all of the above sources.

Net cash flows provided by operating activities totaled $3.833 billion, $2.926
billion and $1.219 billion in 2003, 2002 and 2001, respectively. The 2003 net
cash flows provided by operating activities benefited from premium rate
increases, the receipt of $360.7 million from Citigroup related to recoveries
under the asbestos indemnification agreement and $530.9 million of federal
income taxes refunded from the Companys net operating loss carryback. The
2002 net cash flows provided by operating activities also benefited
significantly from premium rate increases compared to 2001.

77



---



##### Table of Contents



Net cash flows used in investing activities totaled $2.475 billion, $2.270
billion and $95.5 million in 2003, 2002 and 2001, respectively. The 2003 net
cash flows used in investing activities primarily reflected the investing of
net cash from operating activities of $3.833 billion. This was offset, in
part, by sales of securities to fund net payment activity of $771.6 million
related to debt and TIGHIs junior subordinated debt securities held by
subsidiary trusts. In addition, cash was used to pay quarterly dividends to
shareholders of $281.8 million. The 2002 net cash flows used in investing
activities principally reflected investing of net cash from operating
activities of $2.926 billion and the receipt of $4.090 billion from the first
quarter 2002 initial public offering and the concurrent issuance of $867.0
million of convertible notes payable, partially offset by the repayment of
$6.349 billion of notes payable to a former affiliate. The 2001 net cash flows
used in investing activities principally reflected investing of net cash from
operating activities of $1.219 billion, partially offset by sales of securities
to fund the repayment of $1.040 billion of notes payable to a former affiliate
and the payment of $526.0 million of dividends.

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 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, 2003 totaled $38.653 billion,
including $348.8 million of securities in process of settlement, of which 91%
was invested in fixed maturity and short-term investments, 2% in common stocks
and other equity securities, 1% in mortgage loans and real estate held for sale
and 6% in other investments. The effective average duration of fixed
maturities and short-term securities, net of securities lending activities and
net receivables and payables on investment sales and purchases, was 4.1 years
as of December 31, 2003, a 0.9 decrease from 5.0 years as of December 31, 2002.
The reduction in effective average duration resulted from the investment of
underwriting cash flows and investment maturities and sales proceeds in
shorter-term investments along with the sale of certain treasury futures
contracts.

An investment in a fixed maturity or equity security which is available for
sale is impaired if its fair value falls below its book value and the decline
is considered to be other-than-temporary.

Debt securities for which fair value is less than 80% of amortized cost for
more than one quarter are evaluated for other-than-temporary impairment. A
debt security is impaired if it is probable that the Company will not be able
to collect all amounts due under the securitys contractual terms.

Factors the Company considers in determining whether a decline is
other-than-temporary for debt securities include the following:



| |  | The length of time and the extent to which fair value has been below
cost. It is likely that the decline will become other than temporary
if the market value has been below cost for six to nine months or
more;                                                                                                                                                                                                                                                                                                                                                                                
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | The financial condition and near-term prospects of the issuer. The
issuer may be experiencing depressed and declining earnings relative
to competitors, erosion of market share, deteriorating financial
position, lowered dividend payments, declines in securities ratings,
bankruptcy, and financial statement reports that indicate an uncertain
future. Also, the issuer may experience specific events that may
influence its operations or earnings potential, such as changes in
technology, discontinuation of a business segment, catastrophic losses
or exhaustion of natural resources.
| 
| |  | The Companys ability and intent to hold the investment for a period
of time sufficient to allow for any anticipated recovery.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

Equity investments are impaired when it becomes probable that the Company will
not recover its cost over the expected holding period. Public equity
investments (i.e., common stocks) trading at a price that is less than 80% of
cost for more than one quarter are reviewed for impairment. Investments
accounted for using the equity method of accounting are evaluated for
impairment any time the investment has sustained losses and/or negative
operating cash flow for a period of 9 months or more. Events triggering the
other-than-temporary impairment analysis of public and non-public equities may
include the following, in addition to the considerations noted above for debt
securities:

78



---



##### Table of Contents



Factors affecting performance:



| |  |  | The investee loses a principal customer or supplier for which there
is no short-term prospect for replacement or experiences other
substantial changes in market conditions;           
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The company is performing substantially and consistently behind plan;                                                                                                                  
|
| |  |  | The investee has announced, or the
Company has become aware of, adverse
changes or events such as changes or planned changes in senior
management, restructurings, or a sale of assets;
|
| |  |  | The regulatory, economic, or technological environment has changed in
a way that is expected to adversely affect the investees profitability;                                         

Factors affecting on-going financial condition:



| |  |  | Factors that raise doubts about the investees ability to continue as
a going concern, such as negative cash flows from operations,
working-capital deficiencies, investment advisors recommendations, or
non-compliance with regulatory capital requirements or debt covenants;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | A secondary equity offering at a price substantially lower than the holders cost;                                                                                                                                                                                               
|
| |  |  | A breach of a covenant or the failure to service debt;                                                                                                                                                                                                                           
|
| |  |  | Fraud within the company.                                                                                                                                                                                                                                                        

For debt and equity investments, factors that may indicate that a decline in
value is not other-than-temporary include the following:



| |  |  | The securities owned continue to generate reasonable earnings and
dividends, despite a general stock market decline;                                                     
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Bond interest or preferred stock dividend rate (on cost) is lower
than rates for similar securities issued currently but quality of
investment is not adversely affected;
|
| |  |  | The investment is performing as expected and is current on all expected payments;                                                                                        
|
| |  |  | Specific, recognizable, short-term factors have affected the market value;                                                                                               
|
| |  |  | Financial condition, market share, backlog and other key statistics indicate growth.                                                                                     

Impairment charges included in net realized investment gains (losses) were as
follows:

|                                              |       |      |      |      |  |      |       |       |  |   |       |       | 
|--------------------------------------------- | ----- | ---- | ---- | ---- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|(for the year ended December 31, in millions) |       | 2003 |      | 2002 |  | 2001
|                                              |       |      |      |      |  |     
|Fixed maturities                              |       | $    | 65.4 |      |  | $    | 255.0 |       |  | $ | 109.7 |      
|Equity securities                             |       |      | 5.9  |      |  |      | 8.5   |       |  |   | 35.8  |      
|Real estate and other                         |       |      | 18.9 |      |  |      | 20.6  |       |  |   | 0.7   |      
|                                              |       |      |      |      |  |      |       |       |  |   |       |      
|                                              | Total |      | $    | 90.2 |  |      | $     | 284.1 |  |   | $     | 146.2 | 
|                                              |       |      |      |      |  |      |       |       |  |   |       |      

The Company recognized other-than-temporary impairments of $65.4 million in the
fixed income portfolio during 2003 related to various issuers, with $8.3
million due to companies filing bankruptcy and the remainder related to credit
risk associated with the issuers deteriorated financial position.

For publicly traded securities, the amounts of the impairments were determined
by writing down the investments to quoted market prices. For non-publicly
traded securities, impairments are determined by writing down the investment to
its estimated fair value, as determined during the Companys quarterly internal
review process.

The specific circumstances that led to the impairments described above did not
materially impact other individual investments held during 2003. The Company
continues to evaluate current developments in the market that have the
potential to affect the valuation of the Companys investments.

79



---



##### Table of Contents



The Companys investment portfolio includes non-publicly
traded investments,
such as real estate partnerships and joint ventures, investment partnerships,
private equities and certain fixed income securities. The real estate
partnerships and joint ventures, investment partnerships and certain private
equities are accounted for using the equity method of accounting. These
investments are carried at cost, adjusted for the Companys share of earnings
or losses and reduced by any cash distributions. Certain other private equity
investments which are not subject to the provisions of FAS 115 are reported at
fair value.

The following is a summary of the
approximate carrying value of the Companys
non-publicly traded securities:

|                                               |  |                |         | 
|---------------------------------------------- |  | -------------- | ------- | 
|(in millions)                                  |  | Carrying Value
|                                               |  |               
|Real estate partnerships and joint ventures    |  | $              | 239.5   | 
|Investment partnerships, including hedge
funds |  |                | 1,769.8 | 
|Equity investments                             |  |                | 439.8   | 
|Fixed income securities                        |  |                | 482.8   | 
|                                               |  |                |         | 
|Total                                          |  | $              | 2,931.9 | 
|                                               |  |                |         | 

The following table summarizes for all fixed maturities and equity securities
available for sale for which fair value is less than 80% of amortized cost at
December 31, 2003, the gross unrealized investment loss by length of time those
securities have continuously been in an unrealized loss position:

|                  |       |          |                                                                |          |           |           |           |           |          |       |         |     |  |   |   |   |  |   |     |     | 
|----------------- | ----- | -------- | -------------------------------------------------------------- | -------- | --------- | --------- | --------- | --------- | -------- | ----- | ------- | --- |  | - | - | - |  | - | --- | --- | 
|                  |       |          | Period For Which Fair Value Is Less Than 80% of Amortized Cost
|                  |       |          |                                                               
|                  |       |          |                                                                |          |           |           | Greater   |           | Greater  |       |         |     |  |   |   |   | 
|                  |       |          |                                                                |          |           |           | Than      |           | Than     |       |         |     |  |   |   |   | 
|                  |       |          |                                                                |          |           |           | 3 Months  |           | 6 Months |       | Greater |     |  |   |  
|                  |       |          | Less Than                                                      |          | Less Than |           | Less Than |           | Than     |       |         |     | 
|(in millions)     |       | 3 Months |                                                                | 6 Months |           | 12 Months |           | 12 Months |          | Total
|                  |       |          |                                                                |          |           |           |           |           |          |      
|Fixed maturities  |       | $        | 3.5                                                            |          |           | $         |          |           |          | $     | 1.9     |     |  | $ |  |   |  | $ | 5.4 |    
|Equity
securities |       |          |                                                               |          |           |           |          |           |          |       |        |     |  |   |  |   |  |   |    |    
|                  |       |          |                                                                |          |           |           |           |           |          |       |         |     |  |   |   |   |  |   |     |    
|                  | Total |          | $                                                              | 3.5      |           |           | $         |          |          |       | $       | 1.9 |  |   | $ |  |  |   | $   | 5.4 | 
|                  |       |          |                                                                |          |           |           |           |           |          |       |         |     |  |   |   |   |  |   |     |    

The Company believes that the prices of the securities identified above were
temporarily depressed primarily as a result of market dislocation and generally
poor cyclical economic conditions. Further, unrealized losses as of December
31, 2003 represent less than 1% of the portfolio, and, therefore, any impact on
the Companys financial position would not be significant.

At December 31, 2003, non-investment grade securities comprised 6% of the
Companys fixed income investment portfolio. Included in those categories at
December 31, 2003 were securities in an unrealized loss position that, in the
aggregate, had an amortized cost of $251.3 million and a fair value of $232.1
million, resulting in a net pretax unrealized loss of $19.2 million.

These securities in an unrealized loss position represented less than 1% of the
total amortized cost and less than 1% of the fair value of the fixed income
portfolio at December 31, 2003, and accounted for 13% of the total pretax
unrealized loss in the fixed income portfolio.

80



---



##### Table of Contents



No individual security had a greater than $2.0 million unrealized loss as of
December 31, 2003.

Following are the pretax realized losses on investments sold during the year
ended December 31, 2003:

|                  |  |      |       |            |  |   |         | 
|----------------- |  | ---- | ----- | ---------- |  | - | ------- | 
|(in millions)     |  | Loss |       | Fair Value
|                  |  |      |       |           
|Fixed maturities  |  | $    | 147.2 |            |  | $ | 3,776.1 | 
|Equity
securities |  |      | 9.2   |            |  |   | 72.0    | 
|Other             |  |      | 14.8  |            |  |   | 3.6     | 
|                  |  |      |       |            |  |   |         | 
|Total             |  | $    | 171.2 |            |  | $ | 3,851.7 | 
|                  |  |      |       |            |  |   |         | 

Resulting purchases and sales of investments are based on cash requirements,
the characteristics of the insurance liabilities and current market conditions.
The Company identifies investments to be sold to achieve its primary investment
goals of assuring the Companys ability to meet policyholder obligations as
well as to optimize investment returns, given these obligations.

TPC is a holding company whose principal asset is the capital stock of TIGHI
and its insurance operating subsidiaries. TIGHIs insurance subsidiaries are
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. A maximum of $1.647 billion will be
available by the end of 2004 for such dividends without prior approval of the
Connecticut Insurance Department. TIGHI received $927.0 million of dividends
from its insurance subsidiaries during 2003.

At December 31, 2003, total cash and short-term invested assets aggregating
$212.3 million were held at TPC and TIGHI. These liquid assets were primarily
funded by dividends received from the Companys operating subsidiaries. These
liquid assets, combined with other sources of funds available to TPC, primarily
additional dividends from the Companys operating subsidiaries, are considered
sufficient to meet the liquidity requirements of TPC and TIGHI. These
liquidity requirements include primarily, shareholder dividends and debt
service. In addition, effective April 17, 2003, TPC entered into the following
line of credit agreements with Citibank, a subsidiary of Citigroup, TPCs
former parent: (i) a $250.0 million 45-month revolving line of credit (the
45-Month Line of Credit), and (ii) a $250.0 million 364-day revolving line of
credit (the 364-Day Line of Credit and, together with the 45-Month Line of
Credit, the Lines of Credit). TPC may, with Citibanks consent, extend the
commitment of the 364-Day Line of Credit for additional 364-day periods under
the same terms and conditions. TPC has the option, provided there is no
default or event of default, to convert outstanding advances under the 364-Day
Line of Credit at the commitment termination date to a term loan maturing no
later than one year from the commitment termination date. Borrowings under the
Lines of Credit may be made, at TPCs option, at a variable interest rate equal
to either the lenders base rate plus an applicable margin or at LIBOR plus an
applicable margin. Each Line of Credit includes a commitment fee and, for any
date on which advances exceed 50% of the total commitment, a utilization fee.
The applicable margin and the rates on which the commitment fee and the
utilization fee are based vary based upon TPCs long-term senior unsecured
non-credit-enhanced debt ratings. Each Line of Credit requires TPC to comply
with various covenants, including the maintenance of minimum statutory capital
and surplus of $5.5 billion and a maximum ratio of total consolidated debt to
total capital of 45%. At December 31, 2003, the Company was in
compliance with these financial covenants. In addition, an event of default will occur if there is
a change in control (as defined in the Lines of Credit agreements) of
TPC. The proposed merger with St. Paul would constitute such a
change in control of TPC; however the Company has obtained a waiver
from Citibank of the event of default that otherwise would have occurred in
connection with the proposed merger with St. Paul.

There were no amounts outstanding under the Lines of Credit at December 31,
2003. Previous lines of credit between TIGHI and Citigroup have been
terminated.

81



---



##### Table of Contents



Net cash flows used in financing activities totaled $1.099 billion, $800.1
million and $1.083 billion in 2003, 2002 and 2001, respectively. Cash flows
used in financing activities in 2003 were primarily attributable to the
redemption of $900.0 million aggregate principal amount of TIGHIs junior
subordinated debt securities held by subsidiary trusts, the repayment of $700.0
million of notes payable to a former affiliate and the repayment of $550.0
million of short-term debt. Funds used in these repayments were primarily
provided by TPCs issuance of $1.400 billion of senior notes on March 11, 2003
and by cash flows provided by operating activities. These refinancing
activities were initiated with the objective of lowering the average interest
rate on the Companys total outstanding debt. Also reflected in 2003 was the
issuance of $550.0 million of short-term Floating Rate Notes which were used to
repay the $550.0 million Promissory Note due in January 2004. Net cash flows
used in financing activities in 2003 also included dividends paid to
shareholders of $281.8 million. The 2002 cash flows used in financing
activities reflects the repayment of $6.349 billion of notes payable to a
former affiliate. These payments were partially offset by the receipt of
$4.090 billion from the first quarter 2002 initial public offering and the
issuance of $917.3 million of convertible notes payable. The 2001 cash flows
used in financing activities reflects the repayment of $1.040 billion of notes
payable to a former affiliate and the payment of $526.0 million of dividends.

Notes payable to former affiliates, long-term debt, convertible notes and TIGHI
junior subordinated debt securities outstanding at December 31, were as
follows:

|                                                       |  |      |         |      |  |   |         | 
|------------------------------------------------------ |  | ---- | ------- | ---- |  | - | ------- | 
|(in millions)                                          |  | 2003 |         | 2002
|                                                       |  |      |         |     
|Notes payable to former affiliates                     |  | $    |        |      |  | $ | 700.0   | 
|Floating rate note due 2004, prepaid February 2003     |  |      |        |      |  |   | 550.0   | 
|6.75% Notes due 2006                                   |  |      | 150.0   |      |  |   | 150.0   | 
|3.75% Notes due 2008                                   |  |      | 400.0   |      |  |   |        | 
|7.81% Note various due dates through 2011              |  |      | 24.0    |      |  |   | 27.0    | 
|5.00% Notes due 2013                                   |  |      | 500.0   |      |  |   |        | 
|7.75% Notes due 2026                                   |  |      | 200.0   |      |  |   | 200.0   | 
|6.375% Notes due 2033                                  |  |      | 500.0   |      |  |   |        | 
|Convertible junior subordinated notes payable due
2032 |  |      | 892.5   |      |  |   | 892.5   | 
|Convertible notes payable due 2032                     |  |      | 49.8    |      |  |   | 49.7    | 
|TIGHI junior subordinated debt securities              |  |      |        |      |  |   | 900.0   | 
|                                                       |  |      |         |      |  |   |         | 
|                                                       |  |      | 2,716.3 |      |  |   | 3,469.2 | 
|Debt issuance costs                                    |  |      | 41.8    |      |  |   | 25.5    | 
|                                                       |  |      |         |      |  |   |         | 
|Total                                                  |  | $    | 2,674.5 |      |  | $ | 3,443.7 | 
|                                                       |  |      |         |      |  |   |         | 

In February 2002, TPC paid a dividend of $1.000 billion to Citigroup in the
form of a non-interest bearing note payable on December 31, 2002. On December
31, 2002, this note was repaid in its entirety. Also in February 2002, TPC
paid an additional dividend of $3.700 billion to Citigroup in the form of a
note payable in two installments. This note was substantially prepaid
following the offerings. The balance of $150.0 million was due on May 9, 2004.
This note was prepaid on May 8, 2002. In March 2002, TPC paid a dividend of
$395.0 million to Citigroup in the form of a note. This note was prepaid
following the offerings.

In March 2002, TPC issued $892.5 million aggregate principal amount of 4.5%
convertible junior subordinated notes which will mature on April 15, 2032,
unless earlier redeemed, repurchased or converted. Interest is payable
quarterly in arrears. See note 8 of notes to the Companys consolidated
financial statements for a further discussion.

82



---



##### Table of Contents



In August 2002, CIRI issued $49.7 million aggregate principal amount of 6.0%
convertible notes which will mature on December 31, 2032 unless earlier
redeemed or repurchased. See note 8 of notes to the Companys consolidated
financial statements for a further discussion.

In December 2002, TPC entered into a loan agreement with an unaffiliated lender
and borrowed $550.0 million under a promissory note due in January 2004. The
Promissory Note carried a variable interest rate of LIBOR plus 25 basis points
per annum. On February 5, 2003, TPC issued $550.0 million of Floating Rate
Notes due in February 2004. The proceeds from these notes were used to repay
the $550.0 million due on the Promissory Note. The Floating Rate Notes also
carried a variable interest rate of LIBOR plus 25 basis points per annum. On
March 14, 2003 and June 17, 2003, the Company repurchased $75.0 million and
$24.0 million, respectively, of the Floating Rate Notes at par plus accrued
interest. The remaining $451.0 million were repaid on September 5, 2003.

On March 11, 2003, TPC issued
$1.400 billion of senior notes comprising $400.0
million of 3.75% senior notes due March 15, 2008, $500.0 million of 5.00%
senior notes due March 15, 2013 and $500.0 million of 6.375% senior notes due
March 15, 2033. The notes pay interest semi-annually on March 15 and September
15 of each year, beginning September 15, 2003, are senior unsecured obligations
and rank equally with all of TPCs other senior unsecured indebtedness. TPC
may redeem some or all of the notes prior to maturity by paying a make-whole
premium based on U.S. Treasury rates. The net proceeds from the sale of these
notes were contributed to its primary subsidiary, TIGHI, so that TIGHI could
prepay and refinance $500.0 million of 3.60% indebtedness to Citigroup and to
redeem $900.0 million aggregate principal amount of TIGHIs 8.00% to 8.08%
junior subordinated debt securities held by subsidiary trusts. These trusts,
in turn, used these funds to redeem $900.0 million of preferred capital
securities on April 9, 2003.

These senior notes were sold to qualified institutional buyers as defined under
Rule 144A under the Securities Act of 1933 (the Securities Act) and outside the
United States in reliance on Regulation S under the Securities Act.
Accordingly, the notes (the restricted notes) were not registered under the
Securities Act or any state securities laws and could not be transferred or
resold except pursuant to certain exemptions. As part of this offering, TPC
agreed to file a registration statement under the Securities Act to permit the
exchange of the notes for registered notes (the Exchange Notes) having terms
identical to those of the senior notes described above (Exchange Offer). On
April 14, 2003, TPC initiated the Exchange Offer pursuant to a Form S-4 that
was filed with the Securities and Exchange Commission. Accordingly, each
series of Exchange Notes has been registered under the Securities Act, and the
transfer restrictions and registration rights relating to the restricted notes
do not apply to the Exchange Notes.

83



---



##### Table of Contents



The following table excludes contractual obligations for claim and claim
adjustment expense reserves and short-term obligations. The contractual
obligations, which include only liabilities at December 31, 2003 with a cash
payment requirement for settlement, are as follows:

|                              |                                                                 |       |         |         |  |           |       |       |  |       |       |         |  |   |       |       |  |   |         |         | 
|----------------------------- | --------------------------------------------------------------- | ----- | ------- | ------- |  | --------- | ----- | ----- |  | ----- | ----- | ------- |  | - | ----- | ----- |  | - | ------- | ------- | 
|Payments Due by Period        |                                                                 |       |         |         |  | Less than |       | 1-3   |  | 4-5   |       | After 5
|(in millions)                 |                                                                 | Total |         | 1 Year  |  | Years     |       | Years |  | Years
|                              |                                                                 |       |         |         |  |           |       |       |  |      
|Long-term
debt (1)            |                                                                 |       |         |         |  |           |       |       |  |       |       |         |  |   |       |       |  |   |         |        
|                              | Long-term notes                                                 |       | $       | 1,774.0 |  |           | $     | 4.0   |  |       | $     | 161.0   |  |   | $     | 405.0 |  |   | $       | 1,204.0 | 
|                              | Convertible junior subordinated notes payable                   |       |         | 892.5   |  |           |       |      |  |       |       |        |  |   |       |      |  |   |         | 892.5   | 
|                              | Convertible notes payable                                       |       |         | 49.8    |  |           |       |      |  |       |       |        |  |   |       |      |  |   |         | 49.8    | 
|                              |                                                                 |       |         |         |  |           |       |       |  |       |       |         |  |   |       |       |  |   |         |        
|                              | Total long-term debt                                            |       |         | 2,716.3 |  |           |       | 4.0   |  |       |       | 161.0   |  |   |       | 405.0 |  |   |         | 2,146.3 | 
|                              |                                                                 |       |         |         |  |           |       |       |  |       |       |         |  |   |       |       |  |   |         |         | 
|Operating leases(2)           |                                                                 |       | 301.6   |         |  |           | 81.6  |       |  |       | 160.5 |         |  |   | 33.1  |       |  |   | 26.4    |        
|                              |                                                                 |       |         |         |  |           |       |       |  |       |       |         |  |   |       |       |  |   |         |         | 
|Purchase obligations          |                                                                 |       |         |         |  |           |       |       |  |       |       |         |  |   |       |       |  |   |         |        
|                              | Information systems administration &
maintenance
commitments(3) |       |         | 36.3    |  |           |       | 13.1  |  |       |       | 22.1    |  |   |       | 1.1   |  |   |         |        | 
|                              | Real estate maintenance commitments(4)                          |       |         | 11.0    |  |           |       | 4.3   |  |       |       | 6.0     |  |   |       | 0.7   |  |   |         |        | 
|                              | Other purchase commitments(5)                                   |       |         | 11.1    |  |           |       | 1.5   |  |       |       | 6.6     |  |   |       | 3.0   |  |   |         |        | 
|                              |                                                                 |       |         |         |  |           |       |       |  |       |       |         |  |   |       |       |  |   |         |         | 
|                              | Total purchase obligations                                      |       |         | 58.4    |  |           |       | 18.9  |  |       |       | 34.7    |  |   |       | 4.8   |  |   |         |        | 
|                              |                                                                 |       |         |         |  |           |       |       |  |       |       |         |  |   |       |       |  |   |         |         | 
|Long-term liabilities         |                                                                 |       |         |         |  |           |       |       |  |       |       |         |  |   |       |       |  |   |         |        
|                              | Renewal rights obligations(6)                                   |       |         | 36.3    |  |           |       | 27.9  |  |       |       | 8.4     |  |   |       |      |  |   |         |        | 
|                              | Insurance related assessments(7)                                |       |         | 257.2   |  |           |       | 99.0  |  |       |       | 57.6    |  |   |       | 21.8  |  |   |         | 78.8    | 
|                              | Unfunded investment commitments(8)                              |       |         | 620.1   |  |           |       | 335.4 |  |       |       | 229.4   |  |   |       | 50.0  |  |   |         | 5.3     | 
|                              | Deposit liability(9)                                            |       |         | 325.2   |  |           |       |      |  |       |       | 206.2   |  |   |       | 119.0 |  |   |         |        | 
|                              |                                                                 |       |         |         |  |           |       |       |  |       |       |         |  |   |       |       |  |   |         |         | 
|                              | Total long-term liabilities                                     |       |         | 1,238.8 |  |           |       | 462.3 |  |       |       | 501.6   |  |   |       | 190.8 |  |   |         | 84.1    | 
|                              |                                                                 |       |         |         |  |           |       |       |  |       |       |         |  |   |       |       |  |   |         |         | 
|Total Contractual Obligations |                                                                 | $     | 4,315.1 |         |  | $         | 566.8 |       |  | $     | 857.8 |         |  | $ | 633.7 |       |  | $ | 2,256.8 |        
|                              |                                                                 |       |         |         |  |           |       |       |  |       |       |         |  |   |       |       |  |   |         |         | 



|(1) |  | See note 8 of the notes to the Companys consolidated financial statements
for a further discussion.                                                                                                                                                                                                         
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Represents agreements entered into in the ordinary course of business to
lease office space, equipment and furniture.                                                                                                                                                                                        
|   
|(3) |  | Includes agreements with vendors to purchase system software
administration and maintenance services.                                                                                                                                                                                                        
|   
|(4) |  | Includes contracts with various building maintenance contractors for
company owned and occupied real estate.                                                                                                                                                                                                 
|   
|(5) |  | Includes commitments to vendors entered in the ordinary course of
business for goods and services including office supplies, archival
services, etc.                                                                                                                                                         
|   
|(6) |  | Represents amounts due under renewal rights purchase agreements based on
the estimated final purchase price. Amounts relate to the renewal rights
purchased by the Company in the third quarter of 2003. See note 5 of the
notes to the Companys consolidated financial statements for a further
discussion.
|   
|(7) |  | Represents assessments for guaranty funds and second-injury funds.                                                                                                                                                                                                                                           
|   
|(8) |  | Represents estimated timing for fulfilling unfunded commitments for
investments in real estate partnerships, private equities and hedge funds.                                                                                                                                                               
|   
|(9) |  | Represents estimated timing for amounts payable under reinsurance
agreements that are accounted for as deposits (amounts reported on a
present value basis consistent with the balance sheet presentation).                                                                                                  

On January 22, 2004, the Companys Board of Directors declared a quarterly
dividend of $0.08 per share on class A and class B common stock, payable on
February 27, 2004, to shareholders of record on February 4, 2004. The
declaration and payment of future dividends to holders of the Companys common
stock will be at the discretion of the Companys Board of Directors and will
depend upon many factors, including the Companys financial condition,
earnings, capital requirements of TPCs operating subsidiaries, legal
requirements, regulatory constraints and other factors as the Board of
Directors deems relevant. In addition, if the merger with St. Paul is
consummated, dividend decisions will be those of the Board of Directors of the
combined St. Paul Travelers Companies, Inc. (St. Paul Travelers). Dividends
would be paid by St. Paul Travelers only if declared by its Board of Directors
out of funds legally available and subject to any other restrictions that may
be applicable to St. Paul Travelers. Subject to the foregoing, it is
anticipated that St. Paul Travelers will pay a regular quarterly dividend of
$0.22 per share, after adjustment for the conversion of Company shares pursuant
to the .4334 exchange ratio.

84



---



##### Table of Contents



The Companys principal insurance subsidiaries are domiciled in the State of
Connecticut. The insurance holding company law of Connecticut applicable to
the Companys subsidiaries 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 10% of the insurers surplus as of the preceding
December 31, or the insurers net income for the twelve-month period ended the
preceding December 31, in each case determined in accordance with statutory
accounting practices. This declaration or payment is further limited by
adjusted unassigned 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 some instances somewhat more restrictive, limitations on the
payment of dividends. A maximum of $1.647 billion is available by the end of
2004 for such dividends without prior approval of the Connecticut Insurance
Department.

On September 25, 2002, the Board of Directors approved a $500.0 million share
repurchase program. Purchases of class A and class B stock may be made from
time to time in the open market, and it is expected that funding for the
program will principally come from dividends from TPCs operating subsidiaries.
Shares repurchased are reported as treasury stock in the consolidated balance
sheet. During 2003, TPC repurchased approximately 2.6 million shares of class
A common stock at a total cost of $40.0 million, representing the first
acquisition of shares under this program. Also during 2003, 1.8 million shares
of common stock were acquired from employees as treasury stock primarily to
cover payroll withholding taxes in connection with the vesting of restricted
stock awards and exercises of stock options. In anticipation of the potential
merger with St. Paul, the Company does not anticipate the repurchase of
additional shares in 2004.

TPC has the option to defer interest payments on its convertible junior
subordinated notes for a period not exceeding 20 consecutive quarterly interest
periods. If TPC elects to defer interest payments on the notes, it will not
be permitted, with limited exceptions, to pay dividends on its common stock
during a deferral period.

The NAIC adopted 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 these companies. At
December 31, 2003, all of the Companys insurance subsidiaries had adjusted
capital in excess of amounts requiring any company or regulatory action.

CRITICAL ACCOUNTING ESTIMATES

The Company considers its most significant accounting estimates to be those
applied to claim and claim adjustment expense reserves and related
reinsurance recoverables.

Total claims and claim adjustment expense reserves were $34.573 billion at
December 31, 2003. The Company maintains property and casualty loss reserves
to cover estimated ultimate unpaid liability for losses and loss adjustment
expenses with respect to reported and unreported claims incurred as of the end
of each accounting period. Reserves do not represent an exact calculation of
liability, but instead represent estimates, generally utilizing actuarial
projection techniques at a given accounting date. These reserve estimates are
expectations of what the ultimate settlement and administration of claims will
cost based on the Companys assessment of facts and circumstances then known,
review of historical settlement patterns, estimates of trends in claims
severity, frequency, legal theories of liability and other factors. Variables
in the reserve estimation process can be affected by both internal and external
events, such as changes in claims handling procedures, economic inflation,
legal trends and legislative changes. Many of these items are not directly
quantifiable, particularly on a prospective basis. Additionally, there may be
significant reporting lags between the occurrence of the policyholder event and
the time it is actually reported to the insurer. Reserve estimates are
continually refined in a regular ongoing process as historical loss experience
develops and additional claims are reported and settled. Adjustments to
reserves are reflected in the results of the periods in which the estimates are
changed. Because establishment of reserves is an inherently uncertain process
involving estimates, currently established reserves may not be sufficient. If
estimated reserves are insufficient, the Company will incur additional income
statement charges.

85



---



##### Table of Contents



Some of the Companys loss reserves are for asbestos and
environmental claims and related litigation which aggregated $3.267 billion at
December 31, 2003. While the ongoing study of asbestos claims and associated
liabilities and of environmental claims considers the inconsistencies of court
decisions as to coverage, plaintiffs expanded theories of liability, and the
risks inherent in major litigation and other uncertainties, in the opinion of
the Companys management, it is possible that the outcome of the continued
uncertainties regarding asbestos-related claims could result in liability in
future periods that differ from current reserves by an amount that could be
material to the Companys future operating results and financial condition.
See the preceding discussion of Asbestos Claims and Litigation and
Environmental Claims and Litigation. Total reinsurance recoverables were $11.174 billion at December 31, 2003 and
included $2.018 billion from servicing carrier arrangements with various
involuntary assigned risk pools and $2.411 billion of structured settlement
annuities. 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. In addition, in the ordinary
course of business, the Company may become involved in coverage disputes with
its reinsurers. In recent quarters, the Company has experienced an increase in
the frequency of these reinsurance coverage disputes. Some of these disputes
could result in lawsuits and arbitrations brought by or against the reinsurers
to determine the companys rights and obligations under the various reinsurance
agreements. The Company employs dedicated specialists and aggressive
strategies to manage reinsurance collections and disputes. The Company reports its reinsurance recoverables net of an allowance for
estimated uncollectible reinsurance recoverables. The allowance is based upon
the Companys ongoing review of amounts outstanding, length of collection
periods, changes in reinsurer credit standing, applicable coverage defenses and
other relevant factors. Accordingly, the establishment of reinsurance
recoverables and the related allowance for uncollectible reinsurance
recoverables is also an inherently uncertain process involving estimates.
During 2003, the Company increased the allowance by a net amount of $57.3
million in connection with the Companys ongoing review process. The allowance
for estimated uncollectible reinsurance recoverables was $386.4 million at
December 31, 2003. Changes in these estimates could result in additional
income statement charges. CLAIMS AND CLAIM
ADJUSTMENT EXPENSE RESERVES Claims and claim adjustment expense reserves by product line were as follows: (at the year ended December 31, $ in millions)
    
    2003
    
    2002General liability
    
    $
    11,041.8
    
    
    $
    10,864.4Property
    
    
    2,161.9
    
    
    
    2,237.2Commercial multi-peril
    
    
    3,384.1
    
    
    
    3,195.3Commercial automobile
    
    
    2,718.3
    
    
    
    2,499.1Workers compensation
    
    
    11,287.5
    
    
    
    11,142.6Fidelity and surety
    
    
    580.8
    
    
    
    655.3Personal automobile
    
    
    2,383.6
    
    
    
    2,177.4Homeowners and personal lines  other
    
    
    916.2
    
    
    
    857.1Property-casualty
    
    
    34,474.2
    
    
    
    33,628.4Accident and health
    
    
    98.4
    
    
    
    107.6Claims and claim adjustment expense reserves
    
    $
    34,572.6
    
    
    $
    33,736.0
 Asbestos and environmental reserves are included in the General liability and
Commercial multi-peril lines in the summary table. Asbestos and environmental
reserves are discussed separately, see Asbestos Claims and Litigation,
Environmental Claims and Litigation and Uncertainty Regarding Adequacy of
Asbestos and Environmental Reserves. 86




---



##### Table of Contents



General Discussion Claims and claim adjustment expense reserves represent managements estimate of
the unpaid liability for claim and claim adjustment expenses. The process for
estimating these liabilities begins with the collection and analysis of claim
data. Data on individual reported claims, both current and historical,
including paid amounts and individual claim adjuster estimates, are grouped by
common characteristics (components) and evaluated by actuaries in their
analyses of ultimate claim liabilities by product line. Such data is
occasionally supplemented with external data. The process of analyzing
reserves for a component is undertaken on a regular basis, generally quarterly,
in light of continually updated information. Multiple estimation methods are available for the analysis of ultimate claim
liabilities Each estimation method has its own set of assumption variables,
and its own advantages and disadvantages, with no single estimation method
being better than the others in all situations and no one set of assumption
variables being meaningful for all product line components. The relative
strengths and weaknesses of the particular estimation methods when applied to a
particular group of claims can also change over time (and potentially for each
reporting date). Therefore, the actual choice of estimation method(s) can
change with each evaluation. The estimation method(s) chosen are those that
are believed to produce the most reliable indication at that particular
evaluation date for the claim liabilities being evaluated. In most cases, multiple estimation methods will be valid for the particular
facts and circumstances of the claim liabilities being evaluated. This will
result in a range of reasonable estimates for any particular claim liability.
The Company uses such range analyses to back test whether previously
established estimates for reserves at the reporting segments are reasonable,
given subsequent information. Reported values found to be closer to the
endpoints of a range of reasonable estimates are subject to further detailed reviews.
These reviews may substantiate the validity of managements recorded estimate
or lead to a change in the reported estimate. The exact boundary points of these ranges are more qualitative than
quantitative in nature, as no clear line of demarcation exists to determine
when the set of underlying assumptions for an estimation method switches from
being reasonable to unreasonable. As a result, the Company does not believe
that the endpoints of these ranges are or would be comparable across companies.
In addition, potential interactions among the different estimation assumptions
for different product lines make the aggregation of individual ranges a highly
judgmental and inexact process. A key assumption in most actuarial analyses is that past patterns demonstrated
in the data will repeat themselves in the future, absent a material change in
the associated risk factors discussed below. To the extent a material
change affecting the ultimate claim liability is known, such change is
quantified to the extent possible through an analysis of internal company (and,
if necessary, external) data. Such a measurement is specific to the facts and
circumstances of the particular claim portfolio and the known change being
evaluated. Risk factors The major causes of material uncertainty (risk factors) generally will vary
for each product line, as well as for each separately analyzed component of the
product line. In some cases, such risk factors are explicit assumptions of the
estimation method and in others, they are implicit. For example, a method may
explicitly assume that a certain percentage of claims will close each year, but
will implicitly assume that the legal interpretation of existing contract
language will remain unchanged. Actual results will likely vary from
expectations for each of these assumptions, resulting in an ultimate claim
liability that is different from that being estimated currently. Some risk factors will affect more than one product line. Examples include
changes in claim department practices, changes in settlement patterns,
regulatory and legislative actions, court actions, timeliness of claim
reporting, state mix of claimants, and degree of claimant fraud. The extent of
the impact of a risk factor will also vary by components within a product line.
Individual risk factors are also subject to interactions with other risk
factors within product line components. 87




---



##### Table of Contents



The effect of a particular risk factor on estimates of claim liabilities can
not be isolated in most cases. For example, estimates of potential claim
settlements may be impacted by the risk associated with potential court
rulings, but the final settlement agreement typically does not delineate how
much of the settled amount is due to this and other factors. The evaluation of data is also subject to distortion from extreme events or
structural shifts, sometimes in unanticipated ways. For example, the timing of
claims payments in one geographic region will be impacted if claim adjusters
are temporarily reassigned from that region to help settle catastrophe claims
in another region. While some changes in the claim environment are sudden in nature (such as a new
court ruling affecting the interpretation of all contracts in that
jurisdiction), others are more evolutionary. Evolutionary changes can occur
when multiple factors affect final claim values, with the uncertainty
surrounding each factor being resolved separately, in step-wise fashion. The
final impact is not known until all steps have occurred. Sudden changes generally
cause a one-time shift in claim liability estimates,
although there may be some lag in reliable quantification of their impact.
Evolutionary changes generally cause a series of shifts in claim liability
estimate, as each component of the evolutionary change becomes evident and
estimable. Managements estimates At least once per quarter, Company management meets with its actuaries to
review the latest claim and claim adjustment expense reserve analyses. Based
on these analyses, management determines whether its ultimate claim liability
estimates should be changed. In doing so, it must evaluate whether the new
data provided represents credible actionable information or an anomaly that
will have no effect on estimated ultimate claim liability. For example, as
described above, payments may have decreased in one geographic region due to
fewer claim adjusters being available to process claims. The resulting claim
payment patterns would be analyzed to determine whether or not the change in
payment pattern represents a change in ultimate claim liability. Such an assessment requires considerable judgment. It is frequently not
possible to determine whether a change in the data is an anomaly until sometime
after the event. Even if a change is determined to be permanent, it is not
always possible to reliably determine the extent of the change until sometime
later. The overall detailed analyses supporting such an effort can take
several months to perform. This is due to the need to evaluate the underlying
cause of the trends observed, and may include the gathering or assembling of
data not previously available. It may also include interviews with experts
involved with the underlying processes. As a result, there can be a time lag
between the emergence of a change and a determination that the change should be
reflected in the Companys estimated claim liabilities. The final estimate
selected by management in a reporting period is a function of these detailed
analyses of past data, adjusted to reflect any new actionable information. Discussion of Product Lines The following section details reserving considerations and common risk factors
by product line. There are many additional risk factors that may impact
ultimate claim costs. Each risk factor presented will have a different impact
on required reserves. Also, risk factors can have offsetting or compounding
effects on required reserves. For example, in workers compensation, the use
of expensive medical procedures that result in medical cost inflation may
enable workers to return to work faster, thereby lowering indemnity costs.
Thus, in almost all cases, it is impossible to discretely measure the effect of
a single risk factor and construct a meaningful sensitivity expectation. 88




---



##### Table of Contents



General Liability General liability is considered a long tail line, as it takes a relatively long
period of time to finalize and settle claims from a given accident year. The
speed of claim reporting and claim settlement is a function of the specific
coverage provided, the jurisdiction, and specific policy provisions such as
self-insured retentions. There are numerous components underlying the general
liability product line. Some of these have relatively moderate payment
patterns (with most of the claims for a given accident year closed within 5 to
7 years), while others can have extreme lags in both reporting and payment of
claims (e.g., a reporting lag of a decade for construction defect claims). General liability reserves are generally analyzed as two components: primary
and excess/umbrella, with the primary component generally analyzed separately
for bodily injury and property damage. Bodily injury liability payments
reimburse the claimant for damages pertaining to physical injury as a result of
the policyholders legal obligation arising from non-intentional acts such as
negligence, subject to the insurance policy provisions. In some cases the
damages can include future wage loss (which is a function of future earnings
power and wage inflation) and future medical treatment costs. Property damage
liability payments result from damages to the claimants private property
arising from the policyholders legal obligation for non-intentional acts. In
most cases, property damage losses are a function of costs as of the loss date,
or soon thereafter. In addition, sizable unique exposures are reviewed
separately, such as asbestos, environmental, other mass torts, construction
defect, and large unique accounts that would otherwise distort the analysis.
These unique categories often require reserve analyses that do not rely on
traditional actuarial methods. Legal fees are also a part of the insured costs covered by liability policies
and can be significant, sometimes greater than the cost of the actual paid
claims. Examples of common risk factors that can change and, thus, affect the required
general liability reserves (beyond those included in the general discussion
section) include: General liability risk factors Changes in claim handling philosophies
Changes in policy provisions or court interpretation of such provision
New theories of liability
Trends in jury awards
Changes in the propensity to sue
Changes in statutes of limitations
Changes in the underlying court system
Distortions from large single accounts or single issues
Changes in tort law
Shifts in law suit mix between federal and state courts
Changes in claim adjuster office structure (causing distortions in the data) General liability book of business risk factors Changes in policy provisions (e.g., deductibles, policy limits, endorsements)
Changes in underwriting standards
Product mix (e.g., size of account, industries insured, jurisdiction mix) 89




---



##### Table of Contents



Property Property is considered a short tail line with a simpler and faster claim
adjustment process than liability coverages, and less uncertainty in the
reserve setting process. The claim reporting and settlement process for
property coverage claim reserves is generally restricted to the insured and the
insurer. Property reserves are typically analyzed in two components, one for
catastrophic or other large single events, and another for all other events.
Examples of common risk factors that can change and, thus, affect the required
property reserves (beyond those included in the general discussion section)
include: Property risk factors Physical concentration of policyholders
Availability and cost of local contractors
For the more severe catastrophic events, demand surge inflation, whereby the
greatly increased demand for building materials such as plywood far surpasses
the immediate supply, leading to short-term material increases in building
material costs
Local building codes
Amount of time to return property to full usage (for business interruption
claims)
Court interpretation of policy provisions (such as occurrence definition)
Lags in reporting claims (e.g. winter damage to summer homes, hidden damage
after an earthquake)
Court or legislative changes to the statute of limitations Property book of business risk factors Policy provisions mix (e.g., deductibles, policy limits, endorsements)
Changes in underwriting standards Commercial Multi-Peril Commercial multi-peril provides a combination of property and liability
coverage typically for small businesses and, therefore, includes both short and
long tail coverages. For property coverage, it generally takes a relatively
short period of time to close claims, while for the other coverages, generally
for the liability coverages, it takes a longer period of time to close claims. The reserving risk for this line is dominated by the liability coverage portion
of this product, except occasionally in the event of catastrophic or large
single losses. The reserving risk for this line differs from that of the
general liability product line and the property product line due to the nature
of the customer. Commercial multi-peril is generally sold to smaller sized
accounts, while the customer profile for general liability and property include
larger customers. See the discussions under the property and general liability product lines with
regard to reserving risk for commercial multi-peril. Commercial Automobile The commercial automobile product line is a mix of property and liability
coverages and, therefore, includes both short and long tail coverages. The
payments that are made quickly typically pertain to auto physical damage
(property) claims and property damage (liability) claims. The payments that
take longer to finalize and are more difficult to estimate relate to bodily
injury claims. This mixture of claim payments creates a moderate estimation
risk. Commercial automobile reserves are typically analyzed in four components;
bodily injury liability, property damage liability, collision claims and
comprehensive claims. These last two components have minimum reserve risk and
fast payouts and, accordingly, separate risk factors are not presented. 90




---



##### Table of Contents



Examples of common risk factors that can change and, thus, affect the required
commercial automobile reserves (beyond those included in the general discussion
section) include: Bodily injury and property damage liability risk factors Trends in jury awards
Changes in the underlying court system
Changes in case law
Litigation trends
Frequency of claims with payment capped by policy limits
Change in average severity of accidents, or proportion of severe accidents
Subrogation opportunities
Changes in claim handling philosophies
Frequency of visits to health providers
Number of medical procedures given during visits to health providers
Types of health providers used
Types of medical treatments received
Changes in cost of medical treatments
Degree of patient responsiveness to treatment Commercial automobile book of business risk factors Changes in policy provisions (e.g., deductibles, policy limits, endorsements,
etc.)
Changes in mix of insured vehicles (e.g., long haul trucks versus local and
smaller vehicles, fleet risks versus non-fleets)
Changes in underwriting standards Workers Compensation Workers compensation is considered a long tail coverage, as it takes a
relatively long period of time to finalize claims from a given accident year.
While certain payments such as initial medical treatment or temporary wage
replacement for the injured worker are made quickly, some other payments are
made over the course of several years, such as awards for permanent partial
injuries. In addition, some payments can run as long as the injured workers
life, such as permanent disability benefits and on-going medical care. Workers compensation reserves are typically analyzed in three components:
indemnity losses, medical losses and claim adjustment expenses. Examples of common risk factors that can change and, thus, affect the required
workers compensation reserves (beyond those included in the general discussion
section) include: Indemnity risk factors Time required to recover from the injury
Degree of available transitional jobs
Degree of legal involvement
Changes in the interpretations and processes of the workers compensation
commissions oversight of claims1
Future wage inflation for states that index benefits
Changes in the administrative policies of second injury funds   1
 91




---



##### Table of Contents



Medical risk factors Changes in the cost of medical treatments and underlying fee schedules
(inflation)
Frequency of visits to health providers
Number of medical procedures given during visits to health providers
Types of health providers used
Type of medical treatments received
Use of preferred provider networks and other medical cost containment practices
Availability of new medical processes and equipment
Changes in the use of pharmaceutical drugs
Degree of patient responsiveness to treatment Workers compensation book of business risk factors Product mix
Injury type mix
Changes in underwriting standards General workers compensation risk factors Frequency of claim reopenings on claims previously closed
Mortality trends of injured workers with lifetime benefits and medical
treatment
Degree of cost shifting between workers compensation and health insurance Fidelity and Surety Fidelity is considered a short tail coverage. It takes a relatively short
period of time to finalize and settle fidelity claims. The volatility of
fidelity reserves is generally related to the type of business of the insured,
the size and complexity of the insureds business operations, amount of policy
limit and attachment point of coverage. The uncertainty surrounding reserves
for small, commercial insureds is typically less than the uncertainty for large
commercial or financial institutions. The low severity, high frequency nature
of small commercial fidelity losses provides for stability in loss estimates
whereas, the high severity, low frequency nature of losses for large insureds
results in a wider range of ultimate loss outcomes. Actuarial techniques that
rely on a stable pattern of loss development are generally not applicable to
high severity, low frequency policies. Surety is also considered a short tail coverage. The frequency of losses in
surety correlates with economic cycles as the primary cause of surety loss is
the inability to perform financially. The volatility of surety reserves is
generally related to the type of business performed by the insured, the type of
bonded obligation, the amount of limit exposed to loss, and the amount of
assets available to the insurer to mitigate losses, such as unbilled contract
funds, collateral, first and third party indemnity, and other security
positions of an insureds assets. Surety claims are generally high severity,
low frequency in nature. Other claim factors affecting reserve variability of
surety includes litigation related to amounts owed by and due the insured
(e.g., salvage and subrogation efforts) and the results of financial
restructuring of an insured. Examples of common risk factors that can change and, thus, affect the required
fidelity and surety reserves (beyond those included in the general discussion
section) include: Fidelity risk factors Type of business of insured
Policy limit and attachment points
Third-party claims
Coverage litigation
Complexity of claims
Growth in insureds operations 92




---



##### Table of Contents



Surety risk factors Economic trends
Concentration of reserves in a relatively few large claims
Type of business insured
Type of obligation insured
Cumulative limits of liability for insured
Assets available to mitigate loss
Defective workmanship/latent defects
Financial strategy of insured
Changes in statutory obligations
Geographic spread of business Personal Automobile Personal automobile includes both short and long tail coverages. The payments
that are made quickly typically pertain to auto physical damage (property)
claims and property damage (liability) claims. The payments that take longer
to finalize and are more difficult to estimate relate to bodily injury claims.
This mixture of claim payments creates a moderate estimation risk. Personal automobile reserves are typically analyzed in five components: bodily
injury liability, property damage liability, no-fault losses, collision claims
and comprehensive claims. These last two components have minimum reserve risk
and fast payouts and, accordingly, separate factors are not presented. Examples of common risk factors that can change and, thus, affect the required
personal automobile reserves (beyond those included in the general discussion
section) include: Bodily injury and property damage liability risk factors Trends in jury awards
Changes in the underlying court system and its philosophy
Changes in case law
Litigation trends
Frequency of claims with payment capped by policy limits
Change in average severity of accidents, or proportion of severe accidents
Subrogation opportunities
Degree of patient responsiveness to treatment
Changes in claim handling philosophies No-Fault risk factors (for selected states and time periods) Effectiveness of no-fault laws
Frequency of visits to health providers
Number of medical procedures given during visits to health providers
Types of health providers used
Types of medical treatments received
Changes in cost of medical treatments
Degree of patient responsiveness to treatment Personal automobile book of business risk factors Changes in policy provisions (e.g., deductibles, policy limits, endorsements,
etc.)
Changes in underwriting standards 93




---



##### Table of Contents



Homeowners and Personal Lines Other Homeowners is considered a short tail coverage. Most payments are related to
the property portion of the policy, where the claim reporting and settlement
process is generally restricted to the insured and the insurer. Claims on
property coverage are typically reported soon after the actual damage occurs,
although delays of several months are not unusual. The claim is settled when
the two parties agree on the amount due in accordance with the policy contract
language and the appropriate payment is made (or alternatively, the property
replacement/repair is performed by the insurer). The resulting settlement
process is typically fairly short term, although exceptions do exist. The liability portion of the homeowners policy generates claims which take
longer to pay due to the involvement of litigation and negotiation. In
addition, reserves related to umbrella coverages have greater uncertainty since
umbrella liability payments are often made far into the future. Homeowners reserves are typically analyzed in two components: non-catastrophe
related losses and catastrophe loss payments. Examples of common risk factors that can change and, thus, affect the required
homeowners reserves (beyond those included in the general reserve discussion
section) include: Non-catastrophe risk factors Salvage opportunities
Amount of time to return property to residential use
Changes in weather patterns
Local building codes
Litigation trends
Trends in jury awards Catastrophe risk factors Physical concentration of policyholders
Availability and cost of local contractors
Local building codes
Quality of construction of damaged homes
Amount of time to return property to residential use
For the more severe catastrophic events, demand surge inflation, whereby the
greatly increased demand for building materials such as plywood far surpasses
the immediate supply, leading to short-term material increases in building
material costs Homeowners book of business risk factors Policy provisions mix (e.g., deductibles, policy limits, endorsements, etc.)
Degree of concentration of policyholders
Changes in underwriting standards OTHER MATTERS Reserves for losses and loss adjustment expenses on a statutory basis were
$24.029 billion, $23.280 billion and $20.215 billion at December 31, 2003, 2002
and 2001, respectively. The $749.0 million increase from December 31, 2002 to
December 31, 2003 was primarily due to business growth, and reserve
strengthening at Gulf which increased reserves by $521.1 million and American
Equity which increased reserves by $115.0 million,
partially offset by asbestos and environmental net loss payments of $607.0
million. The $3.065 billion increase from December 31, 2001 to December 31,
2002 was primarily due to the increase in asbestos reserves of $2.584 billion
during the year, partially offset by net loss payments of $521.7 million for
asbestos and environmental claims. 94




---



##### Table of Contents



Prior to the IPO, the Company participated in Citigroups Capital Accumulation
Plan (CAP) that provided for the issuance of shares of Citigroup common stock
in the form of restricted stock awards to eligible officers and other key
employees. On August 20, 2002, in connection with the Citigroup Distribution,
the unvested outstanding awards of restricted stock and deferred shares held by
Company employees on that date under Citigroup CAP awards, were cancelled and
replaced by awards comprised primarily of 3.1 million newly issued shares of
class A common stock at a total market value of $53.3 million based on the
closing price of the class A common stock on August 20, 2002. These
replacement awards were granted on substantially the same terms, including
vesting, as the former Citigroup awards. The value of these newly issued
shares along with class A and class B common stock received in the Citigroup
Distribution on the Citigroup restricted shares, were equal to the value of the
cancelled Citigroup restricted share awards. In addition the Board of
Directors plan allows deferred receipt of shares of class A common stock
(deferred stock) to a future distribution date or upon termination of their
service.

Prior to the Citigroup Distribution on August 20, 2002, unearned compensation
expense associated with the Citigroup restricted common stock grants is
included in other assets in the consolidated balance sheet. Following the
Citigroup Distribution and the issuance of replacement stock awards in the
Companys class A and class B shares on August 20, 2002, the unamortized
unearned compensation expense associated with these awards is included as
unearned compensation in the consolidated balance sheet. Unearned compensation
expense is recognized as a charge to income ratably over the vesting period.
The after-tax compensation cost charged to earnings for these restricted stock
and deferred stock awards was $17.1 million, $17.0 million and $19.4 million
for the years ended December 31, 2003, 2002 and 2001, respectively. See note
10 of notes to the Companys consolidated financial statements for a discussion
of restricted common stock awards.

FUTURE APPLICATION OF ACCOUNTING STANDARDS

See note 1 of notes to the Companys consolidated financial statements for a
discussion of recently issued accounting pronouncements.

FORWARD-LOOKING STATEMENTS

This report contains, and oral statements by management of the Company may
contain, certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements, other than
statements of historical facts, may be forward-looking statements.
Specifically, the Company has forward-looking statements about the Companys
results of operations, financial condition, liquidity, and the sufficiency of
the Companys asbestos reserves. These forward-looking statements also include
statements about the Companys proposed merger with St. Paul, including but not
limited to statements regarding the integration of the Companys business with
St. Pauls under the heading Outlook and elsewhere.

Many risks and uncertainties may impact the matters addressed in these
forward-looking statements. Actual results may differ materially from those
expressed or implied. In particular, the sufficiency of the Companys asbestos
reserves, as well as the Companys results of operations, financial condition
and liquidity, to the extent impacted by the sufficiency of the Companys
asbestos reserves, is subject to a number of potential adverse developments
including, among others, adverse developments involving asbestos claims and
related litigation, the willingness of parties, including the Company, to
settle disputes, the impact of aggregate policy coverage limits, and the impact
of bankruptcies of various asbestos producers and related businesses. In
addition, we may not be able to fully integrate the Companys business with
that of St. Pauls in the manner or in the time frame currently anticipated.

95



---



##### Table of Contents



Some of the other factors that could cause actual results to differ include,
but are not limited to, the following: the Companys inability to obtain price
increases due to competition or otherwise; the performance of the Companys
investment portfolios, which could be adversely impacted by adverse
developments in U.S. and global financial markets, interest rates and rates of
inflation; weakening U.S. and global economic conditions; insufficiency of, or
changes in, loss reserves; the occurrence of catastrophic events, both natural
and man-made, including terrorist acts, with a severity or frequency exceeding
the Companys expectations; exposure to, and adverse developments involving,
environmental claims and related litigation; the impact of claims related to
exposure to potentially harmful products or substances, including, but not
limited to, lead paint, silica and other potentially harmful substances;
adverse changes in loss cost trends, including inflationary pressures in
medical costs and auto and home repair costs; developments relating to coverage
and liability for mold claims; the effects of corporate bankruptcies on surety
bond claims; adverse developments in the cost, availability and/or ability to
collect reinsurance; the ability of the Companys subsidiaries to pay dividends
to the Company; adverse outcomes in legal proceedings; judicial expansion of
policy coverage and the impact of new theories of liability; the impact of
legislative actions, including federal and state legislation related to
asbestos liability reform; larger than expected assessments for guaranty funds
and mandatory pooling arrangements; a downgrade in the Companys claims-paying
and financial strength ratings; the loss or significant restriction on the
Companys ability to use credit scoring in the pricing and underwriting of
Personal Lines policies; and amendments and changes to the risk-based capital
requirements. The Companys forward-looking statements speak only as of the
date of this report or as of the date they are made, and the Company undertakes
no obligation to update these forward-looking statements.




Item 7A. QUANTITATIVE AND QUALITATIVE 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, 2003. The Companys market risk sensitive instruments, including
derivatives, are primarily entered into for purposes other than trading.

The carrying value of the Companys investment portfolio as of December 31,
2003 and 2002 was $38.653 billion and $38.425 billion, respectively, of which
85% and 78% was invested in fixed maturity securities, respectively. The
increase in the percentage of total investments invested in fixed maturity
securities is due to the Companys investment strategy to deploy available cash
flow from operations to fixed maturity investments. 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 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, 2002. 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 debt is interest rate risk at
the time of refinancing. The Company monitors the interest rate environment
and evaluates refinancing opportunities as maturity dates approach. For
additional information regarding the Companys debt see notes 8 and 10 to the
Companys consolidated financial statements as well as the Liquidity and
Capital Resources section of Managements Discussion and Analysis.

96



---



##### Table of Contents



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.
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 entered into for purposes other than trading: fixed
maturities, interest-bearing non-redeemable preferred stocks, mortgage loans,
short-term securities, cash, investment income accrued, 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, 2003 and 2002.

For debt and fixed rate trust securities, the change in fair value is
determined by calculating hypothetical December 31, 2003 and 2002 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 approximately $1.2 billion and $1.5
billion based on a 100 basis point increase in interest rates as of December
31, 2003 and 2002, 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 57% of total assets and
approximately 5% of total liabilities as of December 31, 2003 and approximately
57% of total assets and approximately 6% of total liabilities as of December
31, 2002. As a result, the loss value excludes a significant portion of the
Companys consolidated balance sheet which would materially mitigate the impact
of the loss in fair value associated with a 100 basis point increase in
interest rates.

For example, some 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, 2003 and 2002, 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 the Company uses, 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, 2003 and 2002 is not material.

97



---



##### Table of Contents






Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                               |  |      |     | 
|-------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                               |  | Page
|                                                                                                               |  |     
|Independent Auditors Report                                                                                   |  |      | 99  | 
|Consolidated Statement of Income (Loss) for the years ended
December 31, 2003, 2002 and 2001                   |  |      | 100 | 
|Consolidated Balance Sheet at December 31, 2003 and 2002                                                       |  |      | 101 | 
|Consolidated Statement of Changes in Shareholders Equity
for the years ended December 31, 2003, 2002 and 2001 |  |      | 102 | 
|Consolidated Statement of Cash Flows for the years ended
December 31, 2003, 2002 and 2001                      |  |      | 103 | 
|Notes to Consolidated Financial Statements                                                                     |  |      | 104 | 

98



---



##### Table of Contents



Independent Auditors Report

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

We have audited the accompanying consolidated balance sheet of Travelers
Property Casualty Corp. and subsidiaries as of December 31, 2003 and 2002, and
the related consolidated statements of income (loss), changes in shareholders
equity and cash flows for each of the years in the three-year period ended
December 31, 2003. 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 auditing standards generally
accepted in the United States of America. 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, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets in
2002 and its methods of accounting for derivative instruments and hedging
activities and for securitized financial assets in 2001.

/s/KPMG LLP

Hartford, Connecticut
January 28, 2004

99



---



##### Table of Contents



TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (LOSS)
(in millions, except per share data)

|                                                                                                                       |                                                           |      |          |          |  |      |          |          |   |   |         |          |  
|---------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ---- | -------- | -------- |  | ---- | -------- | -------- | - | - | ------- | -------- | -
|For the year ended December 31,                                                                                        |                                                           | 2003 |          | 2002     |  | 2001
|                                                                                                                       |                                                           |      |          |          |  |     
|Revenues                                                                                                               |                                                           |      |          |          |  |      |          |          |   |   |         |         
|Premiums                                                                                                               |                                                           | $    | 12,545.4 |          |  | $    | 11,155.3 |          |   | $ | 9,410.9 |         
|Net investment income                                                                                                  |                                                           |      | 1,868.8  |          |  |      | 1,880.5  |          |   |   | 2,034.0 |         
|Fee income                                                                                                             |                                                           |      | 560.0    |          |  |      | 454.9    |          |   |   | 347.4   |         
|Net realized investment gains                                                                                          |                                                           |      | 38.0     |          |  |      | 146.7    |          |   |   | 322.5   |         
|Recoveries from former affiliate                                                                                       |                                                           |      |         |          |  |      | 520.0    |          |   |   |        |         
|Other revenues                                                                                                         |                                                           |      | 127.0    |          |  |      | 112.3    |          |   |   | 115.7   |         
|                                                                                                                       |                                                           |      |          |          |  |      |          |          |   |   |         |         
|                                                                                                                       | Total revenues                                            |      |          | 15,139.2 |  |      |          | 14,269.7 |   |   |         | 12,230.5 |  
|                                                                                                                       |                                                           |      |          |          |  |      |          |          |   |   |         |         
|Claims and expenses                                                                                                    |                                                           |      |          |          |  |      |          |          |   |   |         |         
|Claims and claim adjustment expenses                                                                                   |                                                           |      | 9,118.4  |          |  |      | 11,138.5 |          |   |   | 7,764.7 |         
|Amortization of deferred acquisition costs                                                                             |                                                           |      | 1,983.7  |          |  |      | 1,810.2  |          |   |   | 1,538.7 |         
|Interest expense                                                                                                       |                                                           |      | 166.4    |          |  |      | 156.8    |          |   |   | 204.9   |         
|General and administrative expenses                                                                                    |                                                           |      | 1,641.3  |          |  |      | 1,424.0  |          |   |   | 1,333.2 |         
|                                                                                                                       |                                                           |      |          |          |  |      |          |          |   |   |         |         
|                                                                                                                       | Total claims and expenses                                 |      |          | 12,909.8 |  |      |          | 14,529.5 |   |   |         | 10,841.5 |  
|                                                                                                                       |                                                           |      |          |          |  |      |          |          |   |   |         |         
|Income (loss) before federal income taxes, minority interest
and cumulative effect of changes in accounting principles |                                                           |      | 2,229.4  |          |  |      | (259.8   | )        |   |   | 1,389.0 |         
|Federal income taxes (benefit)                                                                                         |                                                           |      | 537.4    |          |  |      | (476.5   | )        |   |   | 326.8   |         
|Minority interest, net of tax                                                                                          |                                                           |      | (4.0     | )        |  |      | 1.1      |          |   |   |        |         
|                                                                                                                       |                                                           |      |          |          |  |      |          |          |   |   |         |         
|Income before cumulative effect of changes in accounting
principles                                                    |                                                           |      | 1,696.0  |          |  |      | 215.6    |          |   |   | 1,062.2 |         
|Cumulative effect of change in accounting principles for:                                                              |                                                           |      |          |          |  |      |          |          |   |   |         |         
|                                                                                                                       | Goodwill and other intangible assets, net of tax          |      |          |         |  |      |          | (242.6   | ) |   |         |         |  
|                                                                                                                       | Derivative instruments and hedging activities, net of tax |      |          |         |  |      |          |         |   |   |         | 4.5      |  
|                                                                                                                       | Securitized financial assets, net of tax                  |      |          |         |  |      |          |         |   |   |         | (1.3     | )
|Net income (loss)                                                                                                      |                                                           | $    | 1,696.0  |          |  | $    | (27.0    | )        |   | $ | 1,065.4 |         
|                                                                                                                       |                                                           |      |          |          |  |      |          |          |   |   |         |         
|Basic earnings per share                                                                                               |                                                           |      |          |          |  |      |          |          |   |   |         |         
|Income before cumulative effect of changes in accounting
principles                                                    |                                                           | $    | 1.69     |          |  | $    | 0.23     |          |   | $ | 1.38    |         
|Cumulative effect of changes in accounting principles, net of tax                                                      |                                                           |      |         |          |  |      | (0.26    | )        |   |   | 0.01    |         
|                                                                                                                       |                                                           |      |          |          |  |      |          |          |   |   |         |         
|Net income (loss)                                                                                                      |                                                           | $    | 1.69     |          |  | $    | (0.03    | )        |   | $ | 1.39    |         
|                                                                                                                       |                                                           |      |          |          |  |      |          |          |   |   |         |         
|Diluted earnings per share                                                                                             |                                                           |      |          |          |  |      |          |          |   |   |         |         
|Income before cumulative effect of changes in accounting
principles                                                    |                                                           | $    | 1.68     |          |  | $    | 0.23     |          |   | $ | 1.38    |         
|Cumulative effect of changes in accounting principles, net of tax                                                      |                                                           |      |         |          |  |      | (0.26    | )        |   |   | 0.01    |         
|                                                                                                                       |                                                           |      |          |          |  |      |          |          |   |   |         |         
|Net income (loss)                                                                                                      |                                                           | $    | 1.68     |          |  | $    | (0.03    | )        |   | $ | 1.39    |         
|                                                                                                                       |                                                           |      |          |          |  |      |          |          |   |   |         |         
|Weighted average number of common shares outstanding                                                                   |                                                           |      | 1,002.0  |          |  |      | 949.5    |          |   |   | 769.0   |         
|Weighted average number of common shares outstanding
and common stock equivalents                                      |                                                           |      | 1,007.3  |          |  |      | 951.2    |          |   |   | 769.0   |         
|                                                                                                                       |                                                           |      |          |          |  |      |          |          |   |   |         |         

See notes to consolidated financial statements.

100



---



##### Table of Contents



TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions, except shares and per share data)

|                                                                                                                                                                                                                               |                                                                                                                                                                                             |      |          |          |  |   |          |          | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | -------- | -------- |  | - | -------- | -------- | 
|At December 31,                                                                                                                                                                                                                |                                                                                                                                                                                             | 2003 |          | 2002    
|                                                                                                                                                                                                                               |                                                                                                                                                                                             |      |          |         
|Assets                                                                                                                                                                                                                         |                                                                                                                                                                                             |      |          |          |  |   |          |         
|Fixed maturities, available for sale at fair value (including $696.4 and $580.5 at December 31, 2003 and
2002, respectively, subject to securities lending and repurchase agreements) (amortized cost
$31,478.3 and $28,877.8) |                                                                                                                                                                                             | $    | 33,045.5 |          |  | $ | 30,003.2 |         
|Equity securities, at fair value (cost $672.3 and $861.9)                                                                                                                                                                      |                                                                                                                                                                                             |      | 732.6    |          |  |   | 851.5    |         
|Mortgage loans                                                                                                                                                                                                                 |                                                                                                                                                                                             |      | 210.8    |          |  |   | 257.9    |         
|Real estate held for sale                                                                                                                                                                                                      |                                                                                                                                                                                             |      | 1.5      |          |  |   | 12.5     |         
|Short-term securities                                                                                                                                                                                                          |                                                                                                                                                                                             |      | 2,138.3  |          |  |   | 4,853.6  |         
|Trading securities                                                                                                                                                                                                             |                                                                                                                                                                                             |      | 57.2     |          |  |   | 40.7     |         
|Other investments                                                                                                                                                                                                              |                                                                                                                                                                                             |      | 2,467.0  |          |  |   | 2,405.8  |         
|                                                                                                                                                                                                                               |                                                                                                                                                                                             |      |          |          |  |   |          |         
|                                                                                                                                                                                                                               | Total investments                                                                                                                                                                           |      |          | 38,652.9 |  |   |          | 38,425.2 | 
|                                                                                                                                                                                                                               |                                                                                                                                                                                             |      |          |          |  |   |          |         
|Cash                                                                                                                                                                                                                           |                                                                                                                                                                                             |      | 352.1    |          |  |   | 92.2     |         
|Investment income accrued                                                                                                                                                                                                      |                                                                                                                                                                                             |      | 361.8    |          |  |   | 339.3    |         
|Premium balances receivable                                                                                                                                                                                                    |                                                                                                                                                                                             |      | 4,089.5  |          |  |   | 3,861.4  |         
|Reinsurance recoverables                                                                                                                                                                                                       |                                                                                                                                                                                             |      | 11,173.9 |          |  |   | 10,977.5 |         
|Deferred acquisition costs                                                                                                                                                                                                     |                                                                                                                                                                                             |      | 964.9    |          |  |   | 873.0    |         
|Deferred federal income taxes                                                                                                                                                                                                  |                                                                                                                                                                                             |      | 677.9    |          |  |   | 1,447.1  |         
|Contractholder receivables                                                                                                                                                                                                     |                                                                                                                                                                                             |      | 3,120.7  |          |  |   | 2,544.1  |         
|Goodwill                                                                                                                                                                                                                       |                                                                                                                                                                                             |      | 2,411.5  |          |  |   | 2,411.5  |         
|Receivables for investment sales                                                                                                                                                                                               |                                                                                                                                                                                             |      | 182.4    |          |  |   | 138.7    |         
|Other assets                                                                                                                                                                                                                   |                                                                                                                                                                                             |      | 2,884.4  |          |  |   | 3,027.5  |         
|                                                                                                                                                                                                                               |                                                                                                                                                                                             |      |          |          |  |   |          |         
|                                                                                                                                                                                                                               | Total assets                                                                                                                                                                                |      | $        | 64,872.0 |  |   | $        | 64,137.5 | 
|                                                                                                                                                                                                                               |                                                                                                                                                                                             |      |          |          |  |   |          |         
|Liabilities                                                                                                                                                                                                                    |                                                                                                                                                                                             |      |          |          |  |   |          |         
|Claims and claim adjustment expense reserves                                                                                                                                                                                   |                                                                                                                                                                                             | $    | 34,572.6 |          |  | $ | 33,736.0 |         
|Unearned premium reserves                                                                                                                                                                                                      |                                                                                                                                                                                             |      | 7,110.8  |          |  |   | 6,459.9  |         
|Contractholder payables                                                                                                                                                                                                        |                                                                                                                                                                                             |      | 3,120.7  |          |  |   | 2,544.1  |         
|Notes payable to former affiliates                                                                                                                                                                                             |                                                                                                                                                                                             |      |         |          |  |   | 700.0    |         
|Long-term debt                                                                                                                                                                                                                 |                                                                                                                                                                                             |      | 1,756.0  |          |  |   | 926.2    |         
|Convertible junior subordinated notes payable                                                                                                                                                                                  |                                                                                                                                                                                             |      | 868.7    |          |  |   | 867.8    |         
|Convertible notes payable                                                                                                                                                                                                      |                                                                                                                                                                                             |      | 49.8     |          |  |   | 49.7     |         
|Payables for investment purchases                                                                                                                                                                                              |                                                                                                                                                                                             |      | 531.2    |          |  |   | 3,737.9  |         
|Payables for securities lending and repurchase agreements                                                                                                                                                                      |                                                                                                                                                                                             |      | 711.0    |          |  |   | 597.9    |         
|Other liabilities                                                                                                                                                                                                              |                                                                                                                                                                                             |      | 4,164.5  |          |  |   | 3,480.7  |         
|                                                                                                                                                                                                                               |                                                                                                                                                                                             |      |          |          |  |   |          |         
|                                                                                                                                                                                                                               | Total liabilities                                                                                                                                                                           |      |          | 52,885.3 |  |   |          | 53,100.2 | 
|                                                                                                                                                                                                                               |                                                                                                                                                                                             |      |          |          |  |   |          |         
|TIGHI-obligated mandatorily redeemable securities of subsidiary trusts
holding solely junior subordinated debt securities of TIGHI                                                                                             |                                                                                                                                                                                             |      |         |          |  |   | 900.0    |         
|                                                                                                                                                                                                                               |                                                                                                                                                                                             |      |          |          |  |   |          |         
|Shareholders equity                                                                                                                                                                                                           |                                                                                                                                                                                             |      |          |          |  |   |          |         
|Common stock:                                                                                                                                                                                                                  |                                                                                                                                                                                             |      |          |          |  |   |          |         
|                                                                                                                                                                                                                               | Class A, $.01 par value, 1.5 billion shares authorized, 510.2 million and 504.2 million issued, and
505.7 million and 503.9 million outstanding at December 31, 2003 and 2002, respectively |      |          | 5.1      |  |   |          | 5.0      | 
|                                                                                                                                                                                                                               | Class B, $.01 par value, 1.5 billion shares authorized, 500.0 million issued, and 499.8 million and
500.0 million outstanding at December 31, 2003 and 2002, respectively                   |      |          | 5.0      |  |   |          | 5.0      | 
|Additional paid-in capital                                                                                                                                                                                                     |                                                                                                                                                                                             |      | 8,705.2  |          |  |   | 8,618.4  |         
|Retained earnings                                                                                                                                                                                                              |                                                                                                                                                                                             |      | 2,290.2  |          |  |   | 880.5    |         
|Accumulated other changes in equity from nonowner sources                                                                                                                                                                      |                                                                                                                                                                                             |      | 1,085.5  |          |  |   | 656.6    |         
|Treasury stock, at cost (4.7 million and .3 million shares)                                                                                                                                                                    |                                                                                                                                                                                             |      | (74.4    | )        |  |   | (4.9     | )       
|Unearned compensation                                                                                                                                                                                                          |                                                                                                                                                                                             |      | (29.9    | )        |  |   | (23.3    | )       
|                                                                                                                                                                                                                               |                                                                                                                                                                                             |      |          |          |  |   |          |         
|                                                                                                                                                                                                                               | Total shareholders equity                                                                                                                                                                  |      |          | 11,986.7 |  |   |          | 10,137.3 | 
|                                                                                                                                                                                                                               |                                                                                                                                                                                             |      |          |          |  |   |          |         
|                                                                                                                                                                                                                               | Total liabilities and shareholders equity                                                                                                                                                  |      | $        | 64,872.0 |  |   | $        | 64,137.5 | 
|                                                                                                                                                                                                                               |                                                                                                                                                                                             |      |          |          |  |   |          |         

See notes to consolidated financial statements.

101



---



##### Table of Contents



TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
(in millions)

|                                                                                        |  |      |          |      |  |      |          |   |  |   |          |  
|--------------------------------------------------------------------------------------- |  | ---- | -------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|For the year ended December 31,                                                         |  | 2003 |          | 2002 |  | 2001
|                                                                                        |  |      |          |      |  |     
|Common stock and additional paid-in capital                                             |  |      |          |      |  |      |          |   |  |   |          |  
|Balance, beginning of year                                                              |  | $    | 8,628.4  |      |  | $    | 4,440.7  |   |  | $ | 3,823.4  |  
|Net proceeds from initial public offering                                               |  |      |         |      |  |      | 4,089.5  |   |  |   |         |  
|Net shares issued under employee stock-based compensation plans                         |  |      | 78.6     |      |  |      | 64.7     |   |  |   |         |  
|Acquisition of affiliates                                                               |  |      |         |      |  |      |         |   |  |   | 578.0    |  
|Other                                                                                   |  |      | 8.3      |      |  |      | 33.5     |   |  |   | 39.3     |  
|                                                                                        |  |      |          |      |  |      |          |   |  |   |          |  
|Balance, end of year                                                                    |  |      | 8,715.3  |      |  |      | 8,628.4  |   |  |   | 4,440.7  |  
|                                                                                        |  |      |          |      |  |      |          |   |  |   |          |  
|Retained earnings                                                                       |  |      |          |      |  |      |          |   |  |   |          |  
|Balance, beginning of year                                                              |  |      | 880.5    |      |  |      | 6,004.2  |   |  |   | 4,989.9  |  
|Net income (loss)                                                                       |  |      | 1,696.0  |      |  |      | (27.0    | ) |  |   | 1,065.4  |  
|Receipts from former subsidiaries                                                       |  |      |         |      |  |      | 157.5    |   |  |   | 474.9    |  
|Dividends                                                                               |  |      | (286.3   | )    |  |      | (5,254.2 | ) |  |   | (526.0   | )
|                                                                                        |  |      |          |      |  |      |          |   |  |   |          |  
|Balance, end of year                                                                    |  |      | 2,290.2  |      |  |      | 880.5    |   |  |   | 6,004.2  |  
|                                                                                        |  |      |          |      |  |      |          |   |  |   |          |  
|Accumulated other changes in equity from nonowner sources, net of tax                   |  |      |          |      |  |      |          |   |  |   |          |  
|Balance, beginning of year                                                              |  |      | 656.6    |      |  |      | 241.4    |   |  |   | 400.7    |  
|Net unrealized gain (loss) on investment securities, net of reclassification
adjustment |  |      | 328.7    |      |  |      | 475.4    |   |  |   | (172.0   | )
|Minimum pension liability adjustment                                                    |  |      | 62.0     |      |  |      | (68.3    | ) |  |   |         |  
|Net unrealized gains on investment securities obtained as part of affiliate
acquisition |  |      |         |      |  |      |         |   |  |   | 21.1     |  
|Other (1)                                                                               |  |      | 38.2     |      |  |      | 8.1      |   |  |   | (8.4     | )
|                                                                                        |  |      |          |      |  |      |          |   |  |   |          |  
|Balance, end of year                                                                    |  |      | 1,085.5  |      |  |      | 656.6    |   |  |   | 241.4    |  
|                                                                                        |  |      |          |      |  |      |          |   |  |   |          |  
|Treasury stock (at cost)                                                                |  |      |          |      |  |      |          |   |  |   |          |  
|Balance, beginning of year                                                              |  |      | (4.9     | )    |  |      |         |   |  |   |         |  
|Treasury stock acquired                                                                 |  |      | (40.0    | )    |  |      |         |   |  |   |         |  
|Net shares issued under employee stock-based compensation plans                         |  |      | (29.5    | )    |  |      | (4.9     | ) |  |   |         |  
|                                                                                        |  |      |          |      |  |      |          |   |  |   |          |  
|Balance, end of year                                                                    |  |      | (74.4    | )    |  |      | (4.9     | ) |  |   |         |  
|                                                                                        |  |      |          |      |  |      |          |   |  |   |          |  
|Unearned compensation                                                                   |  |      |          |      |  |      |          |   |  |   |          |  
|Balance, beginning of year                                                              |  |      | (23.3    | )    |  |      |         |   |  |   |         |  
|Net shares issued under restricted stock employee stock-based compensation plans        |  |      | (31.9    | )    |  |      | (29.3    | ) |  |   |         |  
|Restricted stock amortization                                                           |  |      | 25.3     |      |  |      | 6.0      |   |  |   |         |  
|                                                                                        |  |      |          |      |  |      |          |   |  |   |          |  
|Balance, end of year                                                                    |  |      | (29.9    | )    |  |      | (23.3    | ) |  |   |         |  
|                                                                                        |  |      |          |      |  |      |          |   |  |   |          |  
|Total shareholders equity                                                              |  | $    | 11,986.7 |      |  | $    | 10,137.3 |   |  | $ | 10,686.3 |  
|                                                                                        |  |      |          |      |  |      |          |   |  |   |          |  
|Common shares outstanding                                                               |  |      |          |      |  |      |          |   |  |   |          |  
|Balance, beginning of year                                                              |  |      | 1,003.9  |      |  |      | 769.0    |   |  |   | 769.0    |  
|Shares issued in Initial Public Offering                                                |  |      |         |      |  |      | 231.0    |   |  |   |         |  
|Net shares issued under employee stock-based compensation plans                         |  |      | 4.2      |      |  |      | 3.9      |   |  |   |         |  
|Treasury stock acquired                                                                 |  |      | (2.6     | )    |  |      |         |   |  |   |         |  
|                                                                                        |  |      |          |      |  |      |          |   |  |   |          |  
|Balance, end of year                                                                    |  |      | 1,005.5  |      |  |      | 1,003.9  |   |  |   | 769.0    |  
|                                                                                        |  |      |          |      |  |      |          |   |  |   |          |  
|Summary of changes in equity from nonowner sources                                      |  |      |          |      |  |      |          |   |  |   |          |  
|Net income (loss)                                                                       |  | $    | 1,696.0  |      |  | $    | (27.0    | ) |  | $ | 1,065.4  |  
|Other changes in equity from nonowner sources, net of tax                               |  |      | 428.9    |      |  |      | 415.2    |   |  |   | (180.4   | )
|                                                                                        |  |      |          |      |  |      |          |   |  |   |          |  
|Total changes in equity from nonowner sources                                           |  | $    | 2,124.9  |      |  | $    | 388.2    |   |  | $ | 885.0    |  
|                                                                                        |  |      |          |      |  |      |          |   |  |   |          |  



|(1) |  | Includes foreign currency translation adjustments, changes in value of
private equity securities and the cumulative effect of the change in
accounting for derivative instruments.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See notes to consolidated financial statements.

102



---



##### Table of Contents



TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)

|                                                              |                                                                                         |                                                                   |                                           |           |          |          |          |           |          |          |          |           |          |          |  
|------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ----------------------------------------- | --------- | -------- | -------- | -------- | --------- | -------- | -------- | -------- | --------- | -------- | -------- | -
|For the year ended December 31,                               |                                                                                         | 2003                                                              |                                           | 2002      |          | 2001    
|                                                              |                                                                                         |                                                                   |                                           |           |          |         
|Cash flows from operating activities                          |                                                                                         |                                                                   |                                           |           |          |          |          |           |          |          |          |          
|Net income (loss)                                             |                                                                                         | $                                                                 | 1,696.0                                   |           |          | $        | (27.0    | )         |          | $        | 1,065.4  |          
|                                                              | Adjustments to reconcile net income (loss) to net cash provided by operating activities |                                                                   |                                           |           |          |          |          |           |          |          |          |           |         
|                                                              |                                                                                         | Net realized investment gains                                     |                                           |           | (38.0    | )        |          |           | (146.7   | )        |          |           | (322.5   | )       
|                                                              |                                                                                         | Cumulative effect of changes in accounting principles, net of tax |                                           |           |         |          |          |           | 242.6    |          |          |           | (3.2     | )       
|                                                              |                                                                                         | Depreciation and amortization                                     |                                           |           | 84.7     |          |          |           | 41.8     |          |          |           | 121.9    |         
|                                                              |                                                                                         | Deferred federal income taxes (benefits)                          |                                           |           | 539.1    |          |          |           | (588.8   | )        |          |           | 11.1     |         
|                                                              |                                                                                         | Amortization of deferred policy acquisition costs                 |                                           |           | 1,983.7  |          |          |           | 1,810.2  |          |          |           | 1,538.7  |         
|                                                              |                                                                                         | Premium balances receivable                                       |                                           |           | (228.1   | )        |          |           | (204.4   | )        |          |           | (174.1   | )       
|                                                              |                                                                                         | Reinsurance recoverables                                          |                                           |           | (196.4   | )        |          |           | 69.8     |          |          |           | (1,386.2 | )       
|                                                              |                                                                                         | Deferred acquisition costs                                        |                                           |           | (2,075.6 | )        |          |           | (1,915.1 | )        |          |           | (1,619.8 | )       
|                                                              |                                                                                         | Claims and claim adjustment expense reserves                      |                                           |           | 836.6    |          |          |           | 2,999.4  |          |          |           | 1,479.0  |         
|                                                              |                                                                                         | Unearned premium reserves                                         |                                           |           | 650.9    |          |          |           | 793.0    |          |          |           | 407.6    |         
|                                                              |                                                                                         | Trading account activities                                        |                                           |           | (16.5    | )        |          |           | 115.6    |          |          |           | (73.8    | )       
|                                                              |                                                                                         | Recoveries from former affiliate                                  |                                           |           | 360.7    |          |          |           | 159.3    |          |          |           |         |         
|                                                              |                                                                                         | Other                                                             |                                           |           | 236.3    |          |          |           | (424.1   | )        |          |           | 175.1    |         
|                                                              |                                                                                         |                                                                   |                                           |           |          |          |          |           |          |          |          |          
|                                                              |                                                                                         |                                                                   | Net cash provided by operating activities |           |          | 3,833.4  |          |           |          | 2,925.6  |          |           |          | 1,219.2  |  
|                                                              |                                                                                         |                                                                   |                                           |           |          |          |          |           |          |          |          |          
|Cash flows from investing activities                          |                                                                                         |                                                                   |                                           |           |          |          |          |           |          |          |          |          
|Proceeds from maturities of investments                       |                                                                                         |                                                                   |                                           |           |          |          |          |           |          |          |          |          
|                                                              | Fixed maturities                                                                        |                                                                   |                                           | 4,461.7   |          |          |          | 3,013.3   |          |          |          | 2,081.4   |         
|                                                              | Mortgage loans                                                                          |                                                                   |                                           | 58.8      |          |          |          | 21.6      |          |          |          | 15.8      |         
|Proceeds from sales of investments                            |                                                                                         |                                                                   |                                           |           |          |          |          |           |          |          |          |          
|                                                              | Fixed maturities                                                                        |                                                                   |                                           | 8,342.5   |          |          |          | 12,518.5  |          |          |          | 14,469.2  |         
|                                                              | Equity securities                                                                       |                                                                   |                                           | 254.1     |          |          |          | 127.2     |          |          |          | 469.7     |         
|                                                              | Real estate held for sale                                                               |                                                                   |                                           | 11.0      |          |          |          | 23.3      |          |          |          |          |         
|Purchases of investments                                      |                                                                                         |                                                                   |                                           |           |          |          |          |           |          |          |          |          
|                                                              | Fixed maturities                                                                        |                                                                   |                                           | (15,555.2 | )        |          |          | (19,005.3 | )        |          |          | (16,008.7 | )       
|                                                              | Equity securities                                                                       |                                                                   |                                           | (60.6     | )        |          |          | (99.6     | )        |          |          | (67.4     | )       
|                                                              | Mortgage loans                                                                          |                                                                   |                                           | (11.7     | )        |          |          | (5.2      | )        |          |          | (4.1      | )       
|                                                              | Real estate                                                                             |                                                                   |                                           |          |          |          |          | (1.2      | )        |          |          | (6.2      | )       
|Short-term securities, (purchases) sales, net                 |                                                                                         |                                                                   | 2,910.2                                   |           |          |          | (1,730.9 | )         |          |          | (106.1   | )        
|Other investments, net                                        |                                                                                         |                                                                   | 59.8                                      |           |          |          | 244.7    |           |          |          | (667.9   | )        
|Securities transactions in course of settlement               |                                                                                         |                                                                   | (2,945.6                                  | )         |          |          | 2,623.4  |           |          |          | 58.3     |          
|Business acquisitions                                         |                                                                                         |                                                                   |                                          |           |          |          |         |           |          |          | (329.5   | )        
|                                                              |                                                                                         |                                                                   |                                           |           |          |          |          |           |          |          |          |          
|                                                              |                                                                                         |                                                                   | Net cash used in investing activities     |           |          | (2,475.0 | )        |           |          | (2,270.2 | )        |           |          | (95.5    | )
|                                                              |                                                                                         |                                                                   |                                           |           |          |          |          |           |          |          |          |          
|Cash flows from financing activities                          |                                                                                         |                                                                   |                                           |           |          |          |          |           |          |          |          |          
|Issuance of convertible notes, net                            |                                                                                         |                                                                   |                                          |           |          |          | 917.3    |           |          |          |         |          
|Issuance of short-term debt                                   |                                                                                         |                                                                   | 549.5                                     |           |          |          |         |           |          |          | 211.8    |          
|Payment of short-term debt                                    |                                                                                         |                                                                   | (550.0                                    | )         |          |          |         |           |          |          | (211.8   | )        
|Issuance of long-term debt                                    |                                                                                         |                                                                   | 1,381.9                                   |           |          |          | 549.4    |           |          |          |         |          
|Payment of long-term debt                                     |                                                                                         |                                                                   | (553.0                                    | )         |          |          | (3.0     | )         |          |          | (500.0   | )        
|Issuance of note payable to former affiliate                  |                                                                                         |                                                                   |                                          |           |          |          | 250.0    |           |          |          | 775.0    |          
|Payment of note payable to former affiliate                   |                                                                                         |                                                                   | (700.0                                    | )         |          |          | (6,349.0 | )         |          |          | (1,315.0 | )        
|Redemption of mandatorily redeemable preferred stock          |                                                                                         |                                                                   | (900.0                                    | )         |          |          |         |           |          |          |         |          
|Treasury stock acquired:                                      |                                                                                         |                                                                   |                                           |           |          |          |          |           |          |          |          |          
|                                                              | Purchased                                                                               |                                                                   |                                           | (40.0     | )        |          |          |          |          |          |          |          |         
|                                                              | Net shares issued under employee stock-based compensation plans                         |                                                                   |                                           | (17.6     | )        |          |          | (3.7      | )        |          |          |          |         
|Initial public offering                                       |                                                                                         |                                                                   |                                          |           |          |          | 4,089.5  |           |          |          |         |          
|Issuance of common stock-employee stock options               |                                                                                         |                                                                   | 40.4                                      |           |          |          | 10.1     |           |          |          |         |          
|Receipts from former affiliates                               |                                                                                         |                                                                   |                                          |           |          |          | 157.5    |           |          |          | 474.9    |          
|Dividends to shareholders                                     |                                                                                         |                                                                   | (281.8                                    | )         |          |          |         |           |          |          |         |          
|Dividends to former affiliate                                 |                                                                                         |                                                                   |                                          |           |          |          | (157.5   | )         |          |          | (526.0   | )        
|Payment of dividend on subsidiarys preferred stock           |                                                                                         |                                                                   | (5.2                                      | )         |          |          | (2.2     | )         |          |          |         |          
|Purchase of real estate from former affiliate                 |                                                                                         |                                                                   |                                          |           |          |          | (68.2    | )         |          |          |         |          
|Transfer of employee benefit obligations to former affiliates |                                                                                         |                                                                   | (22.7                                     | )         |          |          | (172.4   | )         |          |          |         |          
|Transfer of lease obligations to former affiliate             |                                                                                         |                                                                   |                                          |           |          |          | (87.8    | )         |          |          |         |          
|Return of capital from former subsidiaries                    |                                                                                         |                                                                   |                                          |           |          |          |         |           |          |          | 8.0      |          
|Minority investment in subsidiary                             |                                                                                         |                                                                   |                                          |           |          |          | 89.5     |           |          |          |         |          
|Other                                                         |                                                                                         |                                                                   |                                          |           |          |          | (19.6    | )         |          |          |         |          
|                                                              |                                                                                         |                                                                   |                                           |           |          |          |          |           |          |          |          |          
|                                                              |                                                                                         |                                                                   | Net cash used in financing activities     |           |          | (1,098.5 | )        |           |          | (800.1   | )        |           |          | (1,083.1 | )
|                                                              |                                                                                         |                                                                   |                                           |           |          |          |          |           |          |          |          |          
|Net increase (decrease) in cash                               |                                                                                         |                                                                   | 259.9                                     |           |          |          | (144.7   | )         |          |          | 40.6     |          
|Cash at beginning of period                                   |                                                                                         |                                                                   | 92.2                                      |           |          |          | 236.9    |           |          |          | 196.3    |          
|                                                              |                                                                                         |                                                                   |                                           |           |          |          |          |           |          |          |          |          
|Cash at end of period                                         |                                                                                         | $                                                                 | 352.1                                     |           |          | $        | 92.2     |           |          | $        | 236.9    |          
|                                                              |                                                                                         |                                                                   |                                           |           |          |          |          |           |          |          |          |          
|Supplemental disclosure of cash flow information              |                                                                                         |                                                                   |                                           |           |          |          |          |           |          |          |          |          
|Income taxes (refunded) paid                                  |                                                                                         | $                                                                 | (64.2                                     | )         |          | $        | 83.4     |           |          | $        | 325.6    |          
|Interest paid                                                 |                                                                                         | $                                                                 | 139.7                                     |           |          | $        | 140.6    |           |          | $        | 129.7    |          
|                                                              |                                                                                         |                                                                   |                                           |           |          |          |          |           |          |          |          |          

See notes to consolidated financial statements.

103



---



##### Table of Contents



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. (TPC) and its subsidiaries (collectively, the
Company). Certain reclassifications have been made to prior years
financial statements to conform to the current years presentation.
Significant intercompany transactions and balances have been eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
(GAAP) 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | TPC was reorganized in connection with its initial public offering (IPO) on
March 21, 2002. Pursuant to the reorganization, which was completed on
March 19, 2002, TPCs consolidated financial statements have been adjusted
to exclude the accounts of certain formerly wholly-owned TPC subsidiaries,
principally The Travelers Insurance Company (TIC) and its subsidiaries
(U.S. life insurance operations), certain other wholly-owned noninsurance
subsidiaries of TPC and substantially all of TPCs assets and certain
liabilities not related to the property casualty business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | On March 21, 2002, TPC issued 231 million shares of its class A common
stock in an IPO, representing approximately 23% of TPCs common equity.
After the IPO, Citigroup Inc. (together with its consolidated subsidiaries,
Citigroup) beneficially owned all of the 500 million shares of TPCs
outstanding class B common stock, each share of which is entitled to seven
votes, and 269 million shares of TPCs class A common stock, each share of
which is entitled to one vote, representing at the time 94% of the combined
voting power of all classes of TPCs voting securities and 77% of the
equity interest in TPC. Concurrent with the IPO, TPC issued $892.5 million
aggregate principal amount of 4.5% convertible junior subordinated notes,
which mature on April 15, 2032. The IPO and the offering of the
convertible notes are collectively referred to as the offerings. During
the first quarter of 2002, TPC paid three dividends of $1.000 billion,
$3.700 billion and $395.0 million, aggregating $5.095 billion, which were
each in the form of notes payable to Citigroup. The proceeds of the
offerings were used to prepay the $395.0 million note and substantially
prepay the $3.700 billion note. On December 31, 2002, the $1.000 billion
note payable was repaid in its entirety.
|  
|   |  | In conjunction with the corporate reorganization and the offerings
described above, during March 2002, the Company entered into an agreement
with Citigroup (the Citigroup indemnification agreement) which provided
that in any year in which the Company recorded additional asbestos-related
income statement charges in excess of $150.0 million, net of any
reinsurance, Citigroup would pay to the Company the amount of any such
excess up to a cumulative aggregate of $800.0 million, reduced by the tax
effect of the highest applicable federal income tax rate. During 2002, the
Company recorded $2.945 billion of asbestos incurred losses, net of
reinsurance, and accordingly has fully utilized the total benefit available
under the agreement. For the year ended December 31, 2002, revenues
include $520.0 million from Citigroup under this agreement. At December
31, 2002, other assets included a $360.7 million receivable from Citigroup
under this agreement, which was received during the first quarter of 2003.
Included in federal income taxes in the consolidated statement of income is
a tax benefit of $280.0 million related to the asbestos charge covered by
the agreement.                                                                                                

104



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On August 20, 2002, Citigroup made a tax-free distribution to its
stockholders (the Citigroup Distribution), of a portion of its ownership
interest in TPC, which, together with the shares issued in the IPO,
represented more than 90% of TPCs common equity and more than 90% of the
combined voting power of TPCs outstanding voting securities. For each 100
shares of Citigroup outstanding common stock, approximately 4.32 shares of
TPC class A common stock and 8.88 shares of TPC class B common stock were
distributed. At December 31, 2003 and 2002, Citigroup held for their own
account 9.87% and 9.95%, respectively, of TPCs common equity and 9.87% and
9.98%, respectively, of the combined voting power of TPCs outstanding
voting securities. Citigroup received a private letter ruling from the
Internal Revenue Service that the Citigroup Distribution was tax-free to
Citigroup, its stockholders and TPC. As part of the ruling process,
Citigroup agreed to vote the shares it continues to hold following the
Citigroup Distribution pro rata with the shares held by the public and to
divest the remaining shares it holds within five years following the
Citigroup Distribution.                                                  
|  
|   |  | On August 20, 2002, in connection with the Citigroup Distribution,
stock-based awards held by Company employees on that date under Citigroups
various incentive plans were cancelled and replaced by awards under the
Companys own incentive programs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | TPCs consolidated financial statements include the accounts of its primary
subsidiary, Travelers Insurance Group Holdings Inc. (TIGHI), a property
casualty insurance holding company. Also included are the accounts of
CitiInsurance International Holdings Inc. and its subsidiaries
(CitiInsurance), the principal assets of which are investments in the
property casualty and life operations of Fubon Insurance Co., Ltd. and
Fubon Assurance Co., Ltd., with respect to results prior to March 1, 2002.
On February 28, 2002, the Company sold CitiInsurance to other Citigroup
affiliated companies for $402.6 million, its net book value. The Company
has applied $137.8 million of the proceeds from this sale to repay
intercompany indebtedness to Citigroup. In addition, the Company has
purchased from Citigroup affiliated companies the premises located at One
Tower Square, Hartford, Connecticut and other properties for $68.2 million.
Additionally, certain liabilities relating to employee benefit plans and
lease obligations were assigned and assumed by Citigroup affiliated
companies. In connection with these assignments, the Company transferred
$172.4 million and $87.8 million, respectively, to Citigroup affiliated
companies.
|  
|   |  | Prior to the Citigroup Distribution, the Company provided and purchased
services to and from Citigroup affiliated companies, including facilities
management, banking and financial functions, benefit coverages, data
processing services and short-term investment pool management services.
Charges for these shared services were allocated at cost. In connection
with the Citigroup Distribution, the Company and Citigroup and its
affiliates entered into a transition services agreement for the provision
of certain of these services, tradename and trademark and similar
agreements related to the use of trademarks, logos and tradenames and an
amendment to the March 26, 2002 Intercompany Agreement with Citigroup.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

105



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Adoption of New Accounting Standards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | Consolidation of Variable Interest Entities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | In December 2003, the Financial Accounting Standards Board (FASB) issued
Revised Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46R). FIN 46R clarifies the application of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated
financial support. FIN 46R separates entities into two groups: (1) those
for which voting interests are used to determine consolidation and (2)
those for which variable interests are used to determine consolidation.
FIN 46R clarifies how to identify a variable interest entity (VIE) and how
to determine when a business enterprise should include the assets,
liabilities, non-controlling interests and results of activities of a VIE
in its consolidated financial statements. A company that absorbs a
majority of a VIEs expected losses, receives a majority of a VIEs
expected residual returns, or both, is the primary beneficiary and is
required to consolidate the VIE into its financial statements. FIN 46R
also requires disclosure of certain information where the reporting company
is the primary beneficiary or holds a significant variable interest in a
VIE (but is not the primary beneficiary).
|  
|   |  | FIN 46R is effective for public companies that have interests in VIEs or
potential VIEs that are special-purpose entities for periods ending after
December 15, 2003. Application by public companies for all other types of
entities is required for periods ending after March 15, 2004. The Company
has chosen to adopt FIN 46R effective December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | The adoption of FIN 46R did not have any impact on the Companys
consolidated financial condition or results of operations as no
consolidation was required. However, the Company holds interests in hedge
fund investments that are considered significant under FIN 46R, and the
hedge funds are accounted for under the equity method of accounting and are
included in other invested assets in the consolidated balance sheet.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | Hedge funds are unregistered private investment partnerships, funds or
pools that may invest and trade in many different markets, using a variety
of strategies and instruments (including securities, non-securities and
derivatives). The three hedge funds that were determined to be significant
VIEs have a total value for all investors combined of approximately $326.2
million at December 31, 2003. The Companys share of these funds has a
carrying value of approximately $93.0 million at December 31, 2003. The
Companys involvement with these funds began in the third quarter of 2002.
There are various purposes of the Companys involvement in these funds,
including but not limited to the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



| |  |  | To seek capital appreciation by investing and trading in
securities, including without limitation investments in common stock,
bonds, notes, debentures, investment contracts, partnership interests,
options, warrants.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | To buy and sell U.S. and non-U.S. assets with a primary focus on
a diversified pool of structured mortgage and asset-backed securities
offering attractive and relative value.                                          
|
| |  |  | To exploit arbitrage opportunities in a broad range of equity and
fixed income markets.                                                                                                                                 



| |  | The Company does not have any unfunded commitments associated with these
hedge fund investments, and its exposure to loss is limited to the
investment carrying amounts reported in the consolidated balance sheet.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

106



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Retirement-Plan Disclosures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | In December 2003, the FASB issued a revised Statement of Financial
Accounting Standards No. 132, Employers Disclosures about Pensions and
Other Postretirement Benefits (Revised FAS 132). The Revised FAS 132 does
not change the measurement or recognition provisions required by FASB
Statements No. 87, Employers Accounting for Pensions, No. 88,
Employers Accounting for Settlements and Curtailments of Defined Benefits
Pension Plans and Termination of Benefits, and No. 106, Employers
Accounting for Postretirement Benefits Other Than Pensions. This
statement retains the disclosure requirements of the original FAS 132
issued in February 1998 and requires additional disclosures about the
assets, obligations, cash flows and net periodic benefit cost of defined
benefit pension plans and other defined benefit postretirement plans. The
Revised FAS 132 is effective for fiscal years ending after December 15,
2003, except for disclosures of estimated future benefit payments, which
are effective for fiscal years ending after June 15, 2004. Interim period
disclosures are effective for interim periods beginning after December 15,
2003. Effective December 31, 2003, the Company adopted the Revised FAS
132.                                                                                                                                                         
|  
|   |  | The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | Effective December 31, 2003, the Company adopted FASB Emerging Issues Task
Force (EITF) Issue 03-01, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments (EITF 03-01). EITF 03-01
requires that certain quantitative and qualitative disclosures be made for
debt and marketable equity securities classified as available for sale or
held to maturity that are impaired at the balance sheet date but for which
an other-than-temporary impairment has not been recognized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | Stock-Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | In December 2002, the FASB issued Statement of Financial Standards No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure (FAS
148), an amendment to FASB Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (FAS 123). Provisions of
this statement provide two additional alternative transition methods:
modified prospective method and retroactive restatement method, for an
entity that voluntarily changes to the fair value based method of
accounting for stock-based employee compensation. The statement eliminates
the use of the original FAS 123 prospective method of transition
alternative for those entities that change to the fair value based method
in fiscal years beginning after December 15, 2003. It also amends the
disclosure provisions of FAS 123 to require prominent annual disclosure
about the effects on reported net income in the Summary of Significant
Accounting Policies and also requires disclosure about these effects in
interim financial statements. These provisions are effective for financial
statements for fiscal years ending after December 15, 2002. Accordingly,
the Company adopted the applicable disclosure requirements of this
statement beginning with year-end 2002 reporting. The transition
provisions of this statement apply upon adoption of the FAS 123 fair value
based method.
|  
|   |  | Effective January 1, 2003, the Company adopted the fair value method of
accounting for its employee stock-based compensation plans as defined in
FAS 123. FAS 123 indicates that the fair value based method is the
preferred method of accounting. The Company has elected to use the
prospective recognition transition alternative of FAS 148. Under this
alternative only the awards granted, modified, or settled after January 1,
2003 will be accounted for in accordance with the fair value method. The
adoption of FAS 123 did not have a significant impact on the Companys
results of operations, financial condition or liquidity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

107



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | Effective January 1, 2003, the Company adopted FASB Statement of Financial
Accounting Standards No. 150 (FAS 150), Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
FAS 150 requires an issuer to classify the following instruments as
liabilities (or assets in some circumstances):



| |  |  | A financial instrument issued in the form of shares that is
mandatorily redeemable  that embodies an unconditional obligation
requiring the issuer to redeem it by transferring its assets at a
specified or determinable date (or dates) or upon an event that is
certain to occur;                                                                                                                                              
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | A financial instrument, other than an outstanding share, that, at
inception, embodies an obligation to repurchase the issuers equity
shares, or is indexed to such an obligation, and that requires or may
require the issuer to settle the obligation by transferring assets
(for example, a forward purchase contract or written put option on the
issuers equity shares that is to be physically settled or net cash
settled);
|
| |  |  | A financial instrument that embodies an unconditional obligation,
or a financial instrument other than an outstanding share that
embodies a conditional obligation, that the issuer must or may settle
by issuing a variable number of its equity shares,                                                                                                                                                                          



| |  | if, at inception, the monetary value of the obligation is based solely or
predominantly on any of the following: (a) a fixed monetary amount known at
inception, (b) variations in something other than the fair value of the
issuers equity shares, or (c) variations inversely related to changes in
the fair value of the issuers equity shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The adoption of FAS 150 did not impact the Companys consolidated
financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Business Combinations, Goodwill and Other Intangible Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Effective January 1, 2002, the Company adopted FASB Statements of Financial
Accounting Standards No. 141, Business Combinations (FAS 141) and No.
142, Goodwill and Other Intangible Assets (FAS 142). These standards
change the accounting for business combinations by, among other things,
prohibiting the prospective use of pooling-of-interests accounting and
requiring companies to stop amortizing goodwill and certain intangible
assets with an indefinite useful life created by business combinations
accounted for using the purchase method of accounting. Instead, goodwill
and intangible assets deemed to have an indefinite useful life will be
subject to an annual review for impairment. Other intangible assets that
are not deemed to have an indefinite useful life will continue to be
amortized over their useful lives.

108



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued                                                                                                                                              
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company stopped amortizing goodwill on January 1, 2002. Net income and
earnings per share adjusted to exclude goodwill amortization expense for
the year ended December 31, 2001 is as follows:

|                                                                     |  |      |         | 
|-------------------------------------------------------------------- |  | ---- | ------- | 
|(for the year ended December 31, in millions, except per share data) |  | 2001
|                                                                     |  |     
|Net income                                                           |  |      |         | 
|Reported net income                                                  |  | $    | 1,065.4 | 
|Goodwill amortization                                                |  |      | 71.8    | 
|                                                                     |  |      |         | 
|Adjusted net income                                                  |  | $    | 1,137.2 | 
|                                                                     |  |      |         | 
|Basic and diluted earnings per share                                 |  |      |         | 
|Reported earnings per share                                          |  | $    | 1.39    | 
|Goodwill amortization                                                |  |      | 0.09    | 
|                                                                     |  |      |         | 
|Adjusted earnings per share                                          |  | $    | 1.48    | 
|                                                                     |  |      |         | 



| |  | During the quarter ended March 31, 2002, the Company performed the
transitional impairment tests using the fair value approach required by FAS
142. Based on these tests, the Company impaired $220.0 million after tax
of goodwill and $22.6 million after tax of indefinite-lived intangible
assets representing the value of insurance operating licenses, all
attributable to The Northland Company and subsidiaries (Northland), as a
cumulative effect adjustment as of January 1, 2002. The fair value of the
Northland reporting unit was based on the use of a multiple of earnings
model. The fair value of Northlands indefinite-lived intangible assets
was based on the present value of estimated net cash flows. The Northland
reporting unit is a component of the Commercial Lines operating segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Accounting for Derivative Instruments and Hedging Activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Effective January 1, 2001, the Company adopted FASB Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities (FAS 133). 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 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.
|
| |  | As a result of adopting FAS 133, the Company recorded a benefit of $4.5
million after tax, reflected as a cumulative effect adjustment in the
consolidated statement of income and a charge of $4.0 million after tax,
reflected as a cumulative effect adjustment in the accumulated other
changes in equity from nonowner sources section of shareholders equity.
In addition, the Company redesignated certain investments as trading from
available for sale in accordance with the transition provisions of FAS 133
resulting in a gross gain of $8.0 million after tax, reflected in net
realized investment gains.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

109



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In April 2003, the FASB issued Statement of Financial Standards No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (FAS 149), which amends and clarifies the accounting for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities under FAS 133. FAS 149
amends FAS 133 for decisions made as part of the Derivatives Implementation
Group process that effectively required amendments to FAS 133. FAS 149
also clarifies under what circumstances a contract with an initial net
investment and purchases and sales of when-issued securities that do not
yet exist meet the characteristics of a derivative. In addition, it
clarifies when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. FAS 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of FAS 149 did
not have a significant impact on the Companys results of operations,
financial condition or liquidity.
|  
|   |  | Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | Effective April 1, 2001, the Company adopted EITF Issue 99-20, Recognition
of Interest Income and Impairment on Purchased and Retained Beneficial
Interests in Securitized Financial Assets (EITF 99-20). EITF 99-20
provides new guidance on the recognition and measurement of interest income
and impairment on certain investments, e.g., certain asset-backed
securities. The recognition of impairment resulting from the adoption of
EITF 99-20 is to be recorded as a cumulative effect adjustment as of the
beginning of the fiscal quarter in which it is adopted. Interest income on
beneficial interests falling within the scope of EITF 99-20 is to be
recognized prospectively. As a result of adopting EITF 99-20, the Company
recorded a charge of $1.3 million after tax, reflected as a cumulative
effect adjustment. The implementation of this EITF 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, including instruments subject to
securities lending agreements, 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 shareholders equity.                                                                                                                                                                                      
|  
|   |  | Equity securities, which include common and nonredeemable preferred stocks,
are classified as available for sale and carried at fair value based on
quoted market prices. Changes in fair values of equity securities, net of
income tax, are charged or credited directly to shareholders equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | 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 current real estate financing market returns. Impaired
loans were not significant at December 31, 2003 and 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

110



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|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
acquisition by internal analysis or external appraisers, using discounted
cash flow analyses and other acceptable techniques. Thereafter, an
impairment is taken if the carrying value of the property exceeds its
current fair value less estimated costs to sell.                                                                                                                                                                                              
|  
|   |  | 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.                                                                                                                                                                                                             
|  
|   |  | Trading securities and related liabilities are normally held for periods of
less than six months. These investments are marked to market with the
change recognized in net investment income during the current period.                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | Short-term securities, consisting primarily of money market instruments and
other debt issues purchased with a maturity of less than one year, are
carried at amortized cost, which approximates fair value.                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | Other invested assets include certain private equity securities along with
partnership investments and real estate joint ventures and are accounted
for on the equity method of accounting. Undistributed income is reported
in net investment income.                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | Investment Gains and Losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | Net 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. A decline in the value of a security below its
amortized cost basis is assessed to determine if the decline is
other-than-temporary. If so, the security is deemed to be impaired, and a
charge is recorded in net 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. Such
recoverables are reported net of an allowance for estimated uncollectible
reinsurance recoverables and amounts due from known reinsurer insolvencies.
The Company evaluates and monitors the financial condition of its
reinsurers under voluntary reinsurance arrangement 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
insurance contracts, primarily commissions and premium taxes, are deferred
and amortized pro rata over the contract periods in which the related
premiums are earned. Deferred acquisition costs are reviewed to determine
if they are recoverable from future income, and if not, are charged to
expense. Future investment income attributable to related premiums is
taken into account in measuring the recoverability of the carrying value of
this asset. 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.                                                                                                                                                                                                   

111



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Goodwill and Intangible Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | The Company adopted FAS 141 and FAS 142 effective January 1, 2002. Upon
adoption of FAS 141 and FAS 142, the Company stopped amortizing goodwill.
Instead, goodwill is tested for impairment at least annually using a
two-step process. The first step is performed to identify potential
impairment and, if necessary, the second step is performed for the purpose
of measuring the amount of impairment, if any. Other intangible assets
that are not deemed to have an indefinite useful life continue to be
amortized over their useful lives. The Company does not have
indefinite-lived intangible assets as of December 31, 2003.                                                                                                                                                                                  
|  
|   |  | The carrying amount of intangible assets that are not deemed to have an
indefinite useful life is regularly reviewed for indicators of impairments
in value in accordance with FAS 144. Impairment is recognized only if the
carrying amount of the intangible asset is not recoverable from its
undiscounted cash flows and is measured as the difference between the
carrying amount and the fair value of the asset.                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | Receivables for Investment Sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | Receivables for investment sales represent amounts due the Company from
investment brokers for securities sold, which are recorded as of trade
date, for which the Company, in the normal course of securities settlement,
has not yet received the proceeds.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | 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, 2003 and 2002 are $1.325 billion and $1.370 billion,
respectively, of reserves related to workers compensation that have been
discounted using an interest rate of 5%. Also included at December 31,
2003 and 2002 are $445.4 million and $456.1 million, respectively, of
reserves related to certain fixed and determinable asbestos-related
settlements, where all payment amounts and their timing are known, that
have been discounted using a range of interest rates of 1.56% to 5.50%.
|  
|   |  | 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. The reserves are also reviewed
periodically by a qualified actuary employed by the Company. 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 financial condition and
could occur in a future period.                                                         
|  
|   |  | Payables for Investment Purchases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Payables for investment purchases represent amounts owed by the Company to
investment brokers for securities purchased, which are recorded as of trade
date, for which the Company, in the normal course of securities settlement,
has not yet settled the purchase.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

112



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Securities Lending Payable and Dollar-Roll Repurchase Agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | The Company engages in securities lending activities from which it
generates net investment income from the lending of certain of its
investments to other institutions for short periods of time. The Company
either receives cash or marketable securities as collateral equal to at
least the market value of the loaned securities plus accrued interest.
Collateral is marked to market daily. In those cases where cash collateral
is received, the Company reinvests the collateral in a short-term
investment pool, the loaned securities remain a recorded asset of the
Company and a liability is recorded to recognize the Companys obligation
to return the collateral at the end of the loan. Where marketable
securities have been received as collateral, the collateral is held by a
third party custodian (tri-party lending agreement), and the Company has
the right to access the collateral only in the event that the institution
borrowing the Companys securities is in default under the lending
agreement. In those cases where marketable securities are received as
collateral, the Company does not recognize the receipt of the collateral
held by the third party custodian or the obligation to return the
collateral. The loaned securities remain a recorded asset of the Company.
|  
|   |  | The Company also engages in dollar-roll repurchase activities from which it
generates net investment income from selling mortgage-backed securities and
simultaneously agreeing to repurchase from the same party substantially the
same securities. The Company invests the proceeds from the sale in a
short-term investment pool, the sold securities remain a recorded asset of
the Company and a liability is recorded to recognize the Companys
obligation to repurchase substantially the same securities at the end of a
specified 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, 2003 and 2002, the Company had a liability of $180.3 million and $171.1
million, respectively, for guaranty fund and other assessments and related
recoveries of $15.1 million and $14.3 million, respectively. The liability
for such assessments and their related recoveries are not discounted for
the time value of money. 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.                                                                                                                                                                                                                                                   
|  
|   |  | Also included in other liabilities is an accrual for policyholder
dividends. Certain insurance contracts, primarily workers compensation,
are participating whereby dividends are paid to policyholders in accordance
with contract provisions. Net written premiums for participating dividend
policies were approximately 1%, 2% and 2% of total Company net written
premiums for the years ended December 31, 2003, 2002 and 2001,
respectively. Policyholder dividends are accrued against earnings using
best available estimates of amounts to be paid. Policyholder dividends
were $13.1 million, $14.4 million and $28.3 million for the years ended
December 31, 2003, 2002 and 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | Statutory Accounting Practices                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | The Companys insurance subsidiaries, domiciled principally in the State of
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 are
those practices that are incorporated directly or by reference in state
laws, regulations, and general administrative rules applicable to all
insurance enterprises domiciled in a particular state. Permitted statutory
accounting practices include practices not prescribed by the domiciliary
state, but allowed by the domiciliary state regulatory authority. The
impact of any permitted accounting practices on statutory surplus of the
Company is not material.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

113



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | 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. Premium balances receivable are reported net of an allowance
for estimated uncollectible premium amounts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | Ceded premiums are charged to income over the applicable term of the
various reinsurance contracts with third party reinsurers. Prepaid
reinsurance premiums represent the unexpired portion of premiums ceded to
reinsurers and are reported as part of other assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Fee Income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | Fee income includes servicing fees from carriers and revenues from large
deductible policies and service contracts and is recognized pro rata over
the contract or policy periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | Recoveries From Former Affiliate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | Recoveries from former affiliate consist of the recoveries under the
Citigroup indemnification agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | 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 net realized investment gains and losses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | Federal Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | The provision for federal income taxes comprises 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 has an employee stock incentive compensation plan that includes
stock option programs and restricted stock programs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | For stock-based employee awards granted, modified, or settled after
December 31, 2002, the Company applies the FAS 123 fair value method of
accounting. Under this method, compensation cost is measured at the grant
date based on the fair value of the award and recognized ratably over the
vesting period. For restricted stock the fair value is measured at the
market price of a share on the grant date while for stock options the fair
value is derived by the application of an option pricing model at date of
grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | For stock-based employee awards granted prior to January 1, 2003, the
Company accounts for these awards under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees, and related interpretations.
The Company continues to apply the APB 25 accounting guidance for these
awards as the Company elected to use the prospective recognition transition
alternative of FAS 148. Under this method, compensation cost is measured
at grant date based upon the market value of the underlying stock at the
date of grant less any amount that the employee is required to pay and
recognized ratably over the vesting period. For employee restricted stock
awards, the awards are granted at the market value of the underlying stock
on grant date and accordingly the market value of these awards is
recognized as compensation expense ratably over the vesting period. For
employee stock option awards, the awards are granted at an exercise price
equal to the market value of the underlying common stock on the date of the
grant and accordingly there has been no employee compensation expense
recognized in earnings for the stock option awards granted prior to
adoption of the FAS 123 fair value method of accounting on January 1, 2003.

114



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Additionally, in conjunction with the Citigroup Distribution in August
2002, the Company issued replacement awards for Citigroup awards. These
replacement awards were issued at the intrinsic value of each Citigroup
option and the ratio of exercise price per share to the market value per
share was not reduced. Accordingly there was no compensation cost
recognized in earnings for these replacement awards.                                                                                                                                                
|  
|   |  | In conjunction with and subsequent to the IPO in March 2002 and the
Citigroup Distribution in August 2002, the Companys stock option awards
provide for the purchase of the Companys class A common shares. Prior to
2002, the stock option awards provided for the purchase of Citigroup common
stock. The following tables illustrate the effect on net income (loss) and
earnings per share for each period indicated as if the Company had applied
the fair value recognition provisions of FAS 123 to all outstanding and
unvested stock-based employee awards.
|  
|   |  | The 2003 and 2002 effect of applying the fair value based method to all
outstanding and unvested stock-based employee awards in the Companys class
A common shares is as follows:                                                                                                                                                                                                                                                                                                                                                                                    

|                                                                                                                          |                       |      |         |      |  |   |        |       |  
|------------------------------------------------------------------------------------------------------------------------- | --------------------- | ---- | ------- | ---- |  | - | ------ | ----- | -
|(for the year ended December 31, in millions, except per share data)                                                      |                       | 2003 |         | 2002
|                                                                                                                          |                       |      |         |     
|Net income (loss), as reported                                                                                            |                       | $    | 1,696.0 |      |  | $ | (27.0  | )    
|Add:      Stock-based employee compensation expense
included in
reported net income (loss), net of related tax effects(1) |                       |      | 18.2    |      |  |   | 17.0   |      
|Deduct: Stock-based employee compensation expense determined
under fair value based method, net of related tax effects(2) |                       |      | (73.2   | )    |  |   | (96.1  | )    
|                                                                                                                          |                       |      |         |      |  |   |        |      
|Net income (loss), pro forma                                                                                              |                       | $    | 1,641.0 |      |  | $ | (106.1 | )    
|                                                                                                                          |                       |      |         |      |  |   |        |      
|Earnings per share                                                                                                        |                       |      |         |      |  |   |        |      
|                                                                                                                          | Basic  as reported   |      | $       | 1.69 |  |   | $      | (0.03 | )
|                                                                                                                          | Basic  pro forma     |      |         | 1.64 |  |   |        | (0.11 | )
|                                                                                                                          | Diluted  as reported |      |         | 1.68 |  |   |        | (0.03 | )
|                                                                                                                          | Diluted  pro forma   |      |         | 1.63 |  |   |        | (0.11 | )
|                                                                                                                          |                       |      |         |      |  |   |        |      



|(1) |  | Represents compensation expense on all restricted stock awards
and on stock option awards granted after January 1, 2003.
|--- |  | ------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes the compensation expense added back in (1).                                                                    

115



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued                                                                                                         
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The 2001 effect of applying the fair value based method to all outstanding
and unvested stock-based employee awards in Citigroups common stock is as
follows:

|                                                                                                                          |                                 |      |         |      | 
|------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ---- | ------- | ---- | 
|(for the year ended December 31, in millions, except per share data)                                                      |                                 | 2001
|                                                                                                                          |                                 |     
|Net income, as reported                                                                                                   |                                 | $    | 1,065.4 |     
|Add:      Stock-based employee compensation expense included in
reported net income, net of related tax effects(1)        |                                 |      | 19.4    |     
|Deduct: Stock-based employee compensation expense determined
under fair value based method, net of related tax effects(2) |                                 |      | (68.1   | )   
|                                                                                                                          |                                 |      |         |     
|Net income, pro forma                                                                                                     |                                 | $    | 1,016.7 |     
|                                                                                                                          |                                 |      |         |     
|Earnings per share                                                                                                        |                                 |      |         |     
|                                                                                                                          | Basic and diluted  as reported |      | $       | 1.39 | 
|                                                                                                                          | Basic and diluted  pro forma   |      |         | 1.32 | 
|                                                                                                                          |                                 |      |         |     



|(1) |  | Restricted stock compensation expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes the restricted stock compensation expense added back in
(1).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | Earnings per Share (EPS)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | EPS has been computed in accordance with Financial Accounting Standards No.
128, Earnings per Share. Basic EPS is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding during the period. The computation of diluted EPS
reflects the effect of potentially dilutive outstanding employee
stock-based awards, principally the incremental shares which are assumed to
be issued under the Companys 2002 Incentive Plan. Excluded from the
computation of diluted EPS were 38.6 million of potentially dilutive shares
related to convertible junior subordinated notes because the contingency
conditions for their issuance have not been satisfied. Shares for the
years ended December 31, 2002 and 2001 have been adjusted to give effect to
the recapitalization in March 2002, prior to the IPO, whereby the
outstanding shares of common stock (1,500 shares) were changed into 269.0
million shares of class A common stock and 500.0 million shares of class B
common stock.

116



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued                                                                        
|-- |  | -----------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The following is a reconciliation of the income and share data used in the
basic and diluted earnings per share computations:

|                                                                                            |  |      |         |      |  |      |        |   |  |   |         | 
|------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------ | - |  | - | ------- | 
|(for the year ended December 31, in millions, except                                        |  |      |         |      |  |      |        |   |  |   |         | 
|per share amounts)                                                                          |  | 2003 |         | 2002 |  | 2001
|                                                                                            |  |      |         |      |  |     
|Income before cumulative effect of accounting changes                                       |  | $    | 1,696.0 |      |  | $    | 215.6  |   |  | $ | 1,062.2 | 
|Cumulative effect of accounting changes                                                     |  |      |        |      |  |      | (242.6 | ) |  |   | 3.2     | 
|                                                                                            |  |      |         |      |  |      |        |   |  |   |         | 
|Net income (loss) available to common shareholders
for basic EPS (numerator)                |  |      | 1,696.0 |      |  |      | (27.0  | ) |  |   | 1,065.4 | 
|Effect of dilutive securities                                                               |  |      |        |      |  |      |       |   |  |   |        | 
|                                                                                            |  |      |         |      |  |      |        |   |  |   |         | 
|Net income (loss) available to common shareholders
for diluted EPS (numerator)              |  | $    | 1,696.0 |      |  | $    | (27.0  | ) |  | $ | 1,065.4 | 
|                                                                                            |  |      |         |      |  |      |        |   |  |   |         | 
|Weighted average common shares outstanding applicable
to basic EPS (denominator)            |  |      | 1,002.0 |      |  |      | 949.5  |   |  |   | 769.0   | 
|Effect of dilutive shares                                                                   |  |      | 5.3     |      |  |      | 1.7    |   |  |   |        | 
|                                                                                            |  |      |         |      |  |      |        |   |  |   |         | 
|Adjusted weighted average common shares outstanding
applicable to diluted EPS (denominator) |  |      | 1,007.3 |      |  |      | 951.2  |   |  |   | 769.0   | 
|                                                                                            |  |      |         |      |  |      |        |   |  |   |         | 
|Basic earnings per share                                                                    |  |      |         |      |  |      |        |   |  |   |         | 
|Income before cumulative effect of accounting changes                                       |  | $    | 1.69    |      |  | $    | 0.23   |   |  | $ | 1.38    | 
|Cumulative effect of accounting changes                                                     |  |      |        |      |  |      | (0.26  | ) |  |   | 0.01    | 
|                                                                                            |  |      |         |      |  |      |        |   |  |   |         | 
|Net income (loss)                                                                           |  | $    | 1.69    |      |  | $    | (0.03  | ) |  | $ | 1.39    | 
|                                                                                            |  |      |         |      |  |      |        |   |  |   |         | 
|Diluted earnings per share                                                                  |  |      |         |      |  |      |        |   |  |   |         | 
|Income before cumulative effect of accounting changes                                       |  | $    | 1.68    |      |  | $    | 0.23   |   |  | $ | 1.38    | 
|Cumulative effect of accounting changes                                                     |  |      |        |      |  |      | (0.26  | ) |  |   | 0.01    | 
|                                                                                            |  |      |         |      |  |      |        |   |  |   |         | 
|Net income (loss)                                                                           |  | $    | 1.68    |      |  | $    | (0.03  | ) |  | $ | 1.39    | 
|                                                                                            |  |      |         |      |  |      |        |   |  |   |         | 



| |  | Derivative Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company uses derivative financial instruments, including interest rate
swaps, equity swaps, credit derivatives, options, forward contracts and
financial futures, as a means of hedging exposure to interest rate, equity
price change and foreign currency risk. The Companys insurance
subsidiaries do not hold or issue derivative instruments for trading
purposes. The Company recognizes all derivatives, including certain
derivative instruments embedded in other contracts, as either assets or
liabilities in the consolidated balance sheet and measures those
instruments at fair value. Where applicable, 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. Derivatives that do not qualify for hedge accounting
are marked to market with the changes in market value reflected in the
consolidated statement of income.
|
| |  | Interest rate swaps, equity swaps, credit derivatives, options and forward
contracts were not significant at December 31, 2003 and 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

117



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Nature of Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | The Company comprises two business segments: Commercial Lines and Personal
Lines.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | Commercial Lines                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Commercial Lines offers a broad array of property and casualty insurance
and insurance-related services. Protection is afforded to customers of
Commercial Lines for the risks of property loss such as fire and windstorm,
financial loss such as business interruption from property damage,
liability claims arising from operations and workers compensation benefits
through insurance products where risk is transferred from the customer to
Commercial Lines. Coverages include workers compensation, general
liability, commercial multi-peril, commercial automobile, property,
fidelity and surety, professional liability, and several miscellaneous
coverages.                                                                                              
|  
|   |  | Commercial Lines is organized into five marketing and underwriting groups,
each of which focuses on a particular client base or product grouping to
provide products and services that specifically address customers needs.
The Core marketing and underwriting groups include National Accounts,
Commercial Accounts and Select Accounts, and Specialty includes Bond and
Gulf.                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | National Accounts provides casualty products to large companies, with
particular emphasis on workers compensation, general liability and
automobile liability. Products are marketed through national and regional
brokers. Programs offered by National Accounts include risk management
services, such as claims settlement, loss control and risk management
information services, which are 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 residual
market business, which primarily offers workers compensation products and
services to the involuntary market.
|  
|   |  | Commercial Accounts serves primarily mid-sized businesses for casualty
products and large, mid-sized and small 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 a specialty unit which primarily writes coverages for the
transportation industry and has dedicated operations that exclusively
target the construction industry, providing insurance and risk management
services for virtually all areas of construction. These dedicated
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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Bond markets its products to national, mid-sized and small customers as
well as individuals, and distributes them through both national and
wholesale brokers, and retail agents and regional brokers. Bonds range of
products includes fidelity and surety bonds, directors and officers
liability insurance, errors and omissions insurance, professional liability
insurance, employment practices liability insurance, fiduciary liability
insurance, and other related coverages.                                                                                                                                                                                                                                                                                  
|  
|   |  | Gulf markets products to national, mid-sized and small customers, and
distributes them through both wholesale brokers and retail agents. Gulf
provides a broad range of specialty coverages, including management and
professional liability, excess and surplus lines, environmental, umbrella
and fidelity. Gulf also provides insurance products specifically designed
for financial institutions, the entertainment industry and sports
organizations.                                                                                                                                                                                                                                                                                                                 

118



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
|-- |  | -----------------------------------------------------
|  
|   |  | Net written premiums by market were as follows:      

|                                              |                     |                 |         |         |         |      |         |         |         |   |         |         |         | 
|--------------------------------------------- | ------------------- | --------------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|(for the year ended December 31, in millions) |                     | 2003            |         | 2002    |         | 2001
|                                              |                     |                 |         |         |         |     
|Core                                          |                     |                 |         |         |         |      |         |         |         |   |         |        
|                                              | National Accounts   |                 | $       | 902.8   |         |      | $       | 734.6   |         |   | $       | 418.9   |        
|                                              | Commercial Accounts |                 |         | 3,725.7 |         |      |         | 3,556.1 |         |   |         | 2,407.1 |        
|                                              | Select Accounts     |                 |         | 2,047.6 |         |      |         | 1,869.5 |         |   |         | 1,713.2 |        
|                                              |                     |                 |         |         |         |      |         |         |         |   |         |         |        
|                                              |                     | Total Core      |         |         | 6,676.1 |      |         |         | 6,160.2 |   |         |         | 4,539.2 | 
|                                              |                     |                 |         |         |         |      |         |         |         |   |         |         |        
|Specialty                                     |                     |                 |         |         |         |      |         |         |         |   |         |        
|                                              | Bond                |                 |         | 780.5   |         |      |         | 629.9   |         |   |         | 590.2   |        
|                                              | Gulf                |                 |         | 662.8   |         |      |         | 579.4   |         |   |         | 608.2   |        
|                                              |                     |                 |         |         |         |      |         |         |         |   |         |         |        
|                                              |                     | Total Specialty |         |         | 1,443.3 |      |         |         | 1,209.3 |   |         |         | 1,198.4 | 
|                                              |                     |                 |         |         |         |      |         |         |         |   |         |         |        
|Total net written premiums                    |                     | $               | 8,119.4 |         |         | $    | 7,369.5 |         |         | $ | 5,737.6 |        
|                                              |                     |                 |         |         |         |      |         |         |         |   |         |         |        



| |  | Personal Lines                                                                                                                                                                                                                                                                                                                                                                            
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Personal Lines writes virtually all types of property and casualty
insurance covering personal risks. The primary coverages in Personal Lines
are automobile and homeowners insurance sold to individuals. These
products are distributed through independent agents, sponsoring
organizations such as employee and affinity groups, and joint marketing
arrangements with other insurers.
|
| |  | 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.                                                                                         
|
| |  | Net written premiums by product line were as follows:                                                                                                                                                                                                                                                                                                                                     

|                                              |  |      |         |      |  |      |         |  |  |   |         | 
|--------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|(for the year ended December 31, in millions) |  | 2003 |         | 2002 |  | 2001
|                                              |  |      |         |      |  |     
|Automobile                                    |  | $    | 3,053.3 |      |  | $    | 2,842.9 |  |  | $ | 2,590.7 | 
|Homeowners and other                          |  |      | 2,028.1 |      |  |      | 1,732.1 |  |  |   | 1,517.2 | 
|                                              |  |      |         |      |  |      |         |  |  |   |         | 
|Total net written premiums                    |  | $    | 5,081.4 |      |  | $    | 4,575.0 |  |  | $ | 4,107.9 | 
|                                              |  |      |         |      |  |      |         |  |  |   |         | 

119



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Catastrophe Exposure                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | The Company has geographic exposure to catastrophe losses in certain areas
of the country. Catastrophes can be caused by various natural and manmade
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 larger areas, especially those that are
heavily populated. The Company generally seeks to reduce its exposure to
catastrophes through individual risk selection and the purchase of
catastrophe reinsurance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | The Company also has exposure to significant losses from terrorism,
primarily in the commercial property and workers compensation lines of
business. On November 26, 2002, the Terrorism Risk Insurance Act of 2002
(the Terrorism Act) was enacted into Federal law and established a
temporary Federal program in the Department of the Treasury that provides
for a system of shared public and private compensation for insured losses
resulting from acts of terrorism, committed by or on behalf of a foreign
interest. In order for a loss to be covered under the Terrorism Act (i.e.,
subject losses), the loss must be the result of an event that is certified
as an act of terrorism by the U.S. Secretary of Treasury. In the case of a
war declared by Congress, only workers compensation losses are covered by
the Terrorism Act. The Terrorism Insurance Program (the Program) generally
requires that all commercial property casualty insurers licensed in the
U.S. participate in the Program. The Program became effective upon
enactment and terminates on December 31, 2005. The amount of compensation
paid to participating insurers under the Program is 90% of subject losses,
after an insurer deductible, subject to an annual cap. The deductible
under the Program was 7% for 2003 and is 10% for 2004 and 15% for 2005. In
each case, the deductible percentage is applied to the insurers direct
earned premiums from the calendar year immediately preceding the applicable
year. The Program also contains an annual cap that limits the amount of
subject losses to $100 billion aggregate per program year. Once subject
losses have reached the $100 billion aggregate during a program year, there
is no additional reimbursement from the U.S. Treasury and an insurer that
has met its deductible for the program year is not liable for any losses
(or portion thereof) that exceed the $100 billion cap. The Companys
deductible under this federal program is $927.7 million for 2004. The
Company had no terrorism-related losses in 2003.
|  
|2. |  | MERGERS, ACQUISITIONS AND DISPOSITIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | On November 16, 2003, the Company entered into an agreement (the merger
agreement) and plan of merger (the merger) with The St. Paul Companies,
Inc. (St. Paul). The transaction will be treated as a purchase business
combination by the Company of St. Paul under GAAP. In this merger, the
acquired entity (St. Paul) will issue the equity interests, and this
business combination meets the criteria of a reverse acquisition. Each
share of TPC class A and class B common stock will be exchanged for 0.4334
of a share of St. Paul common stock. The transaction is subject to
customary closing conditions, including the approval by the shareholders of
both companies as well as certain regulatory approvals. A special
shareholder meeting to consider and to vote upon the merger has been
scheduled for March 19, 2004. The transaction is expected to close in the
second quarter of 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

120



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|2. |  | MERGERS, ACQUISITIONS AND DISPOSITIONS, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On August 1, 2002, Commercial Insurance Resources, Inc. (CIRI), a
subsidiary of the Company and the holding company for the Gulf Insurance
Group (Gulf), completed its previously announced transaction with a group
of outside investors and senior employees of Gulf. Capital investments
made by the investors and employees included 9.7 million shares of
mandatorily convertible preferred stock for a purchase price of $8.83 per
share, $49.7 million of convertible notes and .4 million common shares for
a purchase price of $8.83 per share, representing a 24% ownership interest,
on a fully diluted basis. The dividend rate on the preferred stock is
6.0%. The interest rate on the notes is 6.0% payable on an interest-only
basis. The notes mature on December 31, 2032. Trident II, L.P., Marsh &
McLennan Capital Professionals Fund, L.P., Marsh & McLennan Employees
Securities Company, L.P. and Trident Gulf Holding, LLC (collectively,
Trident) invested $125.0 million, and a group of approximately 75 senior
employees of Gulf invested $14.2 million. Fifty percent of the Gulf senior
employees investment was financed by CIRI. This financing is
collateralized by the CIRI securities purchased and is forgivable if
Trident achieves certain investment returns. The applicable agreements
provide for registration rights and transfer rights and restrictions and
other matters customarily addressed in agreements with minority investors.
Gulfs results, net of minority interest, are included in the Commercial
Lines segment.
|  
|   |  | On October 1, 2001, the Company paid $329.5 million to Citigroup for The
Northland Company and its subsidiaries and Associates Lloyds Insurance
Company. These entities had a combined net book value of $572.1 million.
The excess of this net book value over the purchase price was reflected as
a contribution to the Company. In addition, on October 3, 2001, the
capital stock of Associates Insurance Company, with a net book value of
$356.5 million, was contributed to the Company. These acquisitions were
accounted for as transfers of net assets between entities under common
control. The prior period financial statements were not restated due to
immateriality.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|3. |  | SEGMENT INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | The Company comprises two reportable business segments: Commercial Lines
and Personal Lines. See note 1  Nature of Operations for a discussion of
the Commercial Lines and Personal Lines segments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

121



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|3. |  | SEGMENT INFORMATION, Continued
|-- |  | ------------------------------

|                                                     |                                  |                          |          |            |         |          |         |            |         |   |          |          |          | 
|---------------------------------------------------- | -------------------------------- | ------------------------ | -------- | ---------- | ------- | -------- | ------- | ---------- | ------- | - | -------- | -------- | -------- | 
|                                                     |                                  |                          |          |            |         |          |         |            |         |   |          | Total   
|                                                     |                                  |                          |          | Commercial |         | Personal |         | Reportable
|(at and for the year ended December 31, in millions) |                                  | Lines                    |          | Lines      |         | Segments
|                                                     |                                  |                          |          |            |         |         
|2003                                                 |                                  |                          |          |            |         |          |         |            |         |   |          |         
|Revenues                                             |                                  |                          |          |            |         |          |         |            |         |   |          |         
|                                                     | Premiums                         |                          | $        | 7,722.8    |         |          | $       | 4,822.6    |         |   | $        | 12,545.4 |         
|                                                     | Net investment income            |                          |          | 1,506.9    |         |          |         | 361.1      |         |   |          | 1,868.0  |         
|                                                     | Fee income                       |                          |          | 560.0      |         |          |         |           |         |   |          | 560.0    |         
|                                                     | Other revenues                   |                          |          | 40.7       |         |          |         | 85.2       |         |   |          | 125.9    |         
|                                                     |                                  |                          |          |            |         |          |         |            |         |   |          |          |         
|                                                     |                                  | Total operating revenues |          | $          | 9,830.4 |          |         | $          | 5,268.9 |   |          | $        | 15,099.3 | 
|                                                     |                                  |                          |          |            |         |          |         |            |         |   |          |          |         
|Amortization and depreciation                        |                                  | $                        | 1,240.8  |            |         | $        | 810.4   |            |         | $ | 2,051.2  |         
|Federal income taxes                                 |                                  |                          | 377.1    |            |         |          | 221.5   |            |         |   | 598.6    |         
|Operating income                                     |                                  |                          | 1,295.0  |            |         |          | 492.5   |            |         |   | 1,787.5  |         
|Assets                                               |                                  |                          | 54,665.2 |            |         |          | 9,907.5 |            |         |   | 64,572.7 |         
|                                                     |                                  |                          |          |            |         |          |         |            |         |   |          |          |         
|2002                                                 |                                  |                          |          |            |         |          |         |            |         |   |          |         
|Revenues                                             |                                  |                          |          |            |         |          |         |            |         |   |          |         
|                                                     | Premiums                         |                          | $        | 6,801.2    |         |          | $       | 4,354.1    |         |   | $        | 11,155.3 |         
|                                                     | Net investment income            |                          |          | 1,495.3    |         |          |         | 384.7      |         |   |          | 1,880.0  |         
|                                                     | Fee income                       |                          |          | 454.9      |         |          |         |           |         |   |          | 454.9    |         
|                                                     | Recoveries from former affiliate |                          |          | 520.0      |         |          |         |           |         |   |          | 520.0    |         
|                                                     | Other revenues                   |                          |          | 32.1       |         |          |         | 80.1       |         |   |          | 112.2    |         
|                                                     |                                  |                          |          |            |         |          |         |            |         |   |          |          |         
|                                                     |                                  | Total operating revenues |          | $          | 9,303.5 |          |         | $          | 4,818.9 |   |          | $        | 14,122.4 | 
|                                                     |                                  |                          |          |            |         |          |         |            |         |   |          |          |         
|Amortization and depreciation                        |                                  | $                        | 1,112.2  |            |         | $        | 739.4   |            |         | $ | 1,851.6  |         
|Federal income taxes (benefit)                       |                                  |                          | (543.3   | )          |         |          | 127.0   |            |         |   | (416.3   | )       
|Operating income (loss)                              |                                  |                          | (125.8   | )          |         |          | 346.9   |            |         |   | 221.1    |         
|Assets                                               |                                  |                          | 54,782.8 |            |         |          | 8,842.5 |            |         |   | 63,625.3 |         
|                                                     |                                  |                          |          |            |         |          |         |            |         |   |          |          |         
|2001                                                 |                                  |                          |          |            |         |          |         |            |         |   |          |         
|Revenues                                             |                                  |                          |          |            |         |          |         |            |         |   |          |         
|                                                     | Premiums                         |                          | $        | 5,447.0    |         |          | $       | 3,963.9    |         |   | $        | 9,410.9  |         
|                                                     | Net investment income            |                          |          | 1,616.3    |         |          |         | 410.2      |         |   |          | 2,026.5  |         
|                                                     | Fee income                       |                          |          | 347.4      |         |          |         |           |         |   |          | 347.4    |         
|                                                     | Other revenues                   |                          |          | 41.4       |         |          |         | 73.3       |         |   |          | 114.7    |         
|                                                     |                                  |                          |          |            |         |          |         |            |         |   |          |          |         
|                                                     |                                  | Total operating revenues |          | $          | 7,452.1 |          |         | $          | 4,447.4 |   |          | $        | 11,899.5 | 
|                                                     |                                  |                          |          |            |         |          |         |            |         |   |          |          |         
|Amortization and depreciation                        |                                  | $                        | 954.0    |            |         | $        | 695.3   |            |         | $ | 1,649.3  |         
|Federal income taxes                                 |                                  |                          | 302.6    |            |         |          | 97.0    |            |         |   | 399.6    |         
|Operating income                                     |                                  |                          | 752.2    |            |         |          | 241.0   |            |         |   | 993.2    |         
|Assets                                               |                                  |                          | 48,234.7 |            |         |          | 8,369.3 |            |         |   | 56,604.0 |         
|                                                     |                                  |                          |          |            |         |          |         |            |         |   |          |          |         



| |  | Operating income (loss) equals net income (loss) excluding the after-tax
impact of net realized investment gains (losses) and cumulative effect of
changes in accounting principles. For 2002 and prior, operating income
also excludes non-recurring restructuring charges related to periods prior
to the spin-off from Citigroup.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

122



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|3. |  | SEGMENT INFORMATION, Continued  
|-- |  | --------------------------------
|  
|   |  | Business Segment Reconciliations

|                                                        |                   |                                      |                        |                        |          |         |          |   |          |         |          |   |          |         |         | 
|------------------------------------------------------- | ----------------- | ------------------------------------ | ---------------------- | ---------------------- | -------- | ------- | -------- | - | -------- | ------- | -------- | - | -------- | ------- | ------- | 
|(at and for the year ended December 31, in millions)    |                   | 2003                                 |                        | 2002                   |          | 2001   
|                                                        |                   |                                      |                        |                        |          |        
|Revenue reconciliation                                  |                   |                                      |                        |                        |          |         |          |   |          |         |          |  
|Earned premiums                                         |                   |                                      |                        |                        |          |         |          |   |          |         |          |  
|                                                        | Commercial Lines: |                                      |                        |                        |          |         |          |   |          |         |          |   |         
|                                                        |                   |                                      | Commercial multi-peril |                        | $        | 2,256.8 |          |   | $        | 1,956.7 |          |   | $        | 1,686.4 |        
|                                                        |                   |                                      | Workers compensation  |                        |          | 1,238.0 |          |   |          | 1,009.8 |          |   |          | 1,017.1 |        
|                                                        |                   |                                      | Commercial automobile  |                        |          | 1,424.6 |          |   |          | 1,310.3 |          |   |          | 920.9   |        
|                                                        |                   |                                      | Property               |                        |          | 1,113.9 |          |   |          | 1,066.6 |          |   |          | 742.7   |        
|                                                        |                   |                                      | Fidelity and surety    |                        |          | 587.9   |          |   |          | 498.8   |          |   |          | 466.5   |        
|                                                        |                   |                                      | General liability      |                        |          | 1,101.6 |          |   |          | 959.0   |          |   |          | 613.4   |        
|                                                        |                   |                                      |                        |                        |          |         |          |   |          |         |          |   |          |         |        
|                                                        |                   |                                      |                        | Total Commercial Lines |          |         | 7,722.8  |   |          |         | 6,801.2  |   |          |         | 5,447.0 | 
|                                                        |                   |                                      |                        |                        |          |         |          |   |          |         |          |   |          |         |        
|                                                        | Personal Lines:   |                                      |                        |                        |          |         |          |   |          |         |          |   |         
|                                                        |                   |                                      | Automobile             |                        |          | 2,954.5 |          |   |          | 2,737.0 |          |   |          | 2,490.6 |        
|                                                        |                   |                                      | Homeowners and other   |                        |          | 1,868.1 |          |   |          | 1,617.1 |          |   |          | 1,473.3 |        
|                                                        |                   |                                      |                        |                        |          |         |          |   |          |         |          |   |          |         |        
|                                                        |                   |                                      |                        | Total Personal Lines   |          |         | 4,822.6  |   |          |         | 4,354.1  |   |          |         | 3,963.9 | 
|                                                        |                   |                                      |                        |                        |          |         |          |   |          |         |          |   |          |         |        
|                                                        |                   |                                      |                        | Total earned premiums  |          |         | 12,545.4 |   |          |         | 11,155.3 |   |          |         | 9,410.9 | 
|Net investment income                                   |                   |                                      | 1,868.0                |                        |          |         | 1,880.0  |   |          |         | 2,026.5  |  
|Fee income                                              |                   |                                      | 560.0                  |                        |          |         | 454.9    |   |          |         | 347.4    |  
|Recoveries from former affiliates                       |                   |                                      |                       |                        |          |         | 520.0    |   |          |         |         |  
|Other revenues                                          |                   |                                      | 125.9                  |                        |          |         | 112.2    |   |          |         | 114.7    |  
|                                                        |                   |                                      |                        |                        |          |         |          |   |          |         |          |   |          |         |        
|Total operating revenues for reportable segments        |                   |                                      | 15,099.3               |                        |          |         | 14,122.4 |   |          |         | 11,899.5 |  
|Interest Expense and Other                              |                   |                                      | 1.9                    |                        |          |         | .6       |   |          |         | 8.5      |  
|Net realized investment gains                           |                   |                                      | 38.0                   |                        |          |         | 146.7    |   |          |         | 322.5    |  
|                                                        |                   |                                      |                        |                        |          |         |          |   |          |         |          |   |          |         |        
|                                                        |                   | Total consolidated revenues          |                        | $                      | 15,139.2 |         |          | $ | 14,269.7 |         |          | $ | 12,230.5 |        
|                                                        |                   |                                      |                        |                        |          |         |          |   |          |         |          |   |          |         |        
|Income reconciliation, net of tax and minority
interest |                   |                                      |                        |                        |          |         |          |   |          |         |          |  
|Total operating income for reportable segments          |                   | $                                    | 1,787.5                |                        |          | $       | 221.1    |   |          | $       | 993.2    |  
|Interest Expense and Other(1)                           |                   |                                      | (112.2                 | )                      |          |         | (102.9   | ) |          |         | (137.5   | )
|                                                        |                   |                                      |                        |                        |          |         |          |   |          |         |          |   |          |         |        
|                                                        |                   | Total operating income               |                        |                        | 1,675.3  |         |          |   | 118.2    |         |          |   | 855.7    |        
|Net realized investment gains                           |                   |                                      | 20.7                   |                        |          |         | 99.0     |   |          |         | 209.9    |  
|Cumulative effect of changes in accounting principles   |                   |                                      |                       |                        |          |         | (242.6   | ) |          |         | 3.2      |  
|Restructuring charge                                    |                   |                                      |                       |                        |          |         | (1.6     | ) |          |         | (3.4     | )
|                                                        |                   |                                      |                        |                        |          |         |          |   |          |         |          |   |          |         |        
|                                                        |                   | Total consolidated net income (loss) |                        | $                      | 1,696.0  |         |          | $ | (27.0    | )       |          | $ | 1,065.4  |        
|                                                        |                   |                                      |                        |                        |          |         |          |   |          |         |          |   |          |         |        
|Asset reconciliation                                    |                   |                                      |                        |                        |          |         |          |   |          |         |          |  
|Total assets for reportable segments                    |                   | $                                    | 64,572.7               |                        |          | $       | 63,625.3 |   |          | $       | 56,604.0 |  
|Other assets(2)                                         |                   |                                      | 299.3                  |                        |          |         | 512.2    |   |          |         | 1,173.8  |  
|                                                        |                   |                                      |                        |                        |          |         |          |   |          |         |          |   |          |         |        
|                                                        |                   | Total consolidated assets            |                        | $                      | 64,872.0 |         |          | $ | 64,137.5 |         |          | $ | 57,777.8 |        
|                                                        |                   |                                      |                        |                        |          |         |          |   |          |         |          |   |          |         |        



|(1) |  | The primary component of Interest Expense and Other is after-tax
interest expense of $104.9 million, $99.6 million and $133.2 million in
2003, 2002 and 2001, respectively.  
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Other assets consist primarily of goodwill in 2003 and 2002, a
receivable under the Citigroup indemnification agreement in 2002, and
the investment in CitiInsurance in 2001.

123



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|3. |  | SEGMENT INFORMATION, Continued                                                                                                                                                                                        
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Enterprise-Wide Disclosures                                                                                                                                                                                           
|  
|   |  | 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.
|  
|4. |  | INVESTMENTS                                                                                                                                                                                                           
|  
|   |  | Fixed Maturities                                                                                                                                                                                                      
|  
|   |  | The amortized cost and fair value of investments in fixed maturities
classified as available for sale were as follows:                                                                                                

|                                                                                                    |       |      |           |          |  |        |                  |         |  |   |      |      |  |   |          |          | 
|--------------------------------------------------------------------------------------------------- | ----- | ---- | --------- | -------- |  | ------ | ---------------- | ------- |  | - | ---- | ---- |  | - | -------- | -------- | 
|                                                                                                    |       |      |           |          |  |        | Gross Unrealized |         |  |   |     
|                                                                                                    |       |      | Amortized |          |  |        | Fair            
|(at December 2003, in millions)                                                                     |       | Cost |           | Gains    |  | Losses |                  | Value  
|                                                                                                    |       |      |           |          |  |        |                  |        
|Mortgage-backed securities - CMOs and
pass-through securities                                       |       | $    | 7,497.4   |          |  | $      | 248.4            |         |  | $ | 8.5  |      |  | $ | 7,737.3  |         
|U.S. Treasury securities and obligations of
U.S. Government and government agencies and
authorities |       |      | 1,343.1   |          |  |        | 41.1             |         |  |   | .2   |      |  |   | 1,384.0  |         
|Obligations of states, municipalities and
political subdivisions                                    |       |      | 14,616.1  |          |  |        | 813.5            |         |  |   | 2.3  |      |  |   | 15,427.3 |         
|Debt securities issued by foreign
governments                                                       |       |      | 242.7     |          |  |        | 15.6             |         |  |   | 2.1  |      |  |   | 256.2    |         
|All other corporate bonds                                                                           |       |      | 7,537.2   |          |  |        | 475.0            |         |  |   | 26.8 |      |  |   | 7,985.4  |         
|Redeemable preferred stock                                                                          |       |      | 241.8     |          |  |        | 15.6             |         |  |   | 2.1  |      |  |   | 255.3    |         
|                                                                                                    |       |      |           |          |  |        |                  |         |  |   |      |      |  |   |          |         
|                                                                                                    | Total |      | $         | 31,478.3 |  |        | $                | 1,609.2 |  |   | $    | 42.0 |  |   | $        | 33,045.5 | 
|                                                                                                    |       |      |           |          |  |        |                  |         |  |   |      |      |  |   |          |         

|                                                                                                    |       |      |           |          |  |        |                  |         |  |   |       |       |  |   |          |          | 
|--------------------------------------------------------------------------------------------------- | ----- | ---- | --------- | -------- |  | ------ | ---------------- | ------- |  | - | ----- | ----- |  | - | -------- | -------- | 
|                                                                                                    |       |      |           |          |  |        | Gross Unrealized |         |  |   |      
|                                                                                                    |       |      | Amortized |          |  |        | Fair            
|(at December 2002, in millions)                                                                     |       | Cost |           | Gains    |  | Losses |                  | Value  
|                                                                                                    |       |      |           |          |  |        |                  |        
|Mortgage-backed securities - CMOs and
pass-through securities                                       |       | $    | 8,595.4   |          |  | $      | 346.6            |         |  | $ | 1.5   |       |  | $ | 8,940.5  |         
|U.S. Treasury securities and obligations of
U.S. Government and government agencies and
authorities |       |      | 1,034.8   |          |  |        | 62.0             |         |  |   |      |       |  |   | 1,096.8  |         
|Obligations of states, municipalities and
political subdivisions                                    |       |      | 12,664.4  |          |  |        | 631.9            |         |  |   | 10.3  |       |  |   | 13,286.0 |         
|Debt securities issued by foreign
governments                                                       |       |      | 258.2     |          |  |        | 19.9             |         |  |   | 1.7   |       |  |   | 276.4    |         
|All other corporate bonds                                                                           |       |      | 6,093.9   |          |  |        | 342.8            |         |  |   | 245.8 |       |  |   | 6,190.9  |         
|Redeemable preferred stock                                                                          |       |      | 231.1     |          |  |        | 5.6              |         |  |   | 24.1  |       |  |   | 212.6    |         
|                                                                                                    |       |      |           |          |  |        |                  |         |  |   |       |       |  |   |          |         
|                                                                                                    | Total |      | $         | 28,877.8 |  |        | $                | 1,408.8 |  |   | $     | 283.4 |  |   | $        | 30,003.2 | 
|                                                                                                    |       |      |           |          |  |        |                  |         |  |   |       |       |  |   |          |         



| |  | 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.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

124



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|4. |  | INVESTMENTS, Continued
|-- |  | ----------------------

|                                    |       |      |           |          |      |   |          |          | 
|----------------------------------- | ----- | ---- | --------- | -------- | ---- | - | -------- | -------- | 
|                                    |       |      | Amortized |          | Fair
|(at December 31, 2003, in millions) |       | Cost |           | Value   
|                                    |       |      |           |         
|Due in one year or less             |       | $    | 1,282.4   |          |      | $ | 1,301.3  |         
|Due after 1 year through 5 years    |       |      | 5,047.4   |          |      |   | 5,256.2  |         
|Due after 5 years through 10 years  |       |      | 7,260.5   |          |      |   | 7,715.2  |         
|Due after 10 years                  |       |      | 10,390.6  |          |      |   | 11,035.5 |         
|                                    |       |      |           |          |      |   |          |         
|                                    |       |      | 23,980.9  |          |      |   | 25,308.2 |         
|Mortgage-backed securities          |       |      | 7,497.4   |          |      |   | 7,737.3  |         
|                                    |       |      |           |          |      |   |          |         
|                                    | Total |      | $         | 31,478.3 |      |   | $        | 33,045.5 | 
|                                    |       |      |           |          |      |   |          |         



| |  | 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 offer the most favorable return given the risks involved.
One significant risk evaluated is prepayment sensitivity. This drives the
investment process to generally favor prepayment protected CMO tranches
including planned amortization classes and last cash flow tranches. 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, 2003 and 2002, the Company held CMOs classified as
available for sale with a fair value of $3.932 billion and $4.120 billion,
respectively. Approximately 46% and 58% of the Companys CMO holdings are
fully collateralized by GNMA, FNMA or FHLMC securities at December 31, 2003
and 2002, respectively. In addition, the Company held $3.802 billion and
$4.815 billion of GNMA, FNMA, FHLMC or FHA mortgage-backed pass-through
securities classified as available for sale at December 31, 2003 and 2002,
respectively. Virtually all of these securities are rated Aaa.                                                                                                                                                                                          
|
| |  | At December 31, 2003 and 2002, $561.6 million and $580.5 million,
respectively, of securities were on loan for which cash collateral was
received. There were not any securities on loan under tri-party lending
agreements at December 31, 2003 and 2002. At December 31, 2003, $134.8
million of securities were subject to dollar-roll repurchase agreements.
There were not any securities subject to such agreements at December 31,
2002.                                                                                                                                                                                                                                                                                                                                         
|
| |  | Proceeds from sales of fixed maturities classified as available for sale
were $8.343 billion, $12.519 billion and $14.469 billion in 2003, 2002 and
2001, respectively. Gross gains of $281.7 million, $570.9 million and
$599.3 million and gross losses of $147.2 million, $148.4 million and
$158.6 million, respectively, were realized on those sales.                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | At December 31, 2003 and 2002, TPCs insurance subsidiaries had $2.373
billion and $2.052 billion, respectively, of securities on deposit at
financial institutions in certain states pursuant to the respective states
insurance regulatory authorities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

125



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|4. |  | INVESTMENTS, Continued                                                      
|-- |  | ----------------------------------------------------------------------------
|  
|   |  | Equity Securities                                                           
|  
|   |  | The cost and fair value of investments in equity securities were as
follows:

|                                    |       |      |       |       |  |        |                  |       |      |   |      |      |  |   |       |       | 
|----------------------------------- | ----- | ---- | ----- | ----- |  | ------ | ---------------- | ----- | ---- | - | ---- | ---- |  | - | ----- | ----- | 
|                                    |       |      |       |       |  |        | Gross Unrealized |       |      |   |     
|                                    |       |      |       |       |  |        |                  |       | Fair
|(at December 31, 2003, in millions) |       | Cost |       | Gains |  | Losses |                  | Value
|                                    |       |      |       |       |  |        |                  |      
|Common stocks                       |       | $    | 70.9  |       |  | $      | 18.8             |       |      | $ | 1.0  |      |  | $ | 88.7  |      
|Nonredeemable preferred stocks      |       |      | 601.4 |       |  |        | 52.8             |       |      |   | 10.3 |      |  |   | 643.9 |      
|                                    |       |      |       |       |  |        |                  |       |      |   |      |      |  |   |       |      
|                                    | Total |      | $     | 672.3 |  |        | $                | 71.6  |      |   | $    | 11.3 |  |   | $     | 732.6 | 
|                                    |       |      |       |       |  |        |                  |       |      |   |      |      |  |   |       |      

|                                    |       |   |       |       |  |   |      |      |  |   |      |      |  |   |       |       | 
|----------------------------------- | ----- | - | ----- | ----- |  | - | ---- | ---- |  | - | ---- | ---- |  | - | ----- | ----- | 
|(at December 31, 2002, in millions) |       |   |       |       |  |   |      |      |  |   |      |      |  |   |       |      
|                                    |       |   |       |       |  |   |      |      |  |   |      |      |  |   |       |      
|Common stocks                       |       | $ | 57.4  |       |  | $ | 4.0  |      |  | $ | 11.3 |      |  | $ | 50.1  |      
|Nonredeemable preferred stocks      |       |   | 804.5 |       |  |   | 24.6 |      |  |   | 27.7 |      |  |   | 801.4 |      
|                                    |       |   |       |       |  |   |      |      |  |   |      |      |  |   |       |      
|                                    | Total |   | $     | 861.9 |  |   | $    | 28.6 |  |   | $    | 39.0 |  |   | $     | 851.5 | 
|                                    |       |   |       |       |  |   |      |      |  |   |      |      |  |   |       |      



| |  | Proceeds from sales of equity securities were $254.1 million, $127.2
million and $469.7 million in 2003, 2002 and 2001, respectively, resulting
in gross realized gains of $21.7 million, $18.1 million and $61.1 million
and gross realized losses of $9.2 million, $13.7 million and $33.4 million,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Impairments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | An investment in a fixed maturity or equity security which is available for
sale is impaired if its fair value falls below its book value and the
decline is considered to be other-than-temporary. Factors considered in
determining whether a decline is other-than-temporary include the length of
time and the extent to which fair value has been below cost; the financial
condition and near-term prospects of the issuer; and the Companys ability
and intent to hold the investment for a period of time sufficient to allow
for any anticipated recovery. Additionally, for certain securitized
financial assets with contractual cash flows (including asset-back
securities), EITF 99-20 requires the Company to periodically update its
best estimate of cash flows over the life of the security. If management
determines that the fair value of its securitized financial asset is less
than its carrying amount and there has been a decrease in the present value
of the estimated cash flows since the last revised estimate, considering
both timing and amount, then an other-than-temporary impairment is
recognized. A debt security is impaired if it is probable that the Company
will not be able to collect all amounts due under the securitys
contractual terms. Equity investments are impaired when it becomes apparent
that the Company will not recover its cost over the expected holding
period. Further, for securities expected to be sold, an
other-than-temporary impairment charge is recognized if the Company does
not expect the fair value of a security to recover the cost prior to the
expected date of sale.

126



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|4. |  | INVESTMENTS, Continued                                                                                        
|-- |  | --------------------------------------------------------------------------------------------------------------
|  
|   |  | The Companys process for reviewing invested assets for impairments during
any quarter includes the following:



| |  |  | Identification and evaluation of investments which have possible
indications of impairment;                                                                                                                                                                                                                       
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Analysis of investments with gross unrealized investment losses
that have fair values less than 80% of amortized cost during
successive quarterly periods over a rolling one-year period;                                                                                                                         
|
| |  |  | Review of investment advisor(s) recommendations for
other-than-temporary impairments based on the investees current
financial condition, liquidity, near-term recovery prospects and other
factors, as well as consideration of other investments that were not
recommended for other-than-temporary impairments;
|
| |  |  | Discussion of evidential matter, including an evaluation of
factors or triggers that would or could cause individual investments
to qualify as having other-than-temporary impairments and those that
would not support other-than-temporary impairment;                                                          
|
| |  |  | Determination of the status of each analyzed investment as
other-than-temporary or not, with documentation of the rationale for
the decision.                                                                                                                                                                     



| |  | The gross unrealized investment losses and related fair value for fixed
maturities and equity securities available for sale at December 31, 2003
were as follows:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                   |                                       |       |                     |            |                     |       |       |            |  |       |       |            |       |   |     |      |  |   |         |         |  |   |      |      | 
|-------------------------------------------------------------------------------------------------- | ------------------------------------- | ----- | ------------------- | ---------- | ------------------- | ----- | ----- | ---------- |  | ----- | ----- | ---------- | ----- | - | --- | ---- |  | - | ------- | ------- |  | - | ---- | ---- | 
|                                                                                                   |                                       |       | Less than 12 months |            | 12 months or longer |       | Total
|                                                                                                   |                                       |       |                     |            |                     |       |      
|                                                                                                   |                                       |       |                     |            |                     |       | Gross |            |  |       |       |            | Gross |   |     |      |  |   | Gross  
|(at December 31, 2003,                                                                             |                                       | Fair  |                     | Unrealized |                     | Fair  |       | Unrealized |  | Fair  |       | Unrealized
|in millions)                                                                                       |                                       | Value |                     | Losses     |                     | Value |       | Losses     |  | Value |       | Losses    
|                                                                                                   |                                       |       |                     |            |                     |       |       |            |  |       |       |           
|Fixed maturities                                                                                   |                                       |       |                     |            |                     |       |       |            |  |       |       |            |       |   |     |      |  |   |         |         |  |   |      |     
|Mortgage-backed
securities-CMOs and pass-through
securities                                        |                                       | $     | 1,286.4             |            |                     | $     | 8.5   |            |  | $     | .8    |            |       | $ |    |      |  | $ | 1,287.2 |         |  | $ | 8.5  |     
|U.S. Treasury securities
and obligations of U.S
Government and
government agencies and
authorities |                                       |       | 111.2               |            |                     |       | .2    |            |  |       |      |            |       |   |    |      |  |   | 111.2   |         |  |   | .2   |     
|Obligations of states,
municipalities and
political subdivisions                                   |                                       |       | 235.5               |            |                     |       | 1.8   |            |  |       | 19.8  |            |       |   | .5  |      |  |   | 255.3   |         |  |   | 2.3  |     
|Debt securities issued by
foreign governments                                                      |                                       |       | 63.0                |            |                     |       | 2.1   |            |  |       | .3    |            |       |   |    |      |  |   | 63.3    |         |  |   | 2.1  |     
|All other corporate bonds                                                                          |                                       |       | 1,497.6             |            |                     |       | 17.2  |            |  |       | 102.4 |            |       |   | 9.6 |      |  |   | 1,600.0 |         |  |   | 26.8 |     
|Redeemable preferred
stock                                                                         |                                       |       | 15.4                |            |                     |       | .4    |            |  |       | 22.6  |            |       |   | 1.7 |      |  |   | 38.0    |         |  |   | 2.1  |     
|                                                                                                   |                                       |       |                     |            |                     |       |       |            |  |       |       |            |       |   |     |      |  |   |         |         |  |   |      |     
|                                                                                                   | Total fixed maturities                |       |                     | 3,209.1    |                     |       |       | 30.2       |  |       |       | 145.9      |       |   |     | 11.8 |  |   |         | 3,355.0 |  |   |      | 42.0 | 
|                                                                                                   |                                       |       |                     |            |                     |       |       |            |  |       |       |            |       |   |     |      |  |   |         |         |  |   |      |     
|Equity securities                                                                                  |                                       |       |                     |            |                     |       |       |            |  |       |       |            |       |   |     |      |  |   |         |         |  |   |      |     
|Common stocks                                                                                      |                                       |       | 4.6                 |            |                     |       | .2    |            |  |       | 5.6   |            |       |   | .8  |      |  |   | 10.2    |         |  |   | 1.0  |     
|Nonredeemable preferred
stocks                                                                     |                                       |       | 21.2                |            |                     |       | .6    |            |  |       | 34.2  |            |       |   | 9.7 |      |  |   | 55.4    |         |  |   | 10.3 |     
|                                                                                                   |                                       |       |                     |            |                     |       |       |            |  |       |       |            |       |   |     |      |  |   |         |         |  |   |      |     
|                                                                                                   | Total equity securities               |       |                     | 25.8       |                     |       |       | .8         |  |       |       | 39.8       |       |   |     | 10.5 |  |   |         | 65.6    |  |   |      | 11.3 | 
|                                                                                                   |                                       |       |                     |            |                     |       |       |            |  |       |       |            |       |   |     |      |  |   |         |         |  |   |      |     
|                                                                                                   | Total temporarily
impaired
securities |       | $                   | 3,234.9    |                     |       | $     | 31.0       |  |       | $     | 185.7      |       |   | $   | 22.3 |  |   | $       | 3,420.6 |  |   | $    | 53.3 | 
|                                                                                                   |                                       |       |                     |            |                     |       |       |            |  |       |       |            |       |   |     |      |  |   |         |         |  |   |      |     

127



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|4. |  | INVESTMENTS, Continued                                                                
|-- |  | --------------------------------------------------------------------------------------
|  
|   |  | Impairment charges included in net realized investment gains (losses) were
as follows:

|                                              |  |      |      |      |  |      |       |  |  |   |       | 
|--------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ----- |  |  | - | ----- | 
|(for the year ended December 31, in millions) |  | 2003 |      | 2002 |  | 2001
|                                              |  |      |      |      |  |     
|Fixed maturities                              |  | $    | 65.4 |      |  | $    | 255.0 |  |  | $ | 109.7 | 
|Equity securities                             |  |      | 5.9  |      |  |      | 8.5   |  |  |   | 35.8  | 
|Real estate and other                         |  |      | 18.9 |      |  |      | 20.6  |  |  |   | .7    | 
|                                              |  |      |      |      |  |      |       |  |  |   |       | 
|Total                                         |  | $    | 90.2 |      |  | $    | 284.1 |  |  | $ | 146.2 | 
|                                              |  |      |      |      |  |      |       |  |  |   |       | 



| |  | Mortgage Loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Aggregate annual maturities on mortgage loans are $28.8 million, $7.7
million, $14.4 million, $38.6 million, $19.8 million and $101.5 million for
2004, 2005, 2006, 2007, 2008 and 2009 and thereafter, respectively. There
are no mortgage loans that are past due.                                                                                                                                                                                                                                                                                 
|
| |  | Underperforming mortgage loans, which include delinquent loans, loans in
the process of foreclosure and loans modified at interest rates below
market, were $30.7 million at December 31, 2003. There were no
underperforming mortgage loans at December 31, 2002.                                                                                                                                                                                                                                                                                   
|
| |  | Concentrations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | At December 31, 2003 and 2002, the Company had concentrations of credit
risk in tax-exempt investments of the State of Texas of $1.540 billion and
$1.386 billion, respectively, and of the State of New York of $1.350
billion and $1.269 billion, respectively.                                                                                                                                                                                                                                                                                    
|
| |  | Included in fixed maturities are below investment grade assets totaling
$2.057 billion and $1.945 billion at December 31, 2003 and 2002,
respectively. The Company defines its below investment grade assets as
those securities rated below investment grade by external rating agencies,
or the equivalent by the Companys investment advisors when a public rating
does not exist. Such assets include publicly traded below investment grade
bonds and certain other privately issued bonds that are classified as below
investment grade loans.
|
| |  | The Company monitors creditworthiness of counterparties to financial
instruments by using controls that include credit approvals, limits and
other monitoring procedures.                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Net Investment Income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                                              |  |      |         |      |  |      |         |  |  |   |         | 
|--------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|(for the year ended December 31, in millions) |  | 2003 |         | 2002 |  | 2001
|                                              |  |      |         |      |  |     
|Gross investment income                       |  |      |         |      |  |      |         |  |  |   |         | 
|Fixed maturities                              |  | $    | 1,526.6 |      |  | $    | 1,629.8 |  |  | $ | 1,657.3 | 
|Mortgage loans                                |  |      | 25.7    |      |  |      | 26.8    |  |  |   | 28.3    | 
|Other, including trading                      |  |      | 371.4   |      |  |      | 280.6   |  |  |   | 394.6   | 
|                                              |  |      |         |      |  |      |         |  |  |   |         | 
|                                              |  |      | 1,923.7 |      |  |      | 1,937.2 |  |  |   | 2,080.2 | 
|Investment expenses                           |  |      | 54.9    |      |  |      | 56.7    |  |  |   | 46.2    | 
|                                              |  |      |         |      |  |      |         |  |  |   |         | 
|Net investment income                         |  | $    | 1,868.8 |      |  | $    | 1,880.5 |  |  | $ | 2,034.0 | 
|                                              |  |      |         |      |  |      |         |  |  |   |         | 

128



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|4. |  | INVESTMENTS, Continued                                                 
|-- |  | -----------------------------------------------------------------------
|  
|   |  | Net Realized and Unrealized Investment Gains (Losses)                  
|  
|   |  | Net realized investment gains (losses) for the periods were as follows:

|                                              |  |      |       |      |  |      |       |   |  |   |       |  
|--------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|(for the year ended December 31, in millions) |  | 2003 |       | 2002 |  | 2001
|                                              |  |      |       |      |  |     
|Net realized investment gains (losses)        |  |      |       |      |  |      |       |   |  |   |       |  
|Fixed maturities                              |  | $    | 69.1  |      |  | $    | 167.5 |   |  | $ | 331.0 |  
|Equity securities                             |  |      | 6.6   |      |  |      | (4.1  | ) |  |   | (8.1  | )
|Other                                         |  |      | (37.7 | )    |  |      | (16.7 | ) |  |   | (.4   | )
|                                              |  |      |       |      |  |      |       |   |  |   |       |  
|Net realized investment gains                 |  | $    | 38.0  |      |  | $    | 146.7 |   |  | $ | 322.5 |  
|                                              |  |      |       |      |  |      |       |   |  |   |       |  



| |  | 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:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                 |  |      |         |      |  |      |       |   |  |   |        |  
|---------------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ----- | - |  | - | ------ | -
|(at and for the year ended December 31, in millions)             |  | 2003 |         | 2002 |  | 2001
|                                                                 |  |      |         |      |  |     
|Change in net unrealized investments gains (losses)              |  |      |         |      |  |      |       |   |  |   |        |  
|Fixed maturities                                                 |  | $    | 441.8   |      |  | $    | 735.6 |   |  | $ | (279.0 | )
|Equity securities                                                |  |      | 70.7    |      |  |      | (14.0 | ) |  |   | 47.0   |  
|                                                                 |  |      |         |      |  |      |       |   |  |   |        |  
|                                                                 |  |      | 512.5   |      |  |      | 721.6 |   |  |   | (232.0 | )
|Related taxes                                                    |  |      | 183.0   |      |  |      | 249.4 |   |  |   | (81.1  | )
|Minority interest                                                |  |      | (.8     | )    |  |      | 3.2   |   |  |   |       |  
|                                                                 |  |      |         |      |  |      |       |   |  |   |        |  
|Change in net unrealized gains (losses) on investment
securities |  |      | 328.7   |      |  |      | 475.4 |   |  |   | (150.9 | )
|Balance, beginning of year                                       |  |      | 731.6   |      |  |      | 256.2 |   |  |   | 407.1  |  
|                                                                 |  |      |         |      |  |      |       |   |  |   |        |  
|Balance, end of year                                             |  | $    | 1,060.3 |      |  | $    | 731.6 |   |  | $ | 256.2  |  
|                                                                 |  |      |         |      |  |      |       |   |  |   |        |  



|5. |  | INTANGIBLE ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | During the third quarter of 2003, the Company purchased the renewal rights
to Royal & SunAlliance USA Inc.s commercial lines national accounts,
middle market and marine businesses, and standard and preferred personal
lines businesses. Also in the third quarter of 2003, the Company purchased
renewal rights to the majority of Atlantic Mutuals commercial lines inland
marine and ocean cargo businesses written by Atlantic Mutuals Marine
Division. The minimum purchase price for both transactions, which has been
paid, was $48.0 million. The final purchase price, currently estimated to
be $84.5 million, is dependent on the level of business renewed by the
Company. The Company recorded customer-related intangible assets of $79.5
million and a marketing-related intangible asset of $5.0 million related to
these transactions. These intangible assets are estimated to have useful
lives of 5 years.

129



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|5. |  | INTANGIBLE ASSETS, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company had customer-related intangible assets with a gross carrying
amount of $555.1 million and $470.6 million as of December 31, 2003 and
2002, respectively, and with accumulated amortization of $133.1 million and
$90.8 million as of December 31, 2003 and 2002, respectively, which are
included in other assets in the consolidated balance sheet. Amortization
expense was $42.2 million, $35.4 million and $34.5 million for the years
ended December 31, 2003, 2002 and 2001, respectively. Intangible assets
amortization expense is estimated to be $50.6 million, $48.1 million, $47.0
million, $47.0 million and $41.6 million in 2004, 2005, 2006, 2007 and
2008, respectively.
|  
|6. |  | REINSURANCE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | The Company participates in reinsurance in order to limit losses, minimize
exposure to large risks, provide additional capacity for future growth and
to effect business-sharing arrangements. In addition, the Company assumes
100% of the workers compensation premiums written by the Accident
Department of its former 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.
Ceded reinsurance arrangements do not discharge the Company as the primary
insurer, except for cases involving a novation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | Certain of the assumed reinsurance contracts that the Company has entered
into with non-affiliated companies on an excess of loss basis do not
transfer insurance risk. These contracts are accounted for using deposit
accounting and are included in other liabilities in the consolidated
balance sheet and totaled $325.2 million and $274.4 million at December 31,
2003 and 2002, respectively.                                                                                                                                                                                                                                                                                                

130



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|6. |  | REINSURANCE, Continued                                                                                           
|-- |  | -----------------------------------------------------------------------------------------------------------------
|  
|   |  | A summary of reinsurance financial data reflected within the consolidated
statement of income is presented below:

|                                              |                               |      |          |          |   |      |          |          |   |   |          |          |  
|--------------------------------------------- | ----------------------------- | ---- | -------- | -------- | - | ---- | -------- | -------- | - | - | -------- | -------- | -
|(for the year ended December 31, in millions) |                               | 2003 |          | 2002     |   | 2001
|                                              |                               |      |          |          |   |     
|Written premiums                              |                               |      |          |          |   |      |          |          |   |   |          |         
|Direct                                        |                               | $    | 14,976.6 |          |   | $    | 13,468.3 |          |   | $ | 10,995.3 |         
|Assumed from:                                 |                               |      |          |          |   |      |          |          |   |   |          |         
|                                              | Formerly affiliated companies |      |          | (1.7     | ) |      |          | 82.9     |   |   |          | 143.7    |  
|                                              | Non-affiliated companies      |      |          | 499.8    |   |      |          | 524.0    |   |   |          | 529.4    |  
|Ceded to:                                     |                               |      |          |          |   |      |          |          |   |   |          |         
|                                              | Formerly affiliated companies |      |          | (111.3   | ) |      |          | (118.4   | ) |   |          | (120.0   | )
|                                              | Non-affiliated companies      |      |          | (2,162.6 | ) |      |          | (2,012.3 | ) |   |          | (1,702.9 | )
|                                              |                               |      |          |          |   |      |          |          |   |   |          |         
|Total net written premiums                    |                               | $    | 13,200.8 |          |   | $    | 11,944.5 |          |   | $ | 9,845.5  |         
|                                              |                               |      |          |          |   |      |          |          |   |   |          |         
|Earned premiums                               |                               |      |          |          |   |      |          |          |   |   |          |         
|Direct                                        |                               | $    | 14,323.8 |          |   | $    | 12,525.1 |          |   | $ | 10,460.1 |         
|Assumed from:                                 |                               |      |          |          |   |      |          |          |   |   |          |         
|                                              | Formerly affiliated companies |      |          | 20.8     |   |      |          | 109.3    |   |   |          | 181.1    |  
|                                              | Non-affiliated companies      |      |          | 477.4    |   |      |          | 562.1    |   |   |          | 596.0    |  
|Ceded to:                                     |                               |      |          |          |   |      |          |          |   |   |          |         
|                                              | Formerly affiliated companies |      |          | (120.5   | ) |      |          | (116.1   | ) |   |          | (113.0   | )
|                                              | Non-affiliated companies      |      |          | (2,156.1 | ) |      |          | (1,925.1 | ) |   |          | (1,713.3 | )
|                                              |                               |      |          |          |   |      |          |          |   |   |          |         
|Total net earned premiums                     |                               | $    | 12,545.4 |          |   | $    | 11,155.3 |          |   | $ | 9,410.9  |         
|                                              |                               |      |          |          |   |      |          |          |   |   |          |         
|Percentage of amount assumed to net earned    |                               |      | 4.0      | %        |   |      | 6.0      | %        |   |   | 8.3      | %       
|                                              |                               |      |          |          |   |      |          |          |   |   |          |         
|Ceded claims incurred                         |                               | $    | 2,333.4  |          |   | $    | 2,111.6  |          |   | $ | 1,844.5  |         
|                                              |                               |      |          |          |   |      |          |          |   |   |          |         

131



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|6. |  | REINSURANCE, Continued                                                                                                          
|-- |  | --------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Reinsurance recoverables, net of valuation allowance, include amounts
recoverable on unpaid and paid claims and were as follows:

|                               |                                |                              |          |         |       |   |          |         |       | 
|------------------------------ | ------------------------------ | ---------------------------- | -------- | ------- | ----- | - | -------- | ------- | ----- | 
|(at December 31, in millions)  |                                | 2003                         |          | 2002   
|                               |                                |                              |          |        
|Pools and associations         |                                | $                            | 2,203.7  |         |       | $ | 2,094.9  |        
|Structured settlements:        |                                |                              |          |         |       |   |          |        
|                               | Non-affiliated companies       |                              |          | 1,551.6 |       |   |          | 1,563.9 |      
|                               | Formerly affiliated companies: |                              |          |         |       |   |          |         |      
|                               |                                | Property-casualty business   |          |         | 760.6 |   |          |         | 810.4 | 
|                               |                                | Accident and health business |          |         | 98.4  |   |          |         | 107.6 | 
|Other:                         |                                |                              |          |         |       |   |          |        
|                               | Non-affiliated companies       |                              |          | 6,557.0 |       |   |          | 6,398.8 |      
|                               | Formerly affiliated companies  |                              |          | 2.6     |       |   |          | 1.9     |      
|                               |                                |                              |          |         |       |   |          |        
|Total reinsurance recoverables |                                | $                            | 11,173.9 |         |       | $ | 10,977.5 |        
|                               |                                |                              |          |         |       |   |          |        



|   |  | 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, 2003 and 2002 include $269.1 million and $296.5 million,
respectively, recoverable from Equitas. The outcome of the restructuring
of Lloyds continues to be uncertain and the impact, if any, on
collectibility of amounts recoverable by the Company from Equitas cannot be
quantified at this time. 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, in the opinion of the
Companys management, it is not likely that the outcome could have a
material adverse effect on the Companys financial condition or liquidity.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company reports its reinsurance recoverables net of an allowance for
estimated uncollectible reinsurance recoverables. The allowance is based
upon the Companys ongoing review of amounts outstanding, length of
collection periods, amounts in dispute, changes in reinsurer credit
standing, and other relevant factors. Amounts deemed to be uncollectible,
including amounts due from known insolvent reinsurers, are written off and
charged against the allowance for estimated uncollectible reinsurance
recoverables. Any subsequent collections of amounts previously written off
are reported as part of underwriting results.                                                                                                                                                                                                                                       
|  
|   |  | The allowance for estimated uncollectible reinsurance recoverables was
$386.4 million and $329.1 million at December 31, 2003 and 2002,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|7. |  | INSURANCE CLAIMS RESERVES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Claims and claim adjustment expense reserves were as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                              |  |      |          |      |  |   |          | 
|----------------------------- |  | ---- | -------- | ---- |  | - | -------- | 
|(at December 31, in millions) |  | 2003 |          | 2002
|                              |  |      |          |     
|Property-casualty             |  | $    | 34,474.2 |      |  | $ | 33,628.4 | 
|Accident and health           |  |      | 98.4     |      |  |   | 107.6    | 
|                              |  |      |          |      |  |   |          | 
|Total                         |  | $    | 34,572.6 |      |  | $ | 33,736.0 | 
|                              |  |      |          |      |  |   |          | 

132



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|7. |  | INSURANCE CLAIMS RESERVES, Continued                                                                                                    
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The table below is a reconciliation of beginning and ending property
casualty reserve balances for claims and claim adjustment expenses.

|                                                                                          |              |                 |          |         |         |      |          |         |          |   |          |         |         | 
|----------------------------------------------------------------------------------------- | ------------ | --------------- | -------- | ------- | ------- | ---- | -------- | ------- | -------- | - | -------- | ------- | ------- | 
|(at and for the year ended December 31, in millions)                                      |              | 2003            |          | 2002    |         | 2001
|                                                                                          |              |                 |          |         |         |     
|Claims and claim adjustment expense reserves
at beginning of year                         |              | $               | 33,628.4 |         |         | $    | 30,616.5 |         |          | $ | 28,312.0 |        
|Less reinsurance recoverables on unpaid losses                                            |              |                 | 10,360.3 |         |         |      | 10,419.2 |         |          |   | 8,878.1  |        
|                                                                                          |              |                 |          |         |         |      |          |         |          |   |          |        
|Net balance at beginning of year                                                          |              |                 | 23,268.1 |         |         |      | 20,197.3 |         |          |   | 19,433.9 |        
|                                                                                          |              |                 |          |         |         |      |          |         |          |   |          |        
|Provision for claims and claim adjustment expenses
for claims arising in the current year |              |                 | 8,554.1  |         |         |      | 7,872.1  |         |          |   | 7,600.6  |        
|Estimated claims and claim adjustment expenses for
claims arising in prior years          |              |                 | 390.0    |         |         |      | 3,031.0  |         |          |   | (41.0    | )      
|Acquisitions                                                                              |              |                 |         |         |         |      |         |         |          |   | 622.7    |        
|                                                                                          |              |                 |          |         |         |      |          |         |          |   |          |        
|                                                                                          |              | Total increases |          |         | 8,944.1 |      |          |         | 10,903.1 |   |          |         | 8,182.3 | 
|                                                                                          |              |                 |          |         |         |      |          |         |          |   |          |        
|Claims and claim adjustment expense payments
for claims arising in:                       |              |                 |          |         |         |      |          |         |          |   |          |        
|                                                                                          | Current year |                 |          | 2,987.3 |         |      |          | 2,814.3 |          |   |          | 3,044.9 |        
|                                                                                          | Prior years  |                 |          | 5,170.0 |         |      |          | 5,018.0 |          |   |          | 4,374.0 |        
|                                                                                          |              |                 |          |         |         |      |          |         |          |   |          |        
|                                                                                          |              | Total payments  |          |         | 8,157.3 |      |          |         | 7,832.3  |   |          |         | 7,418.9 | 
|                                                                                          |              |                 |          |         |         |      |          |         |          |   |          |        
|Net balance at end of year                                                                |              |                 | 24,054.9 |         |         |      | 23,268.1 |         |          |   | 20,197.3 |        
|Plus reinsurance recoverables on unpaid losses                                            |              |                 | 10,419.3 |         |         |      | 10,360.3 |         |          |   | 10,419.2 |        
|                                                                                          |              |                 |          |         |         |      |          |         |          |   |          |        
|Claims and claim adjustment expense reserves
at end of year                               |              | $               | 34,474.2 |         |         | $    | 33,628.4 |         |          | $ | 30,616.5 |        
|                                                                                          |              |                 |          |         |         |      |          |         |          |   |          |        



| |  | The increase in the claims and claim adjustment expense reserves in 2003
from 2002 was primarily due to net prior year reserve strengthening,
principally in Commercial Lines, and growth in business volume in both
Commercial Lines and Personal Lines. Partially offsetting the above were
net payments of $607.0 million in 2003 for asbestos and environmental
claims.          
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The increase in the claims and claim adjustment expense reserves in 2002
from 2001 was primarily due to the strengthening of the Companys asbestos
reserves, principally in connection with the Companys asbestos reserve
study completed in fourth quarter 2002. Partially offsetting the above
were net payments of $521.7 million in 2002 for asbestos and environmental
claims.

133



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|7. |  | INSURANCE CLAIMS RESERVES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In 2003, estimated claims and claim adjustment expenses for claims arising
in prior years was a net unfavorable development of $390.0 million. This
included $548.7 million of net unfavorable development which impacted
results of operations, primarily due to unfavorable development of $521.1
million related to reserve strengthening at Gulf Insurance, a
majority-owned subsidiary that writes specialty insurance. Claims arising
in prior years for 2003 also included unfavorable development of $115.0
million related to American Equity, an operation that was placed in run-off
in the second quarter of 2002 and $59.8 million related to environmental
claims. This was partially offset by net favorable development in other
Commercial Lines businesses, principally property coverages, in which the
Company has experienced lower non-catastrophe-related claim frequency. In
addition, Personal Lines had a $162.0 million net prior year reserve
development benefit in 2003 principally due to continued reduced levels of
non-catastrophe claim frequency in both homeowners and non-bodily injury
automobile businesses and a $50.0 million reduction in reserves held
related to the terrorist attack on September 11, 2001. In 2003, estimated
claims and claim adjustment expenses for claims arising in prior years
included $42.4 million of net favorable loss development on Commercial
Lines loss sensitive policies in various lines; however, since the business
to which it relates is subject to premium adjustments, there is no impact
on results of operations. For each of the years ended December 31, 2003,
2002 and 2001, changes in allocations between policy years of loss
adjustment expenses, pursuant to regulatory reporting requirements, are
included in claims and claim adjustment expenses for claims arising in
prior years and did not impact results of operations.
|  
|   |  | In 2002, estimated claims and claim adjustment expenses for claims arising
in prior years was a net unfavorable development of $3.031 billion. This
included $3.132 billion of net unfavorable development which impacted
results of operations primarily due to unfavorable development of $2.945
billion related to asbestos. Claims arising in prior years for 2002 also
included unfavorable development of $150.1 million related to environmental
claims and favorable development of $100.1 million related to cumulative
injury claims. In addition, estimated claims and claim adjustment expenses
for claims arising in prior years included net unfavorable development,
primarily related to certain Commercial Lines coverages, predominantly in
assumed reinsurance specialty businesses, partially offset by favorable
development in Commercial Lines workers compensation and Personal Lines
automobile. In 2002, estimated claims and claim adjustment expenses for
claims arising in prior years included $71.2 million of net favorable loss
development on Commercial Lines loss sensitive policies in various lines;
however, since the business to which it relates is subject to premium
adjustments, there is no impact on results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | In 2001, estimated claims and claim adjustment expenses for claims arising
in prior years was a net favorable development of $41.0 million which
included $14.4 million of net favorable development which impacted results
of operations, primarily related to certain Commercial Lines coverages.
The $14.4 million includes favorable development in commercial multi-peril
and other claim adjustment expenses partially offset by unfavorable
development in general liability, commercial auto liability and specialty
businesses. Included in the net unfavorable development in Commercial
Lines general liability was $188.8 million for asbestos claims and $45.7
million for environmental claims partly reduced by favorable development of
$44.9 million for cumulative injury claims. In addition, estimated claims
and claim adjustment expenses for claims arising in prior years included
net favorable loss development of $43.0 million on Commercial Lines loss
sensitive policies in various lines; however, since the business to which
it relates is subject to premium adjustments, there is no impact on results
of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | The claims and claim adjustment expense reserves included $3.267 billion
and $3.790 billion for asbestos and environmental-related claims, net of
reinsurance, at December 31, 2003 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

134



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|7. |  | INSURANCE CLAIMS RESERVES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | It is difficult to estimate the reserves for asbestos and
environmental-related claims due to the vagaries of court coverage
decisions, plaintiffs expanded theories of liability, the risks inherent
in major litigation and other uncertainties, including without limitation,
those which are set forth below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | Because each policyholder presents different liability and coverage issues,
the Company generally evaluates the exposure presented by each policyholder
on a policyholder-by-policyholder basis. In the course of this evaluation,
the Company considers: available insurance coverage, including the role of
any umbrella or excess insurance the Company has issued to the
policyholder; limits and deductibles; an analysis of each policyholders
potential liability; the jurisdictions involved; past and anticipated
future claim activity and loss development on pending claims; past
settlement values of similar claims; allocated claim adjustment expense;
potential role of other insurance; the role, if any, of non-asbestos claims
or potential non-asbestos claims in any resolution process; and applicable
coverage defenses or determinations, if any, including the determination as
to whether or not an asbestos claim is a products/completed operation claim
subject to an aggregate limit and the available coverage, if any, for that
claim. When the gross ultimate exposure for indemnity and related claim
adjustment expense is determined for a policyholder, the Company
calculates, by each policy year, a ceded reinsurance projection based on
any applicable facultative and treaty reinsurance, as well as past ceded
experience. Adjustments to the ceded projections also occur due to actual
ceded claim experience and reinsurance collections. Conventional actuarial
methods are not utilized to establish asbestos reserves. The Companys
evaluations have not resulted in any data from which a meaningful average
asbestos defense or indemnity payment may be determined.
|  
|   |  | With respect to asbestos exposures, the Company also compares its
historical direct and net loss and expense paid experience, year-by-year,
to assess any emerging trends, fluctuations or characteristics suggested by
the aggregate paid activity. As anticipated, losses paid have
increased in 2003 compared to prior years. There has been acceleration in
the amount of payments, including those from prior settlements of coverage
disputes entered into between the Company and certain of its policyholders.
For the years ended December 31, 2003 and 2002, approximately 57% and 54%,
respectively, of total paid losses relate to policyholders with whom the
Company previously entered into settlement agreements that limit the
Companys liability. Net asbestos paid losses were $451.8 million and
$361.1 million for the years ended December 31, 2003 and 2002,
respectively, reflective of the items previously described.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | At December 31, 2003, asbestos reserves, net of reinsurance, were $2.977
billion, a decrease of $427.6 million compared to $3.404 billion as of
December 31, 2002. The decrease is reflective of the
$451.8 million of payments made during the
course of 2003, partly offset by accretion of discounts of $24.2 million on
reserves for certain policyholders with structured agreements. Other than
accretion of discounts, there were no additions to asbestos reserves in
2003 compared to an addition of $2.945 billion in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | At December 31, 2002, asbestos reserves were $3.404 billion compared to
$820.4 million as of December 31, 2001. Net incurred losses and loss
adjustment expenses were $2.945 billion for 2002 compared to $188.8 million
for 2001. The increase in reserves was based on the Companys analysis of
asbestos claims and litigation trends. As part of a periodic, ground-up
study of asbestos reserves, the Company studied the implications of these
and other significant developments, with special attention to major
asbestos defendants and non-products claims alleging that the Companys
coverage obligations are not subject to aggregate limits. In addition,
Company management expanded its historical methodology in response to
recent trends. This included further categorization of policyholders,
conducting a detailed examination of recent claim activity from
policyholders reporting claims for the first time, and conducting a
detailed review of past settlements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

135



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|7. |  | INSURANCE CLAIMS RESERVES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In establishing environmental reserves, the Company evaluates the exposure
presented by each policyholder and the anticipated cost of resolution, if
any. In the course of this analysis, the Company considers the probable
liability, available coverage, relevant judicial interpretations and
historical value of similar exposures. In addition, the Company considers
the many variables presented, such as the nature of the alleged activities
of the policyholder at each site; the allegations of environmental harm at
each site; the number of sites; the total number of potentially responsible
parties at each site; the nature of environmental harm and the
corresponding remedy at each site; the nature of government enforcement
activities at each site; the ownership and general use of each site; the
overall nature of the insurance relationship between the Company and the
policyholder, including the role of any umbrella or excess insurance the
Company has issued to the policyholder; the involvement of other insurers;
the potential for other available coverage, including the number of years
of coverage; the role, if any, of non-environmental claims or potential
non-environmental claims, in any resolution process; and the applicable law
in each jurisdiction. Conventional actuarial techniques are not used to
estimate these reserves. Net environmental losses paid were $155.2
million, $160.6 million and $207.6 million for the years ended December 31,
2003, 2002 and 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | As a result of the processes and procedures described above, management
believes that the reserves carried for asbestos and environmental claims at
December 31, 2003 are appropriately established based upon known facts,
current law and managements judgment. However, the uncertainties
surrounding the final resolution of these claims continue, and it is
presently not possible to estimate the ultimate exposure for asbestos and
environmental claims and related litigation. As a result, the reserve is
subject to revision as new information becomes available or as information
is reevaluated in light of evolving circumstances. The continuing
uncertainties include, without limitation, the risks and lack of
predictability inherent in major litigation, any impact from the bankruptcy
protection sought by various asbestos producers and other asbestos
defendants, a further increase or decrease in asbestos and environmental
claims which cannot now be anticipated, the role of any umbrella or excess
policies the Company has issued, the resolution or adjudication of some
disputes pertaining to the amount of available coverage for asbestos claims
in a manner inconsistent with the Companys previous assessment of these
claims, the number and outcome of direct actions against the Company, and
future developments pertaining to the Companys ability to recover
reinsurance for asbestos and environmental claims. It is also not possible
to predict changes in the legal and legislative environment and their
impact on the future development of asbestos and environmental claims.
This development will be affected by future court decisions and
interpretations, as well as changes in applicable legislation. It is also
difficult to predict the ultimate outcome of large coverage disputes until
settlement negotiations near completion and significant legal questions are
resolved or, failing settlement, until the dispute is adjudicated. This is

particularly the case with policyholders in bankruptcy where negotiations
often involve a large number of claimants and other parties and require
court approval to be effective.
|  
|   |  | In March 2002, Citigroup entered into an agreement under which it provided
the Company with financial support for asbestos claims and related
litigation, in any year that the Companys insurance subsidiaries record
asbestos-related income statement charges in excess of $150.0 million, net
of any reinsurance, up to a cumulative aggregate of $800.0 million, reduced
by the tax effect of the highest applicable federal income tax rate.
During 2002, the Company recorded $2.945 billion of asbestos incurred
losses, net of reinsurance, and accordingly has fully utilized the total
benefit available under the agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | Because of the uncertainties set forth above, additional liabilities may
arise for amounts in excess of the current related reserves. In addition,
the Companys estimate of ultimate claims and claim adjustment expenses may
change. These additional liabilities or increases in estimates, or a range
of either, cannot now be reasonably estimated and could result in income
statement charges that could be material to the Companys operating results
and financial condition in future periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

136



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|8. |  | DEBT                                                                                                         
|-- |  | -------------------------------------------------------------------------------------------------------------
|  
|   |  | Notes payable to former affiliates, long-term debt and convertible notes
payable outstanding were as follows:

|                                                             |       |      |         |         |  |   |         |         | 
|------------------------------------------------------------ | ----- | ---- | ------- | ------- |  | - | ------- | ------- | 
|(at December 31, in millions)                                |       | 2003 |         | 2002   
|                                                             |       |      |         |        
|Notes payable to former affiliates                           |       | $    |        |         |  | $ | 700.0   |        
|Floating rate note due 2004, prepaid February 2003           |       |      |        |         |  |   | 550.0   |        
|6.75% Notes due 2006                                         |       |      | 150.0   |         |  |   | 150.0   |        
|3.75% Notes due 2008                                         |       |      | 400.0   |         |  |   |        |        
|7.81% Notes various due dates through 2011                   |       |      | 24.0    |         |  |   | 27.0    |        
|5.00% Notes due 2013                                         |       |      | 500.0   |         |  |   |        |        
|7.75% Notes due 2026                                         |       |      | 200.0   |         |  |   | 200.0   |        
|6.375% Notes due 2033                                        |       |      | 500.0   |         |  |   |        |        
|4.50% Convertible junior subordinated notes payable due
2032 |       |      | 892.5   |         |  |   | 892.5   |        
|6.00% Convertible notes payable due 2032                     |       |      | 49.8    |         |  |   | 49.7    |        
|                                                             |       |      |         |         |  |   |         |        
|                                                             |       |      | 2,716.3 |         |  |   | 2,569.2 |        
|Debt issuance costs                                          |       |      | (41.8   | )       |  |   | (25.5   | )      
|                                                             |       |      |         |         |  |   |         |        
|                                                             | Total |      | $       | 2,674.5 |  |   | $       | 2,543.7 | 
|                                                             |       |      |         |         |  |   |         |        



| |  | On April 13, 2001, TIGHI entered into a $500.0 million revolving line of
credit agreement (the line of credit) with Citigroup, which expires in
December 2006. On April 16, 2001, TIGHI borrowed $275.0 million on the
line of credit. Proceeds from this borrowing together with $225.0 million
of commercial paper proceeds were used to pay the $500.0 million 6.75%
long-term note payable, which was due on April 16, 2001. On November 8,
2001, TIGHI borrowed another $225.0 million under the line of credit. The
proceeds were used to pay off maturing commercial paper. The maturity for
all $500.0 million borrowed under this line was extended to November 7,
2003, and the interest rate was fixed at 3.60%. The weighted average
interest rate for the line of credit was 3.60% and 3.82% for 2002 and 2001,
respectively. TIGHI had an additional $250.0 million revolving line of
credit from Citigroup. TIGHI paid a commitment fee to Citigroup for this
line of credit, which expires in 2006. This agreement became effective on
December 19, 2001 and replaced a previous facility with a syndicate of
banks. Borrowings under this line of credit carry a variable interest rate
based upon LIBOR plus 50 basis points. During December 2002, the Company
borrowed $250.0 million and subsequently repaid $50.0 million under this
line of credit. At December 31, 2002, borrowings outstanding under this
line of credit were $200.0 million, and the weighted average interest rate
for these borrowings was 1.87% and 1.92% for 2003 and 2002, respectively.
These lines of credit were repaid during March 2003.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

137



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|8. |  | DEBT, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Effective April 17, 2003, TPC entered into the following line of credit
agreements with Citibank, a subsidiary of Citigroup, TPCs former parent:
(i) a $250.0 million 45-month revolving line of credit (the 45-Month Line
of Credit), and (ii) a $250.0 million 364-day revolving line of credit (the
364-Day Line of Credit and, together with the 45-Month Line of Credit, the
Lines of Credit). TPC may, with Citibanks consent, extend the commitment
of the 364-Day Line of Credit for additional 364-day periods under the same
terms and conditions. TPC has the option, provided there is no default or
event of default, to convert outstanding advances under the 364-Day Line of
Credit at the commitment termination date to a term loan maturing no later
than one year from the commitment termination date. Borrowings under the
Lines of Credit may be made, at TPCs option, at a variable interest rate
equal to either the lenders base rate plus an applicable margin or at
LIBOR plus an applicable margin. Each Line of Credit includes a
commitment fee and, for any date on which advances exceed 50% of the total
commitment, a utilization fee. The applicable margin and the rates on
which the commitment fee and the utilization fee are based vary based upon
TPCs long-term senior unsecured non-credit-enhanced debt ratings. Each
Line of Credit requires TPC to comply with various covenants, including the
maintenance of minimum statutory capital and surplus of
$5.5 billion and
compliance with a ratio of total consolidated debt to total capital
of 45%. At December 31, 2003, the Company was in compliance
with these financial covenants. In
addition, an event of default will occur if there is a change in control
(as defined in the Lines of Credit agreements) of TPC. The proposed
merger with St. Paul would constitute such a change of control of TPC;
however the Company has obtained a waiver from Citibank of the event of default
that otherwise would have occurred in connection with the proposed merger with St. Paul. There were no amounts
outstanding under the Lines of Credit at December 31, 2003.
|  
|   |  | At December 31, 2001, TPC had a note payable to Citigroup in the amount of
$1.198 billion, in conjunction with the purchase of TIGHIs outstanding
shares in April 2000. On February 7, 2002, this note payable was replaced
by a new note agreement. Under the terms of the new note agreement,
interest accrued on the aggregate principal amount outstanding at the
commercial paper rate (the then current short-term rate) plus 10 basis
points per annum. Interest was compounded monthly. This note was prepaid
following the offerings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | In February 2002, TPC paid a dividend of $1.000 billion to Citigroup in the
form of a non-interest bearing note payable on December 31, 2002. This
note would have begun to accrue interest from December 31, 2002 on any
outstanding balance at the floating base rate of Citibank, N.A., New York
City plus 2.0%. On December 31, 2002, this note was repaid in its
entirety.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | In February 2002, TPC also paid a dividend of $3.700 billion to Citigroup
in the form of a note payable in two installments. This note was
substantially prepaid following the offerings. The balance of $150.0
million was due on May 9, 2004. This note would have begun to bear
interest from May 9, 2002 at a rate of 7.25% per annum. This note was
prepaid on May 8, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | In March 2002, TPC paid a dividend of $395.0 million to Citigroup in the
form of a note payable, which would have begun to bear interest after May
9, 2002 at a rate of 6.0% per annum. This note was prepaid following the
offerings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | In March 2002, TPC issued $892.5 million aggregate principal amount of 4.5%
convertible junior subordinated notes, which will mature on April 15, 2032,
unless earlier redeemed, repurchased or converted. Interest is payable
quarterly in arrears. TPC has the option to defer interest payments on the
notes for a period not exceeding 20 consecutive interest periods nor beyond
the maturity of the notes. During a deferral period, the amount of
interest due to holders of the notes will continue to accumulate, and such
deferred interest payments will themselves accrue interest. Deferral of
any interest can create certain restrictions for TPC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

138



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|8. |  | DEBT, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Unless previously redeemed or repurchased, the notes are convertible into
shares of class A common stock at the option of the holders at any time
after March 27, 2003 and prior to April 15, 2032 if at any time (1) the
average of the daily closing prices of class A common stock for the 20
consecutive trading days immediately prior to the conversion date is at
least 20% above the then applicable conversion price on the conversion
date, (2) the notes have been called for redemption, (3) specified
corporate transactions have occurred, or (4) specified credit rating events
with respect to the notes have occurred. The notes will be convertible
into shares of class A common stock at a conversion rate of 1.0808 shares
of class A common stock for each $25 principal amount of notes (equivalent
to an initial conversion price of $23.13 per share of class A common
stock), subject to adjustment in certain events. On or after April 18,
2007, the notes may be redeemed at TPCs option. TPC is not required to
make mandatory redemption or sinking fund payments with respect to the
notes. The notes are general unsecured obligations and are subordinated in
right of payment to all existing and future Senior Indebtedness. The notes
are also effectively subordinated to all existing and future indebtedness
and other liabilities of any of TPCs current or future subsidiaries.
|  
|   |  | During May 2002, TPC fully and unconditionally guaranteed the payment of
all principal, premiums, if any, and interest on certain debt obligations
of its wholly-owned subsidiary TIGHI. TPC is deemed to have no independent
assets or operations except for its wholly-owned subsidiary TIGHI.
Consolidated financial statements of TIGHI have not been presented herein
or in any separate reports filed with the Securities and Exchange
Commission because management has determined that such financial statements
would not be material to holders of TIGHI debt. The guarantees pertain to
the $150.0 million 6.75% Notes due 2006 and the $200.0 million 7.75% Notes
due 2026 included in long-term debt, and the $900.0 million of
TIGHI-obligated mandatorily redeemable securities of subsidiary trusts
holding solely junior subordinated debt securities of TIGHI (TIGHI
Securities).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | In August 2002, CIRI, a subsidiary of the Company, issued $49.7 million
aggregate principal amount of 6.0% convertible notes (the CIRI Notes) which
will mature on December 31, 2032 unless earlier redeemed or repurchased.
Interest on the CIRI Notes is payable quarterly in arrears. The CIRI Notes
are convertible as a whole and not in part into shares of CIRI common stock
at the option of the holders of 66-2/3% of the aggregate principal amount
of the notes, in the event of an IPO or change of control of CIRI. At any
time after the earlier of (a) December 31, 2010 or (b) an IPO by CIRI, the
notes may be redeemed by CIRI.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | CIRI also issued $85.9 million of mandatorily convertible preferred stock
during August 2002. The declaration and payment of dividends to holders of
CIRIs convertible preferred stock will be at the discretion of the CIRI
Board of Directors and if declared, paid on a cumulative basis for each
share of convertible preferred stock at an annual rate of 6% of the stated
value per share of the convertible preferred stock. Dividends of $5.1
million and $2.2 million were declared and paid during 2003 and 2002,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | In December 2002, the Company entered into a loan agreement with an
unaffiliated lender and borrowed $550.0 million under a Promissory Note due
in January 2004. The Promissory Note carried a variable interest rate of
LIBOR plus 25 basis points per annum. On February 5, 2003, the Company
issued $550.0 million of Floating Rate Notes due in February 2004, which
was included in short-term debt in the condensed consolidated balance
sheet. The proceeds from these notes were used to prepay the $550.0
million due on the Promissory Note. The Floating Rate Notes also carry a
variable interest rate of LIBOR plus 25 basis points per annum. On March
14, 2003 and June 17, 2003, the Company repurchased $75.0 million and $24.0
million, respectively, of the Floating Rate Notes at par plus accrued
interest. The remaining $451.0 million were repaid on September 5, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

139



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|8. |  | DEBT, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On March 11, 2003, TPC issued $1.400 billion of senior notes comprising of
$400.0 million of 3.75% senior notes due March 15, 2008, $500.0 million of
5.00% senior notes due March 15, 2013 and $500.0 million of 6.375% senior
notes due March 15, 2033. The notes pay interest semi-annually on March 15
and September 15 of each year, beginning September 15, 2003, are senior
unsecured obligations and rank equally with all of TPCs other senior
unsecured indebtedness. TPC may redeem some or all of the notes prior to
maturity by paying a make-whole premium based on U.S. Treasury rates.
The net proceeds from the sale of these notes were contributed to TIGHI, so
that TIGHI could prepay and refinance $500.0 million of 3.60% indebtedness
to Citigroup and to redeem $900.0 million aggregate principal amount of
TIGHIs 8.00% to 8.08% junior subordinated debt securities held by
subsidiary trusts. These trusts, in turn, used these funds to redeem
$900.0 million of preferred capital securities on April 9, 2003.                                                                                                                                                                                                           
|  
|   |  | These senior notes were sold to qualified institutional buyers as defined
under Rule 144A under the Securities Act of 1933 (the Securities Act) and
outside the United States in reliance on Regulation S under the Securities
Act. Accordingly, the notes (the restricted notes) were not registered
under the Securities Act or any state securities laws and could not be
transferred or resold except pursuant to certain exemptions. As part of
this offering, TPC agreed to file a registration statement under the
Securities Act to permit the exchange of the notes for registered notes
(the Exchange Notes) having terms identical to those of the senior notes
described above (Exchange Offer). On April 14, 2003, TPC initiated the
Exchange Offer pursuant to a Form S-4 that was filed with the Securities
and Exchange Commission. Accordingly, each series of Exchange Notes has
been registered under the Securities Act, and the transfer restrictions and
registration rights relating to the restricted notes do not apply to the
Exchange Notes. As of May 13, 2003 (the Expiration Date of the Exchange
Offer), 99.8%, 99.4% and 100% of TPCs 5, 10, and 30-year restricted notes,
respectively, were exchanged for Exchange Notes.
|  
|   |  | TPCs primary source of funds for debt service is dividends from
subsidiaries, which are subject to various restrictions. See note 10.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

140



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|9. |  | FEDERAL INCOME TAXES
|-- |  | --------------------

|                                                                                                                       |                                                      |       |         |        |       |      |        |        |        |   |         |        |       | 
|---------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ----- | ------- | ------ | ----- | ---- | ------ | ------ | ------ | - | ------- | ------ | ----- | 
|(for the year ended December 31, in millions)                                                                          |                                                      | 2003  |         | 2002   |       | 2001
|                                                                                                                       |                                                      |       |         |        |       |     
|Effective tax rate                                                                                                     |                                                      |       |         |        |       |      |        |        |        |   |         |       
|Income (loss) before federal income taxes, minority
interest and cumulative effect of changes in
accounting principles |                                                      | $     | 2,229.4 |        |       | $    | (259.8 | )      |        | $ | 1,389.0 |       
|Statutory tax rate                                                                                                     |                                                      |       | 35.0    | %      |       |      | 35.0   | %      |        |   | 35.0    | %     
|                                                                                                                       |                                                      |       |         |        |       |      |        |        |        |   |         |       
|Expected federal income taxes (benefit)                                                                                |                                                      |       | 780.3   |        |       |      | (90.9  | )      |        |   | 486.2   |       
|Tax effect of:                                                                                                         |                                                      |       |         |        |       |      |        |        |        |   |         |       
|                                                                                                                       | Nontaxable investment income                         |       |         | (200.5 | )     |      |        | (180.1 | )      |   |         | (169.2 | )    
|                                                                                                                       | Recoveries under Citigroup Indemnification Agreement |       |         |       |       |      |        | (182.0 | )      |   |         |       |      
|                                                                                                                       | Tax reserve adjustment                               |       |         | (40.0  | )     |      |        | (23.0  | )      |   |         | (15.0  | )    
|                                                                                                                       | Other, net                                           |       |         | (2.4   | )     |      |        | (.5    | )      |   |         | 24.8   |      
|                                                                                                                       |                                                      |       |         |        |       |      |        |        |        |   |         |       
|Federal income taxes (benefit)                                                                                         |                                                      | $     | 537.4   |        |       | $    | (476.5 | )      |        | $ | 326.8   |       
|                                                                                                                       |                                                      |       |         |        |       |      |        |        |        |   |         |       
|Effective tax rate                                                                                                     |                                                      |       | 24.1    | %      |       |      | (183.4 | )%     |        |   | 23.5    | %     
|                                                                                                                       |                                                      |       |         |        |       |      |        |        |        |   |         |       
|Composition of federal income taxes                                                                                    |                                                      |       |         |        |       |      |        |        |        |   |         |       
|Current expense:                                                                                                       |                                                      |       |         |        |       |      |        |        |        |   |         |       
|                                                                                                                       | United States                                        |       | $       | (6.7   | )     |      | $      | 109.0  |        |   | $       | 310.6  |      
|                                                                                                                       | Foreign                                              |       |         | 5.0    |       |      |        | 3.3    |        |   |         | 5.1    |      
|                                                                                                                       |                                                      |       |         |        |       |      |        |        |        |   |         |       
|                                                                                                                       |                                                      | Total |         |        | (1.7  | )    |        |        | 112.3  |   |         |        | 315.7 | 
|                                                                                                                       |                                                      |       |         |        |       |      |        |        |        |   |         |       
|Deferred expense:                                                                                                      |                                                      |       |         |        |       |      |        |        |        |   |         |       
|                                                                                                                       | United States                                        |       |         | 538.7  |       |      |        | (588.5 | )      |   |         | 11.0   |      
|                                                                                                                       | Foreign                                              |       |         | .4     |       |      |        | (.3    | )      |   |         | .1     |      
|                                                                                                                       |                                                      |       |         |        |       |      |        |        |        |   |         |       
|                                                                                                                       |                                                      | Total |         |        | 539.1 |      |        |        | (588.8 | ) |         |        | 11.1  | 
|                                                                                                                       |                                                      |       |         |        |       |      |        |        |        |   |         |       
|Federal income taxes (benefit)                                                                                         |                                                      | $     | 537.4   |        |       | $    | (476.5 | )      |        | $ | 326.8   |       
|                                                                                                                       |                                                      |       |         |        |       |      |        |        |        |   |         |       



| |  | Additional tax benefits attributable to employee stock plans allocated
directly to shareholders equity were $6.3 million, $2.6 million and $.3
million for the years ended December 31, 2003, 2002 and 2001,
respectively.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The current federal income tax payable was $226.4 million and $179.5
million at December 31, 2003 and 2002, respectively and is included in
other liabilities in the consolidated balance sheet.                           

141



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|9. |  | FEDERAL INCOME TAXES, Continued                                                                                               
|-- |  | ------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The net deferred tax assets comprise the tax effects of temporary
differences related to the following assets and liabilities:

|                                             |       |      |       |         |  |   |         |         | 
|-------------------------------------------- | ----- | ---- | ----- | ------- |  | - | ------- | ------- | 
|(at December 31, in millions)                |       | 2003 |       | 2002   
|                                             |       |      |       |        
|Deferred tax assets                          |       |      |       |         |  |   |         |        
|Claims and claim adjustment expense
reserves |       | $    | 947.4 |         |  | $ | 923.4   |        
|Net operating loss carryforward              |       |      |      |         |  |   | 486.5   |        
|Unearned premium reserves                    |       |      | 432.2 |         |  |   | 388.2   |        
|Employee benefits                            |       |      | 7.6   |         |  |   | 74.6    |        
|Insurance-related assessments                |       |      | 44.6  |         |  |   | 45.1    |        
|Other                                        |       |      | 151.2 |         |  |   | 145.4   |        
|                                             |       |      |       |         |  |   |         |        
|                                             | Total |      |       | 1,583.0 |  |   |         | 2,063.2 | 
|                                             |       |      |       |         |  |   |         |        
|Deferred tax liabilities                     |       |      |       |         |  |   |         |        
|Deferred acquisition costs                   |       |      | 336.8 |         |  |   | 304.4   |        
|Investments                                  |       |      | 521.8 |         |  |   | 261.0   |        
|Other                                        |       |      | 46.5  |         |  |   | 50.7    |        
|                                             |       |      |       |         |  |   |         |        
|                                             | Total |      |       | 905.1   |  |   |         | 616.1   | 
|                                             |       |      |       |         |  |   |         |        
|Deferred federal income taxes                |       | $    | 677.9 |         |  | $ | 1,447.1 |        
|                                             |       |      |       |         |  |   |         |        



| |  | For the period ending March 27, 2002, the Company is included in the
consolidated federal income tax return filed by Citigroup. Citigroup
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 Citigroup. Any
credits for losses will be paid by Citigroup currently to the extent that
such credits are for tax benefits that have been utilized in the
consolidated federal income tax return.                                                                                                                                                                                                                  
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | As of March 28, 2002, as a result of the IPO, the Company is no longer
included in the Citigroup consolidated federal income tax return. As of
that date, the Company began filing its own consolidated federal income tax
return.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | At December 31, 2002, the Company had a net operating loss carryforward of
$1.390 billion. Under terms of the tax sharing agreement with Citigroup,
the Company is entitled to carry operating losses back to prior years upon
receiving Citigroups consent. During the first quarter of 2003, the
Company received Citigroups consent and, as a result, the Companys
deferred tax asset was reduced by $486.5 million with a corresponding
reduction to the current federal income tax payable (included in other cash
flows from operating activities in the consolidated statement of cash
flows.) On June 9, 2003, the Company received a federal income tax refund
of $530.9 million representing the full utilization of the net operating
loss carryforward.
|
| |  | In the opinion of the Companys management, realization of the recognized
deferred federal income taxes of $677.9 million is more likely than not
based on expectations as to the Companys future taxable income. The
Company has reported income (loss) before federal income taxes, minority
interest and cumulative effect of changes in accounting principles of
$1.120 billion on average over the last three years and has generated
federal taxable income exceeding $448.1 million on average in each year
during the same period.                                                                                                                                                                                                                           

142



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|10. |  | SHAREHOLDERS EQUITY AND DIVIDEND AVAILABILITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Mandatorily Redeemable Securities of Subsidiary Trusts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | TIGHI 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 Junior Subordinated Debentures and
the related income effects are eliminated in the consolidated financial
statements. On April 9, 2003, TIGHI redeemed the TIGHI debentures held by
the subsidiary trusts. The subsidiary trusts, in turn, used these funds to
redeem the TIGHI securities. The financial structure of each of Travelers
P&C Capital I and Travelers P&C Capital II (the subsidiary trusts) at
December 31, 2002 was as follows:

|                                                  |  |               |                |               |           |   |              |  
|------------------------------------------------- |  | ------------- | -------------- | ------------- | --------- | - | ------------ | -
|                                                  |  | Travelers P&C |                | Travelers P&C
|                                                  |  | Capital I     |                | Capital II   
|                                                  |  |               |                |              
|Trust Securities (TIGHI 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)                   |  | $             | 800.0          |               |           | $ | 100.0        |  
|Coupon rate                                       |  |               | 8.08           | %             |           |   | 8.00         | %
|Distributions payable                             |  | Quarterly     |                |               | Quarterly |  
|Distributions guaranteed by(1)                    |  | TIGHI         |                |               | TIGHI     |  
|Common Securities issued to TIGHI                 |  |               | 989,720        |               |           |   | 123,720      |  
|                                                  |  |               |                |               |           |   |              |  
|Junior Subordinated Debentures (TIGHI
Debentures) |  |               |                |               |           |   |              |  
|Amount owned (in millions)                        |  | $             | 825.0          |               |           | $ | 103.0        |  
|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 |  



|(1) |  | Under the arrangements, taken as a whole, payments due are fully
and unconditionally guaranteed on a subordinated basis. During May
2002, TPC fully and unconditionally guaranteed the payment of all
principal, premium, if any, and interest of the debt obligations of
TIGHI.                                                                                                                                                                                                                                                                                                                                                                                                      
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The obligations of TIGHI with respect to the TIGHI Debentures, when
considered together with certain undertakings of TIGHI with respect to the
subsidiary trusts, constitute full and unconditional guarantees by TIGHI of
the subsidiary trusts obligations under the respective TIGHI Securities.
The TIGHI Securities are classified in the consolidated balance sheet as
TIGHI-obligated mandatory redeemable securities of subsidiary trusts
holding solely junior subordinated debt securities of TIGHI at their
liquidation value of $900.0 million. Distributions on the TIGHI Securities
have been classified as interest expense in the consolidated statement of
income.

143



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|10. |  | SHAREHOLDERS EQUITY AND DIVIDEND AVAILABILITY, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Common Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | TPCs common stock consists of class A and class B common stock. On all
matters submitted to vote of the TPC shareholders, holders of class A and
class B common stock are entitled to one and seven votes per share,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | On January 22, 2004 and January 23, 2003, the Company, through its Capital
Accumulation Program (CAP), issued 1,955,682 and 1,943,627 shares,
respectively, of class A common stock in the form of restricted stock to
participating officers and other key employees. The fair value per share
of the class A common stock was $17.92 and $16.18, respectively. The
restricted stock generally vests after a three-year period.                                                                                                                                                                                                                                                                                                                                                               
|   
|    |  | On March 21, 2002, TPC sold approximately 231.0 million shares of its class
A common stock in a public offering for net proceeds of $4.090 billion.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | Rights Plan and Preferred Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | In 2002, prior to the Companys IPO, the Companys Board of Directors
adopted a shareholder rights plan as a result of which each outstanding
share of the Companys class A common stock and class B common stock
carries with it the right to acquire one-thousandth of a share in a new
series of the Companys preferred stock designated as series A junior
participating preferred stock. On March 20, 2002, the Board of Directors
designated three million of the 50 million shares of preferred stock
authorized as Series A Junior Participating Preferred Stock (the Series A
Preferred Stock).                                                                                                                                                                                     
|   
|    |  | Under the Companys shareholder rights plan, each outstanding share of the
Companys class A and class B common stock carries with it the right to
acquire one-thousandth of a share of the Series A Preferred Stock. These
Rights trade with the Companys common stock and will expire on March 20,
2012, unless the Rights are earlier redeemed. Such Rights are not
presently exercisable and have no voting rights. At December 31, 2003 and
2002, there were no shares of preferred stock, including the Series A
Preferred Stock, issued or outstanding.                                                                                                                                                                                                                                
|   
|    |  | Ten business days after the announcement that a person is making a tender
or exchange offer for 15% or more of the Companys general voting power or
acquires 15% or more of the Companys general voting power (other than as a
result of repurchases of stock by the Company or through inadvertence by
certain shareholders that subsequently divest all excess shares as set
forth in the rights agreement), the Rights detach from the common stock and
become freely tradable and exercisable, entitling a holder to purchase
one-thousandth of a share in the Companys Series A Preferred Stock at
$77.50, subject to adjustment.                                                                                                                                                      
|   
|    |  | If a person becomes the beneficial owner of 15% or more of the Companys
general voting power, each Right will entitle its holder to purchase $155
market value of the Companys common stock for $77.50. If the Company
subsequently merges with another entity or transfers 50% or more of its
assets, cash flow or earnings power to another entity, each Right will
entitle its holder to purchase $155 market value of such other entitys
common stock for $77.50. The Company may redeem the Rights, at its option,
at $0.01 per Right, prior to any person acquiring beneficial ownership of
at least 15% of the Companys common stock. The shareholder rights plan is
designed primarily to encourage anyone seeking to acquire the Company to
negotiate with the Board of Directors.

144



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|10. |  | SHAREHOLDERS EQUITY AND DIVIDEND AVAILABILITY, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Prior to the execution of the merger agreement, the Company amended its
shareholder rights plan to permit execution of the merger agreement and the
consummation of the transactions contemplated by the merger agreement,
including the merger, without triggering the separation or exercise of the
shareholder rights. In addition, pursuant to the amendment, the Rights
will cease to be exercisable upon consummation of the merger. The
Companys Board of Directors adopted that amendment, and the amendment
became effective, on November 16, 2003.
|   
|    |  | Treasury Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|    |  | During September 2002, the Board of Directors approved a $500.0 million
share repurchase program. Purchases of class A and class B common stock
may be made from time to time in the open market, and it is expected that
funding for the program will principally come from operating cash flow.
During 2003, TPC repurchased approximately 2.6 million shares of class A
common stock at a total cost of $40.0 million, representing the first
acquisition of shares under this program.                                                                   
|   
|    |  | The Companys stock incentive plan provides settlement alternatives to
employees in which the Company repurchases shares to cover tax withholding
costs and exercise costs. At December 31, 2003 and 2002, TPC had purchased
$17.6 million and $3.7 million, respectively, of its common stock under
this plan.                                                                                                                                                                                                                                              
|   
|    |  | The Company also has a commitment in conjunction with the Citigroup
Distribution, for which it prepaid $15.1 million, to acquire class A and
class B common stock held by the Citigroup Capital Accumulation Program
(Citigroup CAP) upon forfeiture of plan participants. This commitment
expires over three years upon vesting of the Citigroup CAP participants.
At December 31, 2003 and 2002, TPC had acquired $3.9 million and $1.3
million, respectively, of its common stock pursuant to this arrangement.                                           
|   
|    |  | Shares acquired under these plans are reported as treasury stock in the
consolidated balance sheet.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | Dividends                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | TIGHIs insurance subsidiaries are 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. A maximum of $1.647 billion will be available by the end of
2004 for such dividends without prior approval of the Connecticut Insurance
Department.                                                                                                                                                                                
|   
|    |  | Statutory Net Income and Surplus                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | Statutory net income (loss) of TIGHIs insurance subsidiaries was $1.952
billion, ($973.6) million and $1.090 billion for the years ended December
31, 2003, 2002 and 2001, respectively. Statutory capital and surplus of
TIGHIs insurance subsidiaries was $8.444 billion and $7.287 billion at
December 31, 2003 and 2002, respectively.                                                                                                                                                                                                                 

145



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|10. |  | SHAREHOLDERS EQUITY AND DIVIDEND AVAILABILITY, Continued                                              
|--- |  | -------------------------------------------------------------------------------------------------------
|   
|    |  | Accumulated Other Changes in Equity from Nonowner Sources, Net of Tax                                  
|   
|    |  | Changes in each component of Accumulated Other Changes in Equity from
Nonowner Sources were as follows:

|                                                                                                                             |  |             |         |            |  |          |       |         |  |             |       |             |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | ---------- |  | -------- | ----- | ------- |  | ----------- | ----- | ----------- |  | - | ------- | -
|                                                                                                                             |  | Net         |         |            |  |          |       |         |  |             |       | Accumulated
|                                                                                                                             |  | Unrealized  |         |            |  |          |       |         |  |             |       | Other      
|                                                                                                                             |  | Gains       |         | Minimum    |  |          |       |         |  | Changes in 
|                                                                                                                             |  | (Losses) on |         | Pension    |  |          |       |         |  | Equity from
|                                                                                                                             |  | Investment  |         | Liability  |  |          |       |         |  | Nonowner   
|(at and for the year ended December 31, in millions)                                                                         |  | Securities  |         | Adjustment |  | Other(1) |       | Sources
|                                                                                                                             |  |             |         |            |  |          |       |        
|Balance, December 31, 2000                                                                                                   |  | $           | 407.1   |            |  | $        |      |         |  | $           | (6.4  | )           |  | $ | 400.7   |  
|Net unrealized gains on investment securities
obtained as part of affiliate acquisition, net
of tax of $11.7                 |  |             | 21.1    |            |  |          |      |         |  |             |      |             |  |   | 21.1    |  
|Net unrealized gains on investment
securities, net of tax of $20.2                                                           |  |             | 37.9    |            |  |          |      |         |  |             |      |             |  |   | 37.9    |  
|Less: Reclassification adjustment for net
realized gains included in net income, net
of tax of ($113.0)                      |  |             | (209.9  | )          |  |          |      |         |  |             |      |             |  |   | (209.9  | )
|Other, net of tax of ($6.7)                                                                                                  |  |             |        |            |  |          |      |         |  |             | (8.4  | )           |  |   | (8.4    | )
|                                                                                                                             |  |             |         |            |  |          |       |         |  |             |       |             |  |   |         |  
|Current period change                                                                                                        |  |             | (150.9  | )          |  |          |      |         |  |             | (8.4  | )           |  |   | (159.3  | )
|                                                                                                                             |  |             |         |            |  |          |       |         |  |             |       |             |  |   |         |  
|Balance, December 31, 2001                                                                                                   |  |             | 256.2   |            |  |          |      |         |  |             | (14.8 | )           |  |   | 241.4   |  
|Net unrealized gains on investment securities, net
of tax and minority interest of $297.1                                    |  |             | 574.4   |            |  |          |      |         |  |             |      |             |  |   | 574.4   |  
|Less: Reclassification adjustment for net
realized gains included in net income,
net of tax and minority interest of ($47.7) |  |             | (99.0   | )          |  |          |      |         |  |             |      |             |  |   | (99.0   | )
|Minimum pension liability adjustment,
net of tax of ($36.7)                                                                  |  |             |        |            |  |          | (68.3 | )       |  |             |      |             |  |   | (68.3   | )
|Other, net of tax of $9.7                                                                                                    |  |             |        |            |  |          |      |         |  |             | 8.1   |             |  |   | 8.1     |  
|                                                                                                                             |  |             |         |            |  |          |       |         |  |             |       |             |  |   |         |  
|Current period change                                                                                                        |  |             | 475.4   |            |  |          | (68.3 | )       |  |             | 8.1   |             |  |   | 415.2   |  
|                                                                                                                             |  |             |         |            |  |          |       |         |  |             |       |             |  |   |         |  
|Balance, December 31, 2002                                                                                                   |  |             | 731.6   |            |  |          | (68.3 | )       |  |             | (6.7  | )           |  |   | 656.6   |  
|Net unrealized gains on investment securities, net
of tax and minority interest of $200.3                                    |  |             | 349.4   |            |  |          |      |         |  |             |      |             |  |   | 349.4   |  
|Less: Reclassification adjustment for net
realized gains included in net income,
net of tax and minority interest of ($17.3) |  |             | (20.7   | )          |  |          |      |         |  |             |      |             |  |   | (20.7   | )
|Minimum pension liability adjustment,
net of tax of $33.3                                                                    |  |             |        |            |  |          | 62.0  |         |  |             |      |             |  |   | 62.0    |  
|Other, net of tax of $17.8                                                                                                   |  |             |        |            |  |          |      |         |  |             | 38.2  |             |  |   | 38.2    |  
|                                                                                                                             |  |             |         |            |  |          |       |         |  |             |       |             |  |   |         |  
|Current period change                                                                                                        |  |             | 328.7   |            |  |          | 62.0  |         |  |             | 38.2  |             |  |   | 428.9   |  
|                                                                                                                             |  |             |         |            |  |          |       |         |  |             |       |             |  |   |         |  
|Balance, December 31, 2003                                                                                                   |  | $           | 1,060.3 |            |  | $        | (6.3  | )       |  | $           | 31.5  |             |  | $ | 1,085.5 |  
|                                                                                                                             |  |             |         |            |  |          |       |         |  |             |       |             |  |   |         |  



|(1) |  | Includes foreign currency translation adjustments, changes in value
of private equity securities and the cumulative effect of the change in
accounting for derivative instruments and hedging activities.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

146



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|11. |  | INCENTIVE PLANS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Companys Board of Directors, in connection with the IPO, adopted the
Travelers Property Casualty Corp. 2002 Stock Incentive Plan (the 2002
Incentive Plan). The 2002 Incentive Plan permits grants of stock options,
restricted stock, deferred stock and other stock-based awards. The purposes
of the 2002 Incentive Plan are to attract and retain employees by providing
compensation opportunities that are competitive with other companies,
provide incentives to those employees who contribute significantly to the
Companys long-term performance and growth, and align employees long-term
financial interests with those of the Companys shareholders. The maximum
number of shares of class A common stock that may be issued pursuant to
awards granted under the 2002 Incentive Plan is 120.0 million shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    |  | The Companys Board of Directors, in connection with the IPO, also adopted
the Travelers Property Casualty Corp. Compensation Plan for Non-Employee
Directors (the Directors Plan). Under the Directors Plan, the directors
receive their annual fees in the form of Company common stock. Each
director may choose to receive a portion of their fees in cash to pay
taxes. Directors may also defer receipt of shares of class A common stock
to a future distribution date or upon termination of their service. The
shares of class A common stock issued under the Directors Plan come from
the 2002 Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | Stock Option Programs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | The Company has established stock option programs pursuant to the 2002
Incentive Plan: the Management stock option program and the Wealthbuilder
stock option program (see also Restricted Stock and Deferred Stock Programs
below). The Management stock option program provides for the granting of
stock options to officers and key employees of the Company and its
participating subsidiaries. The Wealthbuilder stock option program provides
for the granting of stock options to all employees meeting certain
requirements. The exercise price of options is equal to the fair market
value of the Companys class A common stock at the time of grant.
Generally, options vest 20% each year over a five-year period and may be
exercised for a period of ten years from the date of the grant only if the
optionee is employed by the Company, and for certain periods after
employment termination, depending on the cause of termination. The
Management stock option program also permits an employee exercising an
option to be granted a new option (a reload option) in an amount equal to
the number of shares of class A common stock used to satisfy both the
exercise price and withholding taxes due upon exercise of an option. The
reload options are granted at an exercise price equal to the fair market
value of the class A common stock on the date of grant, vest six months
after the grant date and are exercisable for the remaining term of the
related original option. The reload feature is not available for initial
option grants after January 23, 2003. The Wealthbuilder stock option
program does not contain a reload feature.
|   
|    |  | Prior to the IPO, the Company participated in various stock option plans
sponsored by its former affiliate, Citigroup, that provided for the
granting of stock options in Citigroup common stock to officers and key
employees, and, in the case of certain stock option programs, to all
employees meeting specific requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

147



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|11. |  | INCENTIVE PLANS, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On August 20, 2002, in connection with the Citigroup Distribution,
Citigroup stock option awards held by Company employees on that date under
Citigroups various stock option plans were cancelled and replaced with
stock option awards (replacement awards) to purchase the Companys class A
common stock under the Companys own incentive plan. These replacement
awards were granted on substantially the same terms, including vesting, as
the former Citigroup awards. The total number of the Companys class A
common stock subject to the replacement awards was 56.9 million shares of
which 24.6 million shares were then exercisable. The number of shares of
the Companys class A common stock to which the replacement awards relate
and the per share exercise price of the replacement awards were determined
so that:



| |  |  | the intrinsic value of each Citigroup option, which was the
difference between the closing price of Citigroups common stock on
August 20, 2002 and the exercise price of the Citigroup options, was
preserved in each replacement award for the Companys class A common
stock; and                                                               
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the ratio of the exercise price of the replacement award to the
closing price of the Companys class A common stock on August 20,
2002, immediately after the Citigroup Distribution, was the same as
the ratio of the exercise price of the Citigroup option to the price
of Citigroup common stock immediately before the Citigroup
Distribution.



| |  | Information with respect to stock option activity under the Companys stock
option plans for the years ended December 31, 2003 and 2002 is as follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|                               |                    |  |            |            |                |   |                  |       | 
|------------------------------ | ------------------ |  | ---------- | ---------- | -------------- | - | ---------------- | ----- | 
|                               |                    |  |            |            |                |   | Weighted Average
|                               |                    |  | Options    |            | Exercise Price
|                               |                    |  |            |            |               
|Outstanding, January 1, 2002   |                    |  |           |            |                | $ |                 |      
|Granted:                       |                    |  |            |            |                |   |                  |      
|                               | Replacement awards |  |            | 56,894,116 |                |   |                  | 17.29 | 
|                               | Original           |  |            | 21,643,341 |                |   |                  | 18.22 | 
|                               | Reload             |  |            | 264,595    |                |   |                  | 13.77 | 
|Exercised                      |                    |  | (1,186,383 | )          |                |   | 8.54             |      
|Forfeited                      |                    |  | (1,500,419 | )          |                |   | 19.84            |      
|                               |                    |  |            |            |                |   |                  |      
|Outstanding, December 31, 2002 |                    |  | 76,115,250 |            |                | $ | 17.63            |      
|                               |                    |  |            |            |                |   |                  |      
|Granted:                       |                    |  |            |            |                |   |                  |      
|                               | Original           |  |            | 457,473    |                |   |                  | 16.17 | 
|                               | Reload             |  |            | 1,100,880  |                |   |                  | 15.81 | 
|Exercised                      |                    |  | (3,971,931 | )          |                |   | 10.15            |      
|Forfeited                      |                    |  | (3,506,611 | )          |                |   | 20.85            |      
|                               |                    |  |            |            |                |   |                  |      
|Outstanding, December 31, 2003 |                    |  | 70,195,061 |            |                | $ | 17.85            |      
|                               |                    |  |            |            |                |   |                  |      

148



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|11. |  | INCENTIVE PLANS, Continued                                                                                                                          
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The following table summarizes the information about stock options
outstanding under the Companys stock option plans at December 31, 2003 and
2002:

|                |  |                     |            |                     |  |           |  |             |       |          |  |  |            |          |  |   |       |  |  | 
|--------------- |  | ------------------- | ---------- | ------------------- |  | --------- |  | ----------- | ----- | -------- |  |  | ---------- | -------- |  | - | ----- |  |  | 
|2003            |  | Options outstanding |            | Options exercisable
|                |  |                     |            |                    
|                |  |                     |            |                     |  | Weighted  |  | Weighted    |       |          |  |  |            | Weighted
|                |  |                     |            |                     |  | Average   |  | Average     |       |          |  |  |            | Average 
|Range of        |  | Number              |            | Contractual         |  | Exercise  |  | Number      |       | Exercise
|Exercise Prices |  | Outstanding         |            | Life Remaining      |  | Price     |  | Exercisable |       | Price   
|                |  |                     |            |                     |  |           |  |             |       |         
|$0.01 - $4.99   |  |                     | 1,544,448  |                     |  | 1.8 years |  | $           | 4.05  |          |  |  | 1,544,448  |          |  | $ | 4.05  | 
|$5.00 - $9.99   |  |                     | 24,095     |                     |  | 2.3 years |  |             | 7.89  |          |  |  | 24,095     |          |  |   | 7.89  | 
|$10.00 - $14.99 |  |                     | 19,753,883 |                     |  | 4.4 years |  |             | 11.77 |          |  |  | 18,005,847 |          |  |   | 11.75 | 
|$15.00 - $19.99 |  |                     | 24,516,712 |                     |  | 7.8 years |  |             | 17.98 |          |  |  | 6,892,462  |          |  |   | 17.68 | 
|$20.00 - $24.99 |  |                     | 14,745,824 |                     |  | 5.8 years |  |             | 22.11 |          |  |  | 10,147,932 |          |  |   | 22.30 | 
|$25.00 - $29.99 |  |                     | 9,610,099  |                     |  | 6.3 years |  |             | 25.73 |          |  |  | 5,062,615  |          |  |   | 25.87 | 
|                |  |                     |            |                     |  |           |  |             |       |          |  |  |            |          |  |   |       |  |  | 
|                |  |                     | 70,195,061 |                     |  | 6.1 years |  | $           | 17.85 |          |  |  | 41,677,399 |          |  | $ | 16.73 | 
|                |  |                     |            |                     |  |           |  |             |       |          |  |  |            |          |  |   |       |  |  | 

|                |  |                     |            |                     |  |           |  |             |       |          |  |  |            |          |  |   |       |  |  | 
|--------------- |  | ------------------- | ---------- | ------------------- |  | --------- |  | ----------- | ----- | -------- |  |  | ---------- | -------- |  | - | ----- |  |  | 
|2002            |  | Options outstanding |            | Options exercisable
|                |  |                     |            |                    
|                |  |                     |            |                     |  | Weighted  |  | Weighted    |       |          |  |  |            | Weighted
|                |  |                     |            |                     |  | Average   |  | Average     |       |          |  |  |            | Average 
|Range of        |  | Number              |            | Contractual         |  | Exercise  |  | Number      |       | Exercise
|Exercise Prices |  | Outstanding         |            | Life Remaining      |  | Price     |  | Exercisable |       | Price   
|                |  |                     |            |                     |  |           |  |             |       |         
|$0.01 - $4.99   |  |                     | 2,279,909  |                     |  | 2.7 years |  | $           | 3.99  |          |  |  | 2,277,419  |          |  | $ | 3.99  | 
|$5.00 - $9.99   |  |                     | 26,489     |                     |  | 3.4 years |  |             | 7.90  |          |  |  | 25,659     |          |  |   | 7.85  | 
|$10.00 - $14.99 |  |                     | 23,240,238 |                     |  | 5.4 years |  |             | 11.72 |          |  |  | 14,980,804 |          |  |   | 11.63 | 
|$15.00 - $19.99 |  |                     | 24,085,515 |                     |  | 8.9 years |  |             | 18.09 |          |  |  | 1,980,742  |          |  |   | 16.87 | 
|$20.00 - $24.99 |  |                     | 15,978,375 |                     |  | 6.6 years |  |             | 22.15 |          |  |  | 8,648,533  |          |  |   | 22.52 | 
|$25.00 - $29.99 |  |                     | 10,504,724 |                     |  | 7.0 years |  |             | 25.75 |          |  |  | 4,054,375  |          |  |   | 26.03 | 
|                |  |                     |            |                     |  |           |  |             |       |          |  |  |            |          |  |   |       |  |  | 
|                |  |                     | 76,115,250 |                     |  | 6.9 years |  | $           | 17.63 |          |  |  | 31,967,532 |          |  | $ | 16.18 | 
|                |  |                     |            |                     |  |           |  |             |       |          |  |  |            |          |  |   |       |  |  | 



| |  | Restricted Stock and Deferred Stock Programs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company, through its Capital Accumulation Program (CAP) established
pursuant to the 2002 Incentive Plan, issues shares of the Companys common
stock in the form of restricted stock awards to eligible officers and key
employees. Certain CAP participants may elect to receive part of their
awards in restricted stock and part in stock options. The number of shares
included in the restricted stock award is calculated at a 25% discount from
the market price at the time of the award and generally vest in full after
a three-year period. Except under limited circumstances, during this period
the stock cannot be sold or transferred by the participant, who is required
to render service to the Company during the restricted period. CAP awards
granted to non-U.S. CAP participants are in the form of deferred stock
awards. These deferred stock awards are subject to the same conditions as
the restricted stock awards except that the shares are not issued until the
vesting criteria are satisfied.
|
| |  | Prior to the IPO, the Company participated in Citigroups Capital
Accumulation Plan (Citigroup CAP) that provided for the issuance of shares
of Citigroup common stock in the form of restricted stock awards to
eligible officers and other key employees with substantially the same terms
as the Companys 2002 CAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

149



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|11. |  | INCENTIVE PLANS, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On August 20, 2002, in connection with the Citigroup Distribution, the
unvested outstanding awards of restricted stock and deferred shares held by
Company employees on that date under Citigroup CAP awards, were cancelled
and replaced by awards comprised primarily of 3.1 million newly issued
shares of class A common stock at a total market value of $53.3 million
based on the closing price of the class A common stock on August 20, 2002.
These replacement awards were granted on substantially the same terms,
including vesting, as the former Citigroup awards. The value of these newly
issued shares along with class A and class B common stock received in the
Citigroup Distribution on the Citigroup restricted shares, were equal to
the value of the cancelled Citigroup restricted share awards.
|   
|    |  | In addition, the Directors Plan allows deferred receipt of shares of class
A common stock (deferred stock) to a future distribution date or upon
termination of their service. The after-tax compensation cost associated
with this plan was not significant in 2003 and 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | Prior to the Citigroup Distribution on August 20, 2002, unearned
compensation expense associated with the Citigroup restricted common stock
grants was included in other assets in the consolidated balance sheet.
Following the Citigroup Distribution and the issuance of replacement stock
awards in the Companys class A and class B shares on August 20, 2002, the
unamortized unearned compensation expense associated with these awards is
included as unearned compensation as a separate component of equity in the
consolidated balance sheet. Unearned compensation expense is recognized as
a charge to income ratably over the vesting period.                                                                                                                                                              
|   
|    |  | The after-tax compensation cost charged to earnings for these restricted
stock and deferred stock awards was $17.1 million, $17.0 million and $19.4
million for the years ended December 31, 2003, 2002 and 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | Information with respect to restricted stock and deferred stock awards is
as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                                                  |  |      |           |      |  |   |           | 
|------------------------------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                                                  |  | 2003 |           | 2002
|                                                  |  |      |           |     
|New shares granted                                |  |      | 2,185,586 |      |  |   |          | 
|Replacement grants at August 20, 2002             |  |      |          |      |  |   | 3,311,551 | 
|Weighted average fair value per share at
issuance |  | $    | 16.15     |      |  | $ | 17.31     | 



| |  | 401(k) Savings Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On August 20, 2002, in connection with the Citigroup Distribution, the
Company established a 401(k) savings plan under which substantially all
employees are eligible to participate. Through December 31, 2003, the
Company matches employee contributions up to 3% of eligible pay but not
more than $1,500 annually. Effective January 1, 2004, the maximum amount
of the Companys match increased to $2,500 annually. The expense related
to this plan was $20.3 million and $17.0 million for the years ended
December 31, 2003 and 2002, respectively. Prior to the IPO and the
Citigroup Distribution, substantially all of the Companys employees were
eligible to participate in a 401(k) savings plan sponsored by Citigroup,
for which there was no Company matching contribution for substantially all
employees.
|
| |  | Stock Option Fair Value Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The fair value effect of stock options is derived by application of a
variation of the Black-Scholes option pricing model.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

150



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|11. |  | INCENTIVE PLANS, Continued                                                                                                                                                                                                                                                                         
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The significant assumptions used in estimating the fair value on the date
of the grant for original options and reload options granted in 2003 and
2002 and for replacement awards issued August 20, 2002 to Company employees
who held Citigroup stock option awards on that date were as follows:

|                                       |  |      |         |      |  |   |         |  
|-------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                       |  | 2003 |         | 2002
|                                       |  |      |         |     
|Expected life of stock options         |  |      | 3 years |      |  |   | 4 years |  
|Expected volatility of TPC stock (1)   |  |      | 29.4    | %    |  |   | 36.8    | %
|Risk-free interest rate                |  |      | 2.04    | %    |  |   | 3.17    | %
|Expected annual dividend per TPC share |  | $    | 0.26    |      |  | $ | 0.20    |  
|Expected annual forfeiture rate        |  |      | 5       | %    |  |   | 5       | %



|(1) |  | The expected volatility is based on the average volatility of an
industry peer group of entities because the Company only became
publicly traded in March 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In accordance with FAS 123, the exchange of options in conjunction with a
spinoff is considered a modification and therefore the modification
guidance was applied to the replacement awards issued on August 20, 2002.
For vested replacement options, any excess of the fair value of the
modified options issued over the fair value of the original options at the
date of exchange was recognized as additional compensation cost. For
nonvested replacement options, any excess of the fair value of the modified
options issued over the fair value of the original options at the date of
exchange is added to the remaining unrecognized compensation cost of the
original option and recognized over the remaining vesting period.
|   
|    |  | Under FAS 123, reload options are treated as separate grants from the
original grants and as a result are separately valued when granted. Reload
options are exercisable for the remaining term of the related original
option and therefore would generally have a shorter estimated life. Shares
received through option exercises under the reload program are subject to
restriction on sale. Discounts (as measured by the estimated cost of
protection) have been applied to the fair value of reload options granted
to reflect these sales restrictions.                                                                                                                                                                            
|   
|    |  | Awards issued prior to 2002 were granted in Citigroup stock options. The
estimated fair value effect of stock options for 2001 were derived by
applying the following significant assumptions underlying the Citigroup
stock option plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                                             |  |      |         |  
|-------------------------------------------- |  | ---- | ------- | -
|                                             |  | 2001
|                                             |  |     
|Expected life of stock options               |  |      | 3 years |  
|Expected volatility of Citigroup stock       |  |      | 38.6    | %
|Risk-free interest rate                      |  |      | 4.52    | %
|Expected annual dividend per Citigroup
share |  | $    | 0.92    |  
|Expected annual forfeiture rate              |  |      | 5       | %

151



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|11. |  | INCENTIVE PLANS, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | All original and reload stock options granted under the TPC stock option
programs had an exercise price equal to the market value of the Companys
class A common stock on the date of the grant. The replacement awards
granted on August 20, 2002 retained the intrinsic value of the awards
immediately prior to conversion and therefore the exercise price either
exceeded the market value or was less than the market value on August 20,
2002. The following table presents the weighted average exercise price and
weighted average grant date fair value information with respect to these
grants:

|                                         |  |         |            |                  |  |                 |       |                  |  |   |      | 
|---------------------------------------- |  | ------- | ---------- | ---------------- |  | --------------- | ----- | ---------------- |  | - | ---- | 
|                                         |  |         |            |                  |  | Weighted        |       | Weighted Average
|                                         |  | Options |            | Average Exercise |  | Grant Date Fair
|                                         |  | Granted |            | Price            |  | Value          
|                                         |  |         |            |                  |  |                
|Original awards 2003                     |  |         |            |                  |  |                 |       |                  |  |   |      | 
|Exercise price equal to market at grant  |  |         | 1,558,353  |                  |  | $               | 15.92 |                  |  | $ | 1.24 | 
|Exercise price exceeds market at grant   |  |         |           |                  |  |                 |      |                  |  |   |     | 
|Exercise price less than market at
grant |  |         |           |                  |  |                 |      |                  |  |   |     | 
|                                         |  |         |            |                  |  |                 |       |                  |  |   |      | 
|Original awards 2002                     |  |         |            |                  |  |                 |       |                  |  |   |      | 
|Exercise price equal to market at grant  |  |         | 21,907,936 |                  |  | $               | 18.16 |                  |  | $ | 5.84 | 
|Exercise price exceeds market at grant   |  |         |           |                  |  |                 |      |                  |  |   |     | 
|Exercise price less than market at
grant |  |         |           |                  |  |                 |      |                  |  |   |     | 
|Replacement awards 2002                  |  |         |            |                  |  |                 |       |                  |  |   |      | 
|Exercise price equal to market at grant  |  |         |           |                  |  |                 |      |                  |  |   |     | 
|Exercise price exceeds market at grant   |  |         | 27,704,096 |                  |  | $               | 23.45 |                  |  | $ | 3.14 | 
|Exercise price less than market at
grant |  |         | 29,190,020 |                  |  | $               | 11.43 |                  |  | $ | 7.28 | 
|                                         |  |         |            |                  |  |                 |       |                  |  |   |      | 
|Total granted 2002                       |  |         | 78,802,052 |                  |  | $               | 17.53 |                  |  | $ | 5.42 | 
|                                         |  |         |            |                  |  |                 |       |                  |  |   |      | 



|12. |  | PENSION PLANS AND RETIREMENT BENEFITS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Beginning August 20, 2002, TPC sponsors qualified and nonqualified
non-contributory defined benefit pension plans covering substantially all
employees. These plans provide benefits under a cash balance formula,
except that employees satisfying certain age and service requirements
remain covered by a prior final pay formula. TPC also provides
postretirement health and life insurance benefits for employees satisfying
certain age and service requirements who retire after the Citigroup
Distribution. Prior to the Citigroup Distribution, substantially similar
benefits were provided to TPC employees through plans sponsored by
Citigroup.                                                                                                                                                                                                                                                                               
|   
|    |  | Under agreements with Citigroup, TPC assumed liabilities for nonqualified
pension, post retirement health care and life insurance benefit liabilities
related to active Company plan participants as of August 20, 2002. The
initial projected benefit obligation of the Companys nonqualified pension
plan at August 20, 2002 was $21.3 million. Because Citigroup assumed
liabilities for the same benefits for retired or inactive plan
participants, the Company transferred short-term securities of $171.1
million and recorded a payable of $13.5 million in 2002 to Citigroup
affiliated companies, and reduced other liabilities and deferred taxes by
$284.0 million and $99.4 million, respectively, related to retired or
inactive employees, pending final agreements on the amounts. Final
agreement on settlement amounts was reached and an additional $2.2 million
was paid to Citigroup during the first quarter of 2003.

152



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|12. |  | PENSION PLANS AND RETIREMENT BENEFITS, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In addition, the Company assumed liabilities for qualified pension plan
benefits for active Company employees. As a result, assets and liabilities
for qualified pension plan benefits relating to active, but not retired or
inactive, plan participants were transferred from the Citigroup qualified
pension plan to the Companys newly established qualified pension plan.
The initial projected benefit obligation of the Companys qualified pension
plan at August 20, 2002 was $445.0 million. Assets of $390.0 million were
transferred from the Citigroup pension plan to the Companys pension plan
in 2002 and were invested primarily in a Standard & Poors stock index fund
and in a Lehman Brothers Aggregate bond index fund at December 31, 2002. A
final asset transfer of $37.9 million occurred in May 2003.
|   
|    |  | Prior to the Citigroup Distribution, the Company participated in
non-contributory defined benefit pension plans and a postretirement health
care and life insurance benefit plan sponsored by Citigroup. The Companys
share of net expense (credit) related to these plans was $(3.9) million for
January 1, 2002 through August 20, 2002 and $11.7 million for 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                           

153



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|12. |  | PENSION PLANS AND RETIREMENT BENEFITS, Continued                                                                                                                                                                                         
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Obligations and Funded Status                                                                                                                                                                                                            
|   
|    |  | The following tables summarize the funded status, obligations and amounts
recognized in the consolidated balance sheet for TPCs plans. The Company
uses a December 31 measurement date for its pension and postretirement
benefit plans.

|                                                                             |                    |      |               |       |               |      |        |       |   |   |                |     |   |   |       |     |  
|---------------------------------------------------------------------------- | ------------------ | ---- | ------------- | ----- | ------------- | ---- | ------ | ----- | - | - | -------------- | --- | - | - | ----- | --- | -
|                                                                             |                    |      |               |       |               |      |        |       |   |   | Postretirement
|                                                                             |                    |      | Pension Plans |       | Benefit Plans
|                                                                             |                    |      |               |       |              
|(at and for the year ended December 31, in millions)                         |                    | 2003 |               | 2002  |               | 2003 |        | 2002 
|                                                                             |                    |      |               |       |               |      |        |      
|Change in benefit obligation                                                 |                    |      |               |       |               |      |        |       |   |   |                |     |   |   |       |    
|Benefit obligation at beginning of year (1)                                  |                    | $    | 521.0         |       |               | $    | 488.0  |       |   | $ | 13.0           |     |   | $ | 12.3  |    
|Benefits earned                                                              |                    |      | 27.6          |       |               |      | 10.3   |       |   |   | .2             |     |   |   | .1    |    
|Interest cost on benefit obligation                                          |                    |      | 36.9          |       |               |      | 12.5   |       |   |   | .9             |     |   |   | .3    |    
|Actuarial loss                                                               |                    |      | 39.4          |       |               |      | 10.6   |       |   |   | (.2            | )   |   |   | .3    |    
|Benefits paid                                                                |                    |      | (6.3          | )     |               |      | (.4    | )     |   |   |               |     |   |   |      |    
|                                                                             |                    |      |               |       |               |      |        |       |   |   |                |     |   |   |       |    
|Benefit obligation at end of year                                            |                    | $    | 618.6         |       |               | $    | 521.0  |       |   | $ | 13.9           |     |   | $ | 13.0  |    
|                                                                             |                    |      |               |       |               |      |        |       |   |   |                |     |   |   |       |    
|Change in plan assets                                                        |                    |      |               |       |               |      |        |       |   |   |                |     |   |   |       |    
|Fair value of plan assets at beginning of year (1)                           |                    | $    | 430.8         |       |               | $    | 429.3  |       |   | $ |               |     |   | $ |      |    
|Actual return on plan assets                                                 |                    |      | 82.7          |       |               |      | 1.7    |       |   |   |               |     |   |   |      |    
|Company contributions                                                        |                    |      | 94.7          |       |               |      | .2     |       |   |   |               |     |   |   |      |    
|Benefits paid                                                                |                    |      | (6.3          | )     |               |      | (.4    | )     |   |   |               |     |   |   |      |    
|                                                                             |                    |      |               |       |               |      |        |       |   |   |                |     |   |   |       |    
|Fair value of plan assets at end of year                                     |                    | $    | 601.9         |       |               | $    | 430.8  |       |   | $ |               |     |   | $ |      |    
|                                                                             |                    |      |               |       |               |      |        |       |   |   |                |     |   |   |       |    
|Reconciliation of prepaid (accrued) benefit cost
and total amount recognized |                    |      |               |       |               |      |        |       |   |   |                |     |   |   |       |    
|Funded status of plan                                                        |                    | $    | (16.7         | )     |               | $    | (90.2  | )     |   | $ | (13.9          | )   |   | $ | (13.0 | )  
|Unrecognized:                                                                |                    |      |               |       |               |      |        |       |   |   |                |     |   |   |       |    
|                                                                             | Prior service cost |      |               | (37.1 | )             |      |        | (42.9 | ) |   |                | (.1 | ) |   |       | (.2 | )
|                                                                             | Net actuarial loss |      |               | 156.3 |               |      |        | 165.9 |   |   |                | 1.1 |   |   |       | 1.3 |  
|                                                                             |                    |      |               |       |               |      |        |       |   |   |                |     |   |   |       |    
|Net amount recognized                                                        |                    | $    | 102.5         |       |               | $    | 32.8   |       |   | $ | (12.9          | )   |   | $ | (11.9 | )  
|                                                                             |                    |      |               |       |               |      |        |       |   |   |                |     |   |   |       |    
|Amounts recognized in the statement of financial
position consist of:        |                    |      |               |       |               |      |        |       |   |   |                |     |   |   |       |    
|Prepaid benefit cost                                                         |                    | $    | 120.3         |       |               | $    | 49.0   |       |   | $ |               |     |   | $ |      |    
|Accrued benefit liability                                                    |                    |      | (27.5         | )     |               |      | (121.2 | )     |   |   | (12.9          | )   |   |   | (11.9 | )  
|Accumulated other comprehensive income                                       |                    |      | 9.7           |       |               |      | 105.0  |       |   |   |               |     |   |   |      |    
|                                                                             |                    |      |               |       |               |      |        |       |   |   |                |     |   |   |       |    
|Net amount recognized                                                        |                    | $    | 102.5         |       |               | $    | 32.8   |       |   | $ | (12.9          | )   |   | $ | (11.9 | )  
|                                                                             |                    |      |               |       |               |      |        |       |   |   |                |     |   |   |       |    



| | (1) |  | August 20, 2002 is the beginning of the year for 2002 as
TPC-sponsored plans began on that date.
| | --- |  | ------------------------------------------------------------------------------------------------

154



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|12. |  | PENSION PLANS AND RETIREMENT BENEFITS, Continued                                                                                                                                                                                                                                                                                                    
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The accumulated benefit obligation for the Companys defined benefit
pension plans was $573.7 and $476.0 million at December 31, 2003 and 2002,
respectively.                                                                                                                                                                                       
|   
|    |  | For pension plans with an accumulated benefit obligation in excess of plan
assets, the aggregate projected benefit obligation and the aggregate
accumulated benefit obligation were each $27.6 million at December 31, 2003
and were $521.0 million and $476.0 million, respectively, at December 31,
2002.                                         
|   
|    |  | The pretax minimum liability included in other comprehensive income
decreased by $95.3 million from December 31, 2002 to December 31, 2003.                                                                                                                                                                                                         
|   
|    |  | The Company does not have a best estimate of contributions expected to be
paid to the qualified pension plan during the next fiscal year at this
time. However, the maximum tax deductible contribution to the qualified
pension plan for 2004 is currently estimated to be $40.0 million, which may
be contributed on or before September 15, 2005.
|   
|    |  | Assumptions and Health Care Cost Trend Rate Sensitivity                                                                                                                                                                                                                                                                                             

|                                                                              |  |      |      |      |  |  |      |  
|----------------------------------------------------------------------------- |  | ---- | ---- | ---- |  |  | ---- | -
|(at and for the year ended December 31,)                                      |  | 2003 |      | 2002
|                                                                              |  |      |      |     
|Assumptions used to determine benefit obligations                             |  |      |      |      |  |  |      |  
|Discount rate                                                                 |  |      | 6.25 | %    |  |  | 6.75 | %
|Future compensation increase rate                                             |  |      | 4.00 | %    |  |  | 4.50 | %
|Assumptions used to determine net periodic benefit cost
(1)                   |  |      |      |      |  |  |      |  
|Discount rate                                                                 |  |      | 6.75 | %    |  |  | 7.00 | %
|Expected long-term rate of return on assets                                   |  |      | 8.00 | %    |  |  | 8.00 | %
|Assumed health care cost trend rates                                          |  |      |      |      |  |  |      |  
|Following year                                                                |  |      | 10.0 | %    |  |  | 10.0 | %
|Rate to which the cost trend rate is assumed to decline
(ultimate trend rate) |  |      | 5.0  | %    |  |  | 5.0  | %
|Year that the rate reaches the ultimate trend rate                            |  |      | 2009 |      |  |  | 2008 |  



|(1) |  | August 20, 2002 is the beginning of the year for 2002 as
TPC-sponsored plans began on that date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In choosing the expected long-term rate of return, the Companys Pension
Plan Investment Committee considered the historical returns of the S&P 500
Index and the Lehman Aggregate Index in conjunction with todays economic
and financial market conditions.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | As an indicator of sensitivity, increasing the assumed health care cost
trend rate by 1% would have increased the accumulated postretirement
benefit obligation by $.8 million at December 31, 2003 and 2002 and the
aggregate of the service and interest cost components of net postretirement
benefit expense by less than $.1 million for 2003 and 2002. Decreasing the
assumed health care cost trend rate by 1% would have decreased the
accumulated postretirement benefit obligation at December 31, 2003 and 2002
by $.8 million and $.7 million, respectively, and the aggregate of the
service and interest cost components of net postretirement benefit expense
by less than $.1 million for 2003 and 2002.

155



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|12. |  | PENSION PLANS AND RETIREMENT BENEFITS, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (2003 Medicare Act) was enacted. As permitted by
FASB Staff Position No. FAS 106-1, the Company has chosen to defer
recognition of the effects of the 2003 Medicare Act on its postretirement
benefit plan. The Company does not expect that the 2003 Medicare Act will
have a significant impact on the accumulated postretirement benefit
obligation or net postretirement benefit expense.
|   
|    |  | Components of Net Periodic Benefit Cost                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | The following table summarizes the components of net benefit expense
recognized in the consolidated statement of income for TPCs plans for the
period August 20, 2002 through December 31, 2002 and for the year ended
December 31, 2003.                                                                                                                                                                                                                                                  

|                                    |                    |      |               |      |               |      |       |      |   |   |                |   |  |   |    |   | 
|----------------------------------- | ------------------ | ---- | ------------- | ---- | ------------- | ---- | ----- | ---- | - | - | -------------- | - |  | - | -- | - | 
|                                    |                    |      |               |      |               |      |       |      |   |   | Postretirement
|                                    |                    |      | Pension Plans |      | Benefit Plans
|                                    |                    |      |               |      |              
|(in millions)                       |                    | 2003 |               | 2002 |               | 2003 |       | 2002
|                                    |                    |      |               |      |               |      |       |     
|Service cost                        |                    | $    | 27.6          |      |               | $    | 10.3  |      |   | $ | .2             |   |  | $ | .1 |  
|Interest cost on benefit
obligation |                    |      | 36.9          |      |               |      | 12.5  |      |   |   | .9             |   |  |   | .3 |  
|Expected return on plan assets      |                    |      | (38.8         | )    |               |      | (14.8 | )    |   |   |               |   |  |   |   |  
|Amortization of unrecognized:       |                    |      |               |      |               |      |       |      |   |   |                |   |  |   |    |  
|                                    | Prior service cost |      |               | (5.8 | )             |      |       | (2.1 | ) |   |                |  |  |   |    |  | 
|                                    | Net actuarial loss |      |               | 5.1  |               |      |       | .6   |   |   |                |  |  |   |    |  | 
|                                    |                    |      |               |      |               |      |       |      |   |   |                |   |  |   |    |  
|Net benefit expense                 |                    | $    | 25.0          |      |               | $    | 6.5   |      |   | $ | 1.1            |   |  | $ | .4 |  
|                                    |                    |      |               |      |               |      |       |      |   |   |                |   |  |   |    |  



| |  | Plan assets                                                                                  
| |  | ---------------------------------------------------------------------------------------------
|
| |  | The percentage of the fair value of pension plan assets held by asset category is as follows:

|                  |  |      |     |      |  |  |     |  
|----------------- |  | ---- | --- | ---- |  |  | --- | -
|(at December 31,) |  | 2003 |     | 2002
|                  |  |      |     |     
|Equity securities |  |      | 60  | %    |  |  | 59  | %
|Debt securities   |  |      | 40  | %    |  |  | 41  | %
|                  |  |      |     |      |  |  |     |  
|Total             |  |      | 100 | %    |  |  | 100 | %
|                  |  |      |     |      |  |  |     |  



| |  | The Companys Pension Plan Investment Committee has established a target
investment asset allocation of 60% invested in an S&P 500 index fund and
40% in a Lehman Brothers Aggregate Bond Index fund. In establishing this
investment asset allocation for the plan, the Pension Plan Investment
Committee took into account, among other factors, the information provided
to it by the plans actuary, information relating to the historical
investment returns of the S&P 500 and Lehman Brothers Aggregate Bond Index,
asset diversification and market conditions at the time each contribution
to the plan was to be invested. The Pension Plan Investment Committee
periodically reviewed the plans investment performance and asset
allocation during 2003, and has adhered to that allocation.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

156



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|13. |  | LEASES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Prior to the Citigroup Distribution, most leasing functions for TPC and its
subsidiaries were administered by the Company. Rent expense related to
these leases was shared by a former affiliate and the Company on a cost
allocation method based generally on estimated usage by department. In
conjunction with the Citigroup Distribution, the Company purchased certain
properties from Citigroup. Rent expense was $115.3 million, $123.3 million
and $121.0 million in 2003, 2002 and 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | Future minimum annual rental payments under noncancellable operating leases
are $81.6 million, $68.3 million, $52.9 million, $39.3 million, $21.9
million and $37.6 million for 2004, 2005, 2006, 2007, 2008 and 2009 and
thereafter, respectively. Future sublease rental income of approximately
$1.9 million will partially offset these commitments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|14. |  | DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | Derivative Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | The Company uses derivative financial instruments, including interest rate
swaps, equity swaps, credit derivatives, options, financial futures and
forward contracts, as a means of hedging exposure to interest rate, equity
price change and foreign currency risk. The Companys insurance
subsidiaries do not hold or issue derivatives for trading purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | To qualify as a hedge, the hedge relationship is designated and formally
documented at inception detailing the particular risk management objective
and strategy for the hedge, which includes the item and risk that is being
hedged, the derivative that is being used, as well as how effectiveness is
being assessed. A derivative has to be highly effective in accomplishing
the objective of offsetting either changes in fair value or cash flows for
the risk being hedged.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | For fair value hedges, changes in the fair value of derivatives are
reflected in net realized investment gains (losses), together with changes
in the fair value of the related hedged item. The Company did not utilize
fair value hedges during the years ended December 31, 2003 and 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | For cash flow hedges, the accounting treatment depends on the effectiveness
of the hedge. To the extent these derivatives are effective in offsetting
the variability of the hedged cash flows, changes in the derivatives fair
value will not be included in current earnings but are reported in
accumulated other changes in equity from nonowner sources. These changes
in fair value will be included in the earnings of future periods when
earnings are also affected by the variability of the hedged cash flows. At
December 31, 2003, the amount that the Company expects to include in net
realized investment gains (losses) over the next twelve months for these
cash flow hedges is not significant. To the extent these derivatives are
not effective, changes in their fair value are immediately included in net
realized investment gains (losses). The Companys cash flow hedges
primarily include hedges of floating rate available-for-sale securities and
certain forecasted transactions up to a maximum tenure of one year. While
the earnings impact of cash flow hedges is similar to the previous
accounting practice, the amounts included in the accumulated other changes
in equity from nonowner sources will vary depending on market conditions.
|   
|    |  | For net investment hedges in which derivatives hedge the foreign currency
exposure of a net investment in a foreign operation, the accounting
treatment will similarly depend on the effectiveness of the hedge. The
effective portion of the change in fair value of the derivative hedging the
net investment, including any forward premium or discount, is reflected in
the accumulated other changes in equity from nonowner sources as part of
the foreign currency translation adjustment. For the years ended December
31, 2003 and 2002, the amount included in the foreign currency translation
adjustment in equity from nonowner sources was a $17.0 million loss and an
$8.5 million loss, respectively. The ineffective portion is reflected in
net realized investment gains (losses).                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

157



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|14. |  | DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS,
Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The effectiveness of these hedging relationships is evaluated on a
retrospective and prospective basis using quantitative measures of
correlation. If a hedge relationship is found to be ineffective, it no
longer qualifies as a hedge, and any excess gains or losses attributable to
such ineffectiveness as well as subsequent changes in fair value are
recognized in net realized investment gains (losses). During the years
ended December 31, 2003 and 2002, the Company realized gains of zero and
$3.8 million, respectively, from hedge ineffectiveness.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | Derivatives that are not designated or
do not qualify as hedges are also carried at fair value with changes in
value reflected in net realized investment gains (losses). The Company has
certain U.S. treasury futures contracts and foreign currency forward
contracts, which are not designated as hedges at December 31, 2003 and
2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | For those hedge relationships that are terminated, hedge designations
removed, or forecasted transactions that are no longer expected to occur,
the hedge accounting treatment described in the paragraphs above will no
longer apply. For fair value hedges, any changes to the hedged item remain
as part of the basis of the asset and are ultimately reflected as an
element of the yield. For cash flow hedges, any changes in fair value of
the end-user derivative remain in accumulated other changes in equity from
nonowner sources, and are included in earnings of future periods when
earnings are also affected by the variability of the hedged cash flow. If
the hedged relationship was discontinued because a forecasted transaction
will not occur when scheduled, any changes in fair value of the end-user
derivative are immediately reflected in net realized investment gains
(losses). During the years ended December 31, 2003 and 2002, the Company
recognized no gain or loss and a gain of $4.9 million, respectively, from
discontinued forecasted transactions.
|   
|    |  | The Company also purchases investments that have embedded derivatives,
primarily convertible debt securities. These embedded derivatives are
carried at fair value with changes in value reflected in net realized
investment gains (losses). The Company bifurcates an embedded derivative
where: a) the economic characteristics and risks of the embedded instrument
are not clearly and closely related to the economic characteristics and
risks of the host contract, b) the entire instrument would not otherwise be
remeasured at fair value, and c) a separate instrument with the same terms
of the embedded instrument would meet the definition of a derivative under
FAS 133. Derivatives embedded in convertible debt securities are reported
on a combined basis with their host instrument and are classified as fixed
maturity securities.                                                                                                                                                                                                                                   
|   
|    |  | During 2003, the Company engaged in U.S. Treasury note futures transactions
to modify the duration of the investment portfolio. The Company entered
into 90 day futures contracts on 2 year, 5 year, 10 year and 30 year U.S.
Treasury notes which require a daily mark to market settlement with the
broker. The notational value of the open U.S. Treasury futures contracts
was $1.482 billion at December 31, 2003. These derivative instruments are
not designated and do not qualify as hedges under FAS 133 rules and as such
the daily mark to market settlement is reflected in net realized investment
gains (losses).                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | 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, 2003 and 2002, investments in fixed maturities had a fair
value, which equaled carrying value, of $33.046 billion and $30.003
billion, respectively. The fair value of investments in fixed maturities
for which a quoted market price or dealer quote are not available was
$685.4 million and $892.5 million at December 31, 2003 and 2002,
respectively. See note 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

158



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|14. |  | DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS,
Continued                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The carrying values of cash, trading securities, short-term securities,
mortgage loans, investment income accrued, receivables for investment
sales, payables for investment purchases and securities lending payable
approximated their fair values. See notes 1 and 4.                                                                                                                                                                                                                                                          
|   
|    |  | The carrying values of $284.3 million and $607.5 million of financial
instruments classified as other assets approximated their fair values at
December 31, 2003 and 2002, respectively. The carrying values of $2.690
billion and $2.272 billion of financial instruments classified as other
liabilities at December 31, 2003 and 2002, respectively, also approximated
their fair values. Fair value is determined using various methods
including discounted cash flows, as appropriate for the various financial
instruments.
|   
|    |  | The carrying value and fair value of the Companys debt and the TIGHI
debentures was as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                                   |  |          |         |       |  |          |         |       |  |   |         |  |  |   |         | 
|---------------------------------- |  | -------- | ------- | ----- |  | -------- | ------- | ----- |  | - | ------- |  |  | - | ------- | 
|                                   |  | 2003     |         | 2002 
|                                   |  |          |         |      
|                                   |  | Carrying |         | Fair  |  | Carrying |         | Fair 
|(at December 31, in millions)      |  | Value    |         | Value |  | Value    |         | Value
|                                   |  |          |         |       |  |          |         |      
|Notes payable to former
affiliates |  | $        |        |       |  | $        |        |       |  | $ | 700.0   |  |  | $ | 707.5   | 
|Convertible notes                  |  |          | 918.5   |       |  |          | 924.5   |       |  |   | 917.5   |  |  |   | 849.2   | 
|Long-term debt                     |  |          | 1,756.0 |       |  |          | 1,840.5 |       |  |   | 926.2   |  |  |   | 971.7   | 
|TIGHI Securities                   |  |          |        |       |  |          |        |       |  |   | 900.0   |  |  |   | 905.0   | 
|                                   |  |          |         |       |  |          |         |       |  |   |         |  |  |   |         | 
|Total                              |  | $        | 2,674.5 |       |  | $        | 2,765.0 |       |  | $ | 3,443.7 |  |  | $ | 3,433.4 | 
|                                   |  |          |         |       |  |          |         |       |  |   |         |  |  |   |         | 



|    |  | The fair value of the notes payable to former affiliates is based upon
discounted cash flows. The fair value of the convertible notes and the
long-term debt is based upon bid price at December 31, 2003 and 2002. The
fair value of the TIGHI Securities is based upon the closing price at
December 31, 2002.                                                                                                                                                                                                                                         
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|15. |  | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | Commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | In the normal course of business, the Company has unfunded commitments to
partnerships, joint ventures and certain private equity investments in
which it invests. These commitments were $652.3 million and $864.3 million
at December 31, 2003 and 2002, respectively.                                                                                                                                                                                                                                                                                 
|   
|    |  | Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | Asbestos and Environmental-Related Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | In the ordinary course of its insurance business, the Company receives
claims for insurance arising under policies issued by the Company asserting
alleged injuries and damages from asbestos and other hazardous waste and
toxic substances which are the subject of related coverage litigation,
including, among others, the litigation described below. The Company
continues to be subject to aggressive asbestos-related litigation. The
conditions surrounding the final resolution of these claims and the related
litigation continue to change.

159



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|15. |  | COMMITMENTS AND CONTINGENCIES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In May 2002, the Company agreed with approximately three dozen other
insurers and PPG Industries, Inc. (PPG) on key terms to settle
asbestos-related coverage litigation under insurance policies issued to
PPG. While there remain a number of contingencies, including the final
execution of documents, court approval and possible appeals, the Company
believes that the completion of the settlement pursuant to the terms
announced in May 2002 is likely. The Companys single payment contribution
to the proposed settlement is approximately $388.8 million after
reinsurance.                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | The Company is involved in a bankruptcy and other proceedings relating to
ACandS, Inc. (ACandS), formerly a national installer of products containing
asbestos. The proceedings involve disputes as to whether and to what
extent any of ACandS potential liabilities for bodily injury asbestos
claims were covered by insurance policies issued by the Company. There
were a number of developments in the proceedings since the beginning of
2003 including two decisions which were favorable to the Company. These
developments and the status of the various proceedings are described below.                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | One of the proceedings was an arbitration commenced in January 2001 to
determine whether and to what extent ACandS financial obligations for
bodily injury asbestos claims are subject to insurance policy aggregate
limits. On July 31, 2003, the arbitration panel ruled in the Companys
favor that asbestos bodily injury claims paid by ACandS on or after that
decision date are subject to the aggregate limits of the policies issued to
ACandS, which have been exhausted. In October 2003, ACandS commenced
a lawsuit seeking to vacate the arbitration award as beyond the
panels scope of authority (ACandS, Inc. v. Travelers Casualty and Surety
Co., U.S.D.Ct., E.D. Pa.). The Company has filed its opposition to
ACandS motion to vacate.                                                                                                                                                                                                                              
|   
|    |  | ACandS filed for bankruptcy in September 2002 (In re: ACandS, Inc., pending
in the U.S. Bankruptcy Court for the District of Delaware). On January 26,
2004 the bankruptcy court issued a decision rejecting confirmation of
ACandS proposed plan of reorganization. The bankruptcy court found,
consistent with the Companys objections to ACandS proposed plan, that the
proposed plan was not fundamentally fair, was not proposed in good faith
and did not comply with Section 524(g) of the Bankruptcy Code. ACandS has
filed a notice of appeal of the bankruptcy courts decision and has filed
objections to the bankruptcy courts findings of fact and conclusions of
law in the United States District Court. The Company has moved to dismiss
the appeal and objections and has also filed an opposition to ACandS
objections.                                                                                                                                            
|   
|    |  | In its proposed plan of reorganization, ACandS sought to establish a trust
to pay asbestos bodily injury claims against it and sought to assign to the
trust its rights under the insurance policies issued by the Company. The
proposed plan and disclosure statement filed by ACandS claimed that ACandS
had settled the vast majority of asbestos-related bodily injury claims
currently pending against it for approximately $2.8 billion. ACandS
asserts that based on a prior agreement between the Company and ACandS and
ACandS interpretation at the July 31, 2003 arbitration panel ruling, the
Company is liable for 45% of the $2.8 billion. In August 2003, ACandS
filed a new lawsuit against the Company seeking to enforce this position
(ACandS, Inc. v. Travelers Casualty and Surety Co., U.S.D.
Ct., E.D. Pa.).
The Company has not yet responded to the complaint but intends to
vigorously contest ACandS assertions and believes that it has meritorious
defenses.
|   
|    |  | In addition to the proceedings described above the Company and ACandS are
also involved in litigation (ACandS, Inc. v. Travelers Casualty and Surety
Co.,U.S.D.Ct., E.D. Pa.) commenced in September 2000. This litigation
primarily involves the extent to which the asbestos bodily injury claims
against ACandS are subject to occurrence limits under insurance policies
issued by the Company. The Company has filed a motion to dismiss this
action based upon the July 31, 2003 arbitration decision.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

160



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|15. |  | COMMITMENTS AND CONTINGENCIES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | All three of the ongoing proceedings were stayed pending the bankruptcy
courts ruling on ACandS plan of reorganization. In light of the
issuance of that ruling, the Company is now evaluating its next steps in
the proceedings. The Company believes that the findings of the Bankruptcy
Court support various of the Companys assertions in the proceedings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | The Company believes that it has meritorious defenses in all these
proceedings, which it is vigorously asserting, including, among others,
that the purported settlements are not final, are unreasonable in amount
and are not binding on the Company; that any bankruptcy plan of
reorganization which ACandS files is defective to the extent it seeks to
accelerate any of the Companys obligations under policies issued to ACandS
or to deprive the Company of its right to litigate the claims against
ACandS; that the arbitration award is valid and binding on the parties and
applies the claims purportedly settled by ACandS during the pendency of the
arbitration proceeding; and that the occurrence limits in the policies
substantially reduce or eliminate the Companys obligations, if any, with
respect to the purportedly settled claims.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | In October 2001 and April 2002, two purported class action suits (Wisev.
Travelers,and Meningerv. Travelers), were filed against the Company and
other insurers in state court in West Virginia. The plaintiffs in these
cases, which were subsequently consolidated into a single proceeding in
Circuit Court of Kanawha County, West Virginia, allege that the insurer
defendants engaged in unfair trade practices by inappropriately handling
and settling asbestos claims. The plaintiffs seek to reopen large numbers
of settled asbestos claims and to impose liability for damages, including
punitive damages, directly on insurers. Lawsuits similar to Wisehave been
filed in Massachusetts (2002) and Hawaii (filed in 2002, and served in May
2003) (these suits are collectively referred to as the Statutory and
Hawaii Actions). Also, in November 2001, plaintiffs in consolidated
asbestos actions pending before a mass tort panel of judges in West
Virginia state court moved to amend their complaint to name the Company as
a defendant, alleging that the Company and other insurers breached alleged
duties to certain users of asbestos products. In March 2002, the court
granted the motion to amend. Plaintiffs seek damages, including punitive
damages. Lawsuits seeking similar relief and raising allegations similar
to those presented in the West Virginia amended complaint are also pending
against the Company in Louisiana, Ohio and Texas state courts (these suits,
together with the West Virginia suit, are collectively referred to as the
common law claims).

161



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|15. |  | COMMITMENTS AND CONTINGENCIES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | All of the actions described in the preceding paragraph, other than the
Hawaii Actions, are currently subject to a temporary restraining order
entered by the federal bankruptcy court in New York, which had previously
presided over and approved the reorganization in bankruptcy of the
Companys former policyholder Johns Manville. In August 2002, the
bankruptcy court conducted a hearing on the Companys motion for a
preliminary injunction prohibiting further prosecution of the lawsuits
pursuant to the reorganization plan and related orders. At the conclusion
of this hearing, the court ordered the parties to mediation, appointed a
mediator and continued the temporary restraining order. During 2003, the
same bankruptcy court extended the existing injunction to apply to an
additional set of cases filed in various state courts in Texas and Ohio as
well as to the attorneys who are prosecuting these cases. The order also
enjoins these attorneys and their respective law firms from commencing any
further lawsuits against the Company based upon these allegations without
the prior approval of the court. The parties have met with the mediator
several times, and on November 19, 2003, the parties advised the bankruptcy
court that a settlement in principle of the Statutory and Hawaii Actions
had been reached. This settlement in principle is subject to a number of
significant contingencies, including the execution of a definitive
settlement agreement. In addition, the bankruptcy court must issue an
order approving the settlement agreement and clarifying certain prior
orders of the bankruptcy court concerning the scope and breadth of the
injunction previously entered by that court in the Johns Manville
proceeding. All of these orders must become final and all
appeals seeking to reverse these orders must have been denied in
order for the settlement to take effect. The bankruptcy court will
also hold hearings with
respect to the Companys motion for a permanent injunction with
respect to
all of the pending common law claims. If the Company
is successful in finalizing its settlement of the Statutory and Hawaii
Actions and obtains the permanent injunction it is
seeking with respect to the common law claims, then the Statutory and
Hawaii Actions will have been resolved and the pending common law claims
will have been enjoined. It is not possible to predict how the court will
rule on the motion for a permanent injunction with respect to the common
law claims or the motion to approve the
settlement of the Statutory and Hawaii Actions, even assuming that the
settlement in principle of these actions is finalized and reduced to an
executed, definitive settlement agreement. If all of the conditions of the
Statutory and Hawaii settlement in principle are not satisfied, or to the
extent that the bankruptcy court does not enter the permanent injunction
sought by the Company with respect to the common law claims, then the
temporary restraining order currently in effect will be lifted and the
Company will again be subject to the pending litigation and could be
subject to additional litigation based on similar theories of liability.
|   
|    |  | The Company has numerous defenses in all of the direct action cases. Many
of these defenses have been raised in initial motions to dismiss filed by
the Company and other insurers. There have been favorable rulings during
2003 in Texas on some of these motions filed by other insurers during the
pendency of the Johns Manville stay that dealt with statute of limitations
and the validity of the alleged causes of actions. The Companys defenses
include the fact that these novel theories have no basis in law; that they
are directly at odds with the well established law pertaining to the
insured/insurer relationship; that there is no generalized duty to warn as
alleged by the plaintiffs; that to the extent that they have not been
released by virtue of prior settlement agreements by the claimants with the
Companys policyholders, all of these claims were released by virtue of
approved settlements and orders entered by the Johns Manville bankruptcy
court; and that the applicable statute of limitation as to many of these
claims has long since expired.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

162



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|15. |  | COMMITMENTS AND CONTINGENCIES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Other Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | Gulf Insurance Company (Gulf), a majority-owned subsidiary of TPC, brought
an action on May 22, 2003, as amended on July 29, 2003, in the Supreme
Court of New York, County of New York (Gulf Insurance Company v.
Transatlantic Reinsurance Company, et al.), against Transatlantic
Reinsurance Company (Transatlantic), and three other reinsurance companies
to recover amounts due under reinsurance contracts issued to Gulf and
related to Gulfs February 2003 settlement of a coverage dispute under a
vehicle residual value protection insurance policy. On May 22, 2003, as
amended on September 5, 2003, Transatlantic brought an action against Gulf
regarding the same dispute, which has been consolidated with Gulfs action.
Transatlantic seeks rescission of its vehicle residual value reinsurance
contracts issued to Gulf and unspecified damages for breach of contract.
XL Reinsurance America, Inc. (XL), Odyssey America Reinsurance Corporation
(Odyssey) and Employers Reinsurance Company (Employers), the other
defendant reinsurers, also filed answers and counterclaims in the Gulf
action asserting positions similar to Transatlantic, including
counterclaims for rescission of vehicle residual value reinsurance
contracts issued to Gulf. On October 1, 2003, Gulf entered into a final
settlement agreement with Employers, and all claims and counterclaims with
respect to Employers have been dismissed. After the settlement, the Gulf
action now seeks from the remaining three defendants a total of $90.9
million currently due under the reinsurance contracts, a declaration that
$11.6 million will be payable under a second installment due in 2004, and
consequential and punitive damages. Gulf denies the reinsurers
allegations, believes that it has a strong legal basis to collect the
amounts due under the reinsurance contracts, and intends to vigorously
pursue the action.
|   
|    |  | TPC and its board of directors have been named as defendants in three
purported class action lawsuits brought by four of TPCs shareholders
seeking injunctive relief as well as unspecified monetary damages. The
actions are captioned Henzel, et al. v. Travelers Property Casualty Corp.,
et al.(Jud. Dist. of Waterbury, CT Nov. 17, 2003); Vozzolo v. Travelers
Property Casualty Corp., et al.(Jud. Dist. of Waterbury, CT Nov. 17,
2003); and Farina v. Travelers Property Casualty Corp., et al.(Jud. Dist.
of Hartford, CT December 15, 2003). The Henzeland Vozzoloactions were
consolidated and transferred to the complex litigation docket in Waterbury,
Connecticut; the Farinaaction is pending in Hartford, Connecticut.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | All the complaints allege that TPC and its board of directors breached
their fiduciary duties to TPCs shareholders in connection with the
adoption of the merger and the merger agreement with St. Paul. According
to the plaintiffs, the merger enriches TPC management to the detriment of
TPCs shareholders. The plaintiffs further claim that the defendants
failed to adequately investigate alternatives to the merger. The Farina
complaint also names St. Paul and Adams Acquisition Corp, a wholly-owned
subsidiary of St. Paul, as defendants, alleging that they aided and abetted
the alleged breach of fiduciary duty. TPC believes the suits are wholly
without merit and intends to vigorously defend against the suits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

163



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|15. |  | COMMITMENTS AND CONTINGENCIES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In addition to those described above, the Company is involved in numerous
lawsuits, not involving asbestos and environmental claims, arising mostly
in the ordinary course of business operations either as a liability insurer
defending third-party claims brought against policyholders or as an insurer
defending coverage claims brought against it. While the ultimate
resolution of these legal proceedings could be significant to the Companys
results of operations in a future quarter, in the opinion of the Companys
management it would not be likely to have a material adverse effect on the
Companys results of operations for a calendar year or on the Companys
financial condition or liquidity.
|   
|    |  | See note 7 for additional discussion of asbestos and environmental reserves
and claims matters.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | Merger-Related Termination Fees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | Under the merger agreement, each of St. Paul and the Company has agreed to
pay the other party a fee of $300 million in cash in any of the following
payment events:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    



| |  |  | if the other party (i) terminates the merger agreement as a
result of the paying party having made a change of recommendation;
or (ii) willfully and materially breaches its obligations or
certain of its obligations in connection with the filing with the
SEC of the companies joint proxy statement/prospectus;                                                                                                                                                                                                
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | if (i) prior to termination, an Acquisition Proposal (as
defined in the merger agreement) relating to the paying party was
made or renewed and not publicly withdrawn at least 20 days prior
such partys shareholder vote, (ii) either party terminates the
merger agreement following the paying partys failure to obtain its
required shareholder approval and (iii) within 18 months following
termination, the paying party enters into a definitive agreement
for, or consummates, an Acquisition Proposal; or
|
| |  |  | if (i) prior to termination, an Acquisition Proposal
relating to the paying party was made or renewed and not publicly
withdrawn at least 20 days prior to the termination of the merger
agreement, (ii) either party exercises its right to terminate the
merger agreement based on the merger not having been consummated on
or before November 30, 2004 and (iii) within 18 months following
termination, the paying party enters into a definitive agreement
for, or consummates, an Acquisition Proposal.       

164



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|16. |  | RELATED PARTY TRANSACTIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Prior to the Citigroup Distribution, the Company provided and purchased
services to and from Citigroup affiliated companies, including facilities
management, banking and financial functions, benefit coverages, data
processing services, and short-term investment pool management services.
Charges for these shared services were allocated at cost. In connection
with the Citigroup Distribution, the Company and Citigroup and its
affiliates entered into a transition services agreement for the provision
of certain of these services, tradename and trademark and similar
agreements related to the use of trademarks, logos and tradenames and an
amendment to the March 26, 2002 Intercompany Agreement with Citigroup.
During the first quarter of 2002, Citigroup provided investment advisory
services on an allocated cost basis, consistent with prior years. On
August 6, 2002, the Company entered into an investment management
agreement, which has been applied retroactively to April 1, 2002, with an
affiliate of Citigroup whereby the affiliate of Citigroup is providing
investment advisory and administrative services to the Company with respect
to its entire investment portfolio for a period of two years and at fees
mutually agreed upon, including a component based on performance. Charges
incurred related to this agreement were $59.7 million and $47.2 million for
the year ended December 31, 2003 and for the period from April 1, 2002
through December 31, 2002, respectively. This agreement
terminates on March 31, 2004. The Company intends to arrange an
orderly transition of the investment management and the associated
accounting and administrative services to St. Paul Travelers following the merger with St. Paul.
The Company and Citigroup also agreed upon the allocation or transfer of
certain other liabilities and assets, and rights and obligations in
furtherance of the separation of operations and ownership as a result of
the Citigroup Distribution. The net effect of these allocations and
transfers, in the opinion of management, was not significant to the
Companys results of operations or financial condition.
|   
|    |  | For a period of two years following the Citigroup Distribution, the Company
has the right of first offer to provide Citigroup property and casualty
coverage that it does not currently provide to it and Citigroup has the
right of first offer to provide the Company any financial service it does
not currently provide to the Company, at market rates, terms and conditions
at the time of the offer. Neither party is required to purchase the
services at rates, terms or conditions less favorable than those offered by
any third party at the time of the offer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | Included in revenues in the consolidated statement of income (loss) is
$520.0 million from the Citigroup indemnification agreement in 2002. At
December 31, 2002, other assets in the consolidated balance sheet include a
$360.7 million receivable under the Citigroup indemnification agreement,
which was received during the first quarter of 2003. See note 7.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | In conjunction with the purchase of TIGHIs outstanding shares in April
2000, TPC borrowed $2.2 billion pursuant to a note agreement with
Citigroup. This note was prepaid during 2002 following the offerings.
Interest expense included in the consolidated statement of income was $5.5
million and $79.2 million in 2002 and 2001, respectively. See note 8.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | The Company has line of credit agreements with Citigroup. See note 8.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|    |  | The Company had notes payable to Citigroup of $700.0 million at December
31, 2002, which was repaid during 2003. Interest expense included in the
consolidated statement of income was $9.1 million, $18.1 million and $8.7
million in 2003, 2002 and 2001, respectively. See note 8.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|    |  | On October 1, 2001, the Company paid $329.5 million to Citigroup for The
Northland Company and its subsidiaries and Associates Lloyds Insurance
Company. In addition, on October 3, 2001, the capital stock of Associates
Insurance Company, with a net book value of $356.5 million, was contributed
to the Company. See note 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

165



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|16. |  | RELATED PARTY TRANSACTIONS, Continued                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | At December 31, 2003 and 2002, the Company had $14.6 million and $60.2
million, respectively, of securities pledged as collateral to Citigroup to
support a letter of credit facility for certain of the Companys surety
customers.                                                                                                                                                                                    
|   
|    |  | In the ordinary course of business, the Company purchases and sells
securities through formerly affiliated broker-dealers. These transactions
are conducted on an arms-length basis. Commissions are not paid for the
purchase and sale of debt securities. Citigroup was the underwriter of the
offerings and received underwriting discounts and commissions of
approximately $90.0 million.                         
|   
|    |  | The Company participates in reinsurance agreements with TIC, a former
affiliate. See note 6.                                                                                                                                                                                                                                                                                                                            
|   
|    |  | The Company purchases annuities from former affiliates to settle certain
claims. Through 2004, the Company has agreed to use TIC as the most
preferred provider of annuities, as long as Citigroup maintains competitive
ratings and its products are competitively priced. Reinsurance
recoverables at December 31, 2003 and 2002 included $760.6 million and
$810.4 million, respectively, related to these annuities.
|   
|17. |  | NONCASH FINANCING AND INVESTING ACTIVITIES                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | There were no significant noncash financing or investing activities for the
year ended December 31, 2003. In 2002, TPC paid dividends of $5.095
billion to Citigroup in the form of notes payable. These notes were all
repaid during 2002. On October 3, 2001, the capital stock of Associates
Insurance Company, with a net book value of $356.5 million, was contributed
to the Company.                             

166



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|18. |  | SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
|--- |  | ---------------------------------------------

|                                                         |         |         |         |         |  |         |         |         |  |       |         |      |  |   |         |      |  |   |          |      | 
|-------------------------------------------------------- | ------- | ------- | ------- | ------- |  | ------- | ------- | ------- |  | ----- | ------- | ---- |  | - | ------- | ---- |  | - | -------- | ---- | 
|2003                                                     |         | First   |         | Second  |  | Third   |         | Fourth  |  |       |         |     
|(in millions, except per share data)                     |         | Quarter |         | Quarter |  | Quarter |         | Quarter |  | Total
|                                                         |         |         |         |         |  |         |         |         |  |      
|Total revenues                                           |         | $       | 3,603.0 |         |  | $       | 3,748.7 |         |  | $     | 3,745.5 |      |  | $ | 4,042.0 |      |  | $ | 15,139.2 |     
|Total expenses                                           |         |         | 3,195.7 |         |  |         | 3,148.0 |         |  |       | 3,184.8 |      |  |   | 3,381.3 |      |  |   | 12,909.8 |     
|                                                         |         |         |         |         |  |         |         |         |  |       |         |      |  |   |         |      |  |   |          |     
|Income before federal income
taxes and minority interest |         |         | 407.3   |         |  |         | 600.7   |         |  |       | 560.7   |      |  |   | 660.7   |      |  |   | 2,229.4  |     
|Federal income taxes                                     |         |         | 89.8    |         |  |         | 155.1   |         |  |       | 131.6   |      |  |   | 160.9   |      |  |   | 537.4    |     
|Minority interest, net of tax                            |         |         | (22.5   | )       |  |         | 4.4     |         |  |       | 3.0     |      |  |   | 11.1    |      |  |   | (4.0     | )   
|                                                         |         |         |         |         |  |         |         |         |  |       |         |      |  |   |         |      |  |   |          |     
|Net income                                               |         | $       | 340.0   |         |  | $       | 441.2   |         |  | $     | 426.1   |      |  | $ | 488.7   |      |  | $ | 1,696.0  |     
|                                                         |         |         |         |         |  |         |         |         |  |       |         |      |  |   |         |      |  |   |          |     
|Earnings per share (1):                                  |         |         |         |         |  |         |         |         |  |       |         |      |  |   |         |      |  |   |          |     
|                                                         | Basic   |         | $       | 0.34    |  |         | $       | 0.44    |  |       | $       | 0.43 |  |   | $       | 0.49 |  |   | $        | 1.69 | 
|                                                         | Diluted |         |         | 0.34    |  |         |         | 0.44    |  |       |         | 0.42 |  |   |         | 0.49 |  |   |          | 1.68 | 



| | (1) |  | Due to the averaging of shares, quarterly earnings per share may not
add to the total for the full year.
| | --- |  | --------------------------------------------------------------------------------------------------------

|                                                                                                                     |  |         |         |         |  |         |         |         |  |       |         |  |  |   |          |   |  |   |          |  
|-------------------------------------------------------------------------------------------------------------------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | ----- | ------- |  |  | - | -------- | - |  | - | -------- | -
|2002                                                                                                                 |  | First   |         | Second  |  | Third   |         | Fourth  |  |       |         | 
|(in millions, except per share data)                                                                                 |  | Quarter |         | Quarter |  | Quarter |         | Quarter |  | Total
|                                                                                                                     |  |         |         |         |  |         |         |         |  |      
|Total revenues                                                                                                       |  | $       | 3,232.7 |         |  | $       | 3,319.8 |         |  | $     | 3,563.9 |  |  | $ | 4,153.3  |   |  | $ | 14,269.7 |  
|Total expenses                                                                                                       |  |         | 2,778.4 |         |  |         | 2,884.6 |         |  |       | 3,224.3 |  |  |   | 5,642.2  |   |  |   | 14,529.5 |  
|                                                                                                                     |  |         |         |         |  |         |         |         |  |       |         |  |  |   |          |   |  |   |          |  
|Income (loss) before federal income
taxes, cumulative effect of change in
accounting principle and minority
interest |  |         | 454.3   |         |  |         | 435.2   |         |  |       | 339.6   |  |  |   | (1,488.9 | ) |  |   | (259.8   | )
|Federal income taxes (benefit)                                                                                       |  |         | 109.6   |         |  |         | 103.2   |         |  |       | 6.0     |  |  |   | (695.3   | ) |  |   | (476.5   | )
|Minority interest, net of tax                                                                                        |  |         |        |         |  |         |        |         |  |       | 1.3     |  |  |   | (.2      | ) |  |   | 1.1      |  
|                                                                                                                     |  |         |         |         |  |         |         |         |  |       |         |  |  |   |          |   |  |   |          |  
|Income (loss) before cumulative effect
of change in accounting principle                                             |  |         | 344.7   |         |  |         | 332.0   |         |  |       | 332.3   |  |  |   | (793.4   | ) |  |   | 215.6    |  
|Cumulative effect of change in
accounting for goodwill and other
intangible assets, net of tax                       |  |         | (242.6  | )       |  |         |        |         |  |       |        |  |  |   |         |   |  |   | (242.6   | )
|                                                                                                                     |  |         |         |         |  |         |         |         |  |       |         |  |  |   |          |   |  |   |          |  
|Net income (loss)                                                                                                    |  | $       | 102.1   |         |  | $       | 332.0   |         |  | $     | 332.3   |  |  | $ | (793.4   | ) |  | $ | (27.0    | )
|                                                                                                                     |  |         |         |         |  |         |         |         |  |       |         |  |  |   |          |   |  |   |          |  
|Basic and diluted earnings per share (1)                                                                             |  |         |         |         |  |         |         |         |  |       |         |  |  |   |          |   |  |   |          |  
|Income (loss) before cumulative
effect
of change in accounting principle                                             |  | $       | 0.43    |         |  | $       | 0.33    |         |  | $     | 0.33    |  |  | $ | (0.79    | ) |  | $ | 0.23     |  
|Cumulative effect of change in
accounting principle                                                                  |  |         | (0.30   | )       |  |         |        |         |  |       |        |  |  |   |         |   |  |   | (0.26    | )
|                                                                                                                     |  |         |         |         |  |         |         |         |  |       |         |  |  |   |          |   |  |   |          |  
|Net income (loss)                                                                                                    |  | $       | 0.13    |         |  | $       | 0.33    |         |  | $     | 0.33    |  |  | $ | (0.79    | ) |  | $ | (0.03    | )
|                                                                                                                     |  |         |         |         |  |         |         |         |  |       |         |  |  |   |          |   |  |   |          |  



| | (1) |  | Due to the averaging of shares, quarterly earnings per share may not
add to the total for the full year.
| | --- |  | --------------------------------------------------------------------------------------------------------

167



---



##### Table of Contents






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

Not Applicable.




Item 9A. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures (as that term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934 (the Exchange Act)) that are designed to ensure that information
required to be disclosed in the Companys reports under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms, and that such
information is accumulated and communicated to the Companys management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosures. Any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives. The
Companys management, with the participation of the Companys Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
design and operation of the Companys disclosure controls and procedures as of
December 31, 2003. Based upon that evaluation and subject to the foregoing,
the Companys Chief Executive Officer and Chief Financial Officer concluded
that the design and operation of the Companys disclosure controls and
procedures provided reasonable assurance that the disclosure controls and
procedures are effective to accomplish their objectives.

In addition, there was no change in the Companys internal control over
financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) that occurred during the quarter ended December 31,
2003 that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.




PART III




Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Executive Officers of the Company

Set forth below is information concerning the Companys executive officers as
of February 27, 2004. Each executive officer serves for a one year term upon
annual election by the Board of Directors.

|                      |  |     |    |        |  |                                                                                     
|--------------------- |  | --- | -- | ------ |  | ------------------------------------------------------------------------------------
|Name                  |  | Age |    | Office
|                      |  |     |    |       
|Robert I. Lipp        |  |     | 65 |        |  | Chairman of the Board of Directors, Chief Executive Officer                         
|Charles J. Clarke     |  |     | 68 |        |  | President and a director                                                            
|Irwin R. Ettinger     |  |     | 65 |        |  | Vice Chairman                                                                       
|Douglas G. Elliot     |  |     | 43 |        |  | Chief Operating Officer                                                             
|Jay S. Benet          |  |     | 51 |        |  | Chief Financial Officer                                                             
|Stewart R. Morrison   |  |     | 47 |        |  | Chief Investment Officer                                                            
|Maria Olivo           |  |     | 39 |        |  | Executive Vice President  Business and Corporate Development and
Investor Relations
|Peter N. Higgins      |  |     | 56 |        |  | Executive Vice President  Underwriting                                             
|Brian W. MacLean      |  |     | 50 |        |  | Executive Vice President  Claim Services                                           
|Joseph P. Lacher, Jr. |  |     | 34 |        |  | Executive Vice President  Personal Lines                                           
|Douglas K. Russell    |  |     | 46 |        |  | Chief Accounting Officer and Treasurer                                              

168



---



##### Table of Contents



Robert I. Lipp, 65, is Chairman
and Chief Executive Officer of the Company, and has been Chairman and
Chief Executive Officer of TIGHI since
December 18, 2001. Mr. Lipp served as Chairman of the Board of TIGHI from 1996
to 2000 and from January 2001 to October 2001, and was the Chief Executive
Officer and President of TIGHI from 1996 to 1998. During 2000 he was a
Vice-Chairman and member of the Office of the Chairman of Citigroup. He was
Chairman and Chief Executive OfficerGlobal Consumer Business of Citigroup from
1999 to 2000. From October 1998 to April 1999, he was Co-Chairman Global
Consumer Business of Citigroup. From 1993 to 2000, he was Chairman and Chief
Executive Officer of Travelers Insurance Group Inc., a Travelers predecessor
company. From 1991 to 1998, he was a Vice-Chairman and Director of Travelers
Group, Inc. and from 1991 to 1993, he was Chairman and Chief Executive Officer
of CitiFinancial Credit Company. Prior to joining Citigroup in 1986, Mr. Lipp
spent 23 years with Chemical New York Corporation. He is a director of
Accenture Ltd., and Bank One Corporation, a trustee of Carnegie Hall, and Chairman
of the Executive Committee at Williams College.

Charles J. Clarke, 68, is
President of the Company and was Chairman and Chief Executive
Officer of TIGHI just prior to December 18, 2001. He has been a director of the
Company since June 2000. Mr. Clarke was President of TIGHI from January 2001 to October
2001. Prior to that time he had been Vice Chairman of TIGHI from January 1998 to January
2001. Mr. Clarke had been Chief Executive Officer of Commercial Lines from
January 1996 to January 1998 and was Chairman of Commercial Lines from 1990 to
January 1996. He had held other executive and management positions with the
Company for many years, and he has been with the Company since 1958.

Irwin R. Ettinger, 65, joined the Company as Vice Chairman in June 2002. Prior
to this, Mr. Ettinger served as the Chief Accounting and Tax Officer for
Citigroup from 1998 to 2002 and held other positions of increasing
responsibility since joining Citigroup in 1987. He joined Citigroup from
Arthur Young & Co. (now Ernst and Young) where he was a partner for 18 years.
He serves as a member of the Advisory Council of the Weissmen Center for
International Business of Baruch College of the City University of New York and
is a member of the Executive Committee of the Baruch College Fund.

Douglas G. Elliot, 43, is Chief Operating Officer of the Company, responsible
for the business operations of the Company. He was President and Chief
Operating Officer of TIGHI just prior to December 18, 2001. Mr. Elliot was
President and Chief Executive Officer of TIGHI from October 2001 to December 2001. He
was Chief Operating Officer and President of Commercial Lines from September
2000 to October 2001, Chief Operating Officer of Commercial Lines from August
1999 to September 2000 and Senior Vice President of Select Accounts from June
1996 to August 1999. He has held other executive and management positions with
the Company for several years, and he has been with the Company since 1987.
Mr. Elliot serves on the Board of Directors at Hartford Hospital.

Jay S. Benet, 51, has been Executive Vice President and Chief Financial Officer
of the Company since February 2002. Before joining the Company, from March 2001
until January 2002, Mr. Benet was the worldwide head of financial planning,
analysis and reporting at Citigroup and Chief Financial Officer for Citigroups
Global Consumer Europe, Middle East and Africa unit between April 2000 and
March 2001. Prior to this, Mr. Benet spent 10 years in various executive
positions with Travelers Life & Annuity, including Chief Financial Officer of
Travelers Life & Annuity and Executive Vice President, Group Annuity from
December 1998 to April 2000, and Senior Vice President Group Annuity from
December 1996 to December 1998. Prior to joining Travelers Life & Annuity, Mr.
Benet was a partner of Coopers & Lybrand (now Pricewaterhouse Coopers).

Stewart R. Morrison, 47, is the Chief Investment Officer of the Company. Mr.
Morrison joined the Company in November 2002 from Security Benefit Group in
Topeka, Kansas, where he served as Chief Investment Officer. Prior to his role
there, Mr. Morrison spent more than 10 years with Keyport Life Insurance
Company in Boston in a variety of strategic investment positions, including
Chief Investment Officer. Before moving into the insurance field, Mr. Morrison
held positions of increasing responsibility in the banking industry, beginning
at Hartford National Bank.

Maria Olivo, 39, was appointed Executive Vice President, Business and Corporate
Development and Investor Relations of the Company in June 2002. Ms. Olivo, a
certified financial analyst, joined the Company from Swiss Re Capital Partners
where she was a Managing Director involved in Strategic Investments and
Corporate Development from April 2000 to June 2002. Prior to that, she was a
Director at Salomon Smith Barney where she worked on numerous initial public
offerings, mergers and acquisitions and public debt offerings.

169



---



##### Table of Contents



Peter N. Higgins, 56, has been Executive Vice President, Underwriting since
2000, and Chief Executive Officer of Commercial Accounts since 1996. In
addition, he is the Chief Executive Officer of the Northland Companies. Mr.
Higgins began his career at the Company in 1969, was promoted to Senior Vice
President, Commercial Lines in 1992, and Chief Underwriting Officer in 2000.

Brian W. MacLean, 50, is Executive Vice President, Claim Services. Prior to
this, Mr. MacLean served as President of Select Accounts from July 1999 to
January 2002. He also served as Chief Financial Officer of Claim Services from
March 1993 to June 1996. From June 1996 to July 1999, Mr. MacLean was Chief
Financial Officer for Commercial Lines. He joined the Company in 1988 and has
served in several other positions. Prior to joining the Company, Mr. MacLean
was an audit manager at the public accounting firm of Peat Marwick (now KPMG
LLP).

Joseph P. Lacher, 34, is Executive Vice President of Personal Lines. Prior to
this, he was Senior Vice President of Product & Actuarial for Personal Lines
since April 2001. Prior to that, Mr. Lacher was Senior Vice President of
Personal Lines Strategic Distribution from April 1999 to April 2001. From
April 1996 to April 1999, he was Chief Financial Officer of Select Accounts.
Mr. Lacher joined the Company in 1991 and has held other executive and
management positions with the Company.

Douglas K. Russell, 46, is Senior Vice President, Chief Accounting Officer and
Treasurer and has been Controller and Chief Accounting Officer of the Company
since July 1999. Mr. Russell has also served in several other positions at the
Company since January 1997. Prior to joining the Company, Mr. Russell was
Director of Financial Reporting of both The MetraHealth Companies, Inc. from
May 1995 to October 1995, and of United Healthcare Corporation, from October
1995 to December 1996. From 1979 to May 1995, Mr. Russell served in several
positions at Ernst & Young, LLP.

Directors of the Company

Set forth below is information concerning the Companys directors as of
February 27, 2004.

TPCs certificate of incorporation provides for a classified Board of Directors
whose members are divided into three classes, Class I, Class II and Class III,
with each class being as nearly equal in number as possible. At each annual
meeting of shareholders, nominees are elected as directors to a class with a
term of office that expires at the annual meeting of shareholders held three
years after, and until their successors are elected and qualified. The Board of
Directors currently consists of thirteen members, classified as set forth
below.

Class I Directors (terms expire at the 2006 annual meeting)

Kenneth J. Bialkin, 74, has been a director of the Company since May 2002. Mr.
Bialkin is a partner at the law firm of Skadden, Arps, Slate, Meagher & Flom
LLP. From 19962000 he was a director of TIGHI, Travelers predecessor public company. He also was a director
of Citigroup (or its predecessor Travelers Group) from 1986 to 2002. He is a
director of The Municipal Assistance Corporation for the City of New York and
Tecnomatix Technologies Ltd. He is a trustee of Carnegie Hall, a member of the
Board of Governors, Graduate Faculty of New School University, Chairman of the
Board of the American Jewish Historical Society, Chairman of the America-Israel
Friendship League and a member of the Council on Foreign Relations.

Clarence Otis, Jr., 47, has been a director of the Company since September
2002. He has been the Executive Vice President of Darden Restaurants, Inc., and
President of its Smokey Bones Restaurants division, since December 2002. Prior
to this, he was Executive Vice President and Chief Financial Officer of Darden
Restaurants from April 2002 to December 2002, Senior Vice President and Chief
Financial Officer from 19992002, Senior Vice President, Finance and Treasurer
from 19971999, and Vice President and Treasurer from 19951997. Mr. Otis was
also Managing Director, Public Finance (19921995) and Vice President, Public
Finance (19911992) at Chemical Banking Corp.; Managing Director, Public
Finance at Muriel Siebert & Company from 19901991; and Vice President, Public
Finance at Credit Suisse First Boston from 19871990. He is a
director of VF Corporation, and a member of various
associations including the Financial Executive Institute, Executive Leadership
Council and a member of the New York Bar.

170



---



##### Table of Contents



Jeffrey M. Peek, 56, has been a director of the Company since September 2002.
He has been President and Chief Operating Officer and a director of CIT Group
Inc. since September 2003. Prior to this, Mr. Peek was Vice Chairman of Credit
Suisse First Boston since 2002 and was responsible for the firms Financial
Services Division including Credit Suisse Asset Management, Pershing, and
Private Client Services. He was also a member of the Group Executive Board of
Credit Suisse Group. From 1983 to 2001, he held various executive positions at
Merrill Lynch, including Executive Vice President from 1997-2001, and was
President of Merrill Lynch Investment Managers. He also served on the Executive
Management Committee of Merrill Lynch & Co. Mr. Peek is a director or trustee
of the New York City Ballet, Teachers College at Columbia University, the
Brearley School, International Tennis Hall of Fame, Business Committee for the
Metropolitan Museum of Art, and Advisory Council for Bendheim Center for
Finance at Princeton University.

Laurie J. Thomsen, 46, has been a director of the Company since September 2002.
She was a Co-founding General Partner of Prism Venture Partners, a venture
capital firm, from 19952000 and is currently a retiring General Partner of Prism
Venture Partners. From 19881995, she was a General Partner at Harbourvest
Partners (formerly Hancock Venture Partners) in Boston, and an associate there
from 19841988. She also was a Vice President at John Hancock Mutual Life in
the Bond, Corporate Finance Department in 1984; and an Assistant Vice President
at U.S. Trust Co. of New York from 19791984. Ms. Thomsen is a director of The
Horizons Initiative, New Profit, Inc., a trustee of Williams College and Chair
of the Board of Overseers at the Isabella Stewart Gardner Museum.

Class II Directors (terms expire at the 2004 annual meeting)

Howard K. Berkowitz, 63, has been a director of the Company since September
2002. He is the founder and managing partner of HPB Associates, an investment
group, which he sold to BlackRock, Inc., in April 2003 to form BlackRock HPB, a
hedge fund of funds manager. He is CEO of this new venture and a Managing
Director of BlackRock. He has managed investment funds since 1967, when he was
a founding partner of Steinhardt, Fine, Berkowitz & Company, a hedge fund. Mr.
Berkowitz is a member of the Executive Committee of the Washington Institute
for Near East Policy and a former National Chairman of the Anti-Defamation
League. He has served or currently serves on the investment committees of the
UJA Federation, Steadman Hawkins Sports Medicine Foundation, Cancer Research
Institute, the Anti-Defamation League and the New York City Ballet.

Charles J. Clarke, 68, is
President and of the Company was Chairman and Chief Executive
Officer of TIGHI just prior to December 18, 2001. He has been a director of the
Company since June 2000. Mr. Clarke was President of TIGHI from January 2001 to October
2001. Prior to that time he had been Vice Chairman of TIGHI from January 1998 to January
2001. Mr. Clarke had been Chief Executive Officer of Commercial Lines from
January 1996 to January 1998 and was Chairman of Commercial Lines from 1990 to
January 1996. He had held other executive and management positions with the
Company for many years, and he has been with the Company since 1958.

Leslie B. Disharoon, 71, has been a director of the Company since May 2002. He
was Chairman of the Board, President and Chief Executive Officer of Monumental
Corporation (an insurance holding company) from 1978 to 1988. He was a director
of TIGHI from 19982000 and a director of Citigroup and its predecessor
Travelers Group from 1986 until 1998. Mr. Disharoon is a director of Aegon USA,
Inc., Mercantile Funds, Inc. and Mercantile Alternative Funds.

Blythe J. McGarvie, 47, has been a director since July 2003. A Certified Public
Accountant, she is President of Leadership for International Finance, a private
business consulting firm. Prior to founding Leadership for International
Finance, Ms. McGarvie was the Executive Vice President and Chief Financial
Officer at BIC Group, a worldwide leader in writing instruments, lighters and
one-piece shavers from 1999 through the end of 2002. Prior to joining BIC in
July 1999, Ms. McGarvie served as Senior Vice President and Chief Financial
Officer of Hannaford Bros. Co., a food retailer, from 1994-1999. She also has
held senior financial positions at Sara Lee Corporation and Kraft General
Foods, Inc. Ms. McGarvie currently serves on the Boards of Directors of
Accenture Ltd., Pepsi Bottling Group and Wawa Inc., a Philadelphia-based
retailer.

171



---



##### Table of Contents



Nancy A. Roseman, 45, has been a director of the Company since September 2002.
She has been the Dean of Williams College since 2000 where she also has been a
Professor of Biology since 1991. From 19871991 she was a Post-Doctoral Fellow
at Oregon State University.

Class III Directors (terms expire at the 2005 annual meeting)

Meryl D. Hartzband, 49, has been a director of the Company since September
2002. She is a Senior Principal and the Investment Director of MMC Capital,
Inc., a subsidiary of Marsh and McLennan Companies, Inc. Ms. Hartzband joined MMC
Capital in 1999 as Principal and Investment Director. Prior to this, she was a
Managing Director for JP Morgan & Co. from 1982-1999 and an Assistant Treasurer
for Chase Manhattan Bank from 1977-1980.

Robert I. Lipp, 65, is Chairman
and Chief Executive Officer of the Company, and has been Chairman and
Chief Executive Officer of TIGHI since
December 18, 2001. Mr. Lipp served as Chairman of the Board of TIGHI from 1996
to 2000 and from January 2001 to October 2001, and was the Chief Executive
Officer and President of TIGHI from 1996 to 1998. During 2000 he was a
Vice-Chairman and member of the Office of the Chairman of Citigroup. He was
Chairman and Chief Executive OfficerGlobal Consumer Business of Citigroup from
1999 to 2000. From October 1998 to April 1999, he was Co-Chairman Global
Consumer Business of Citigroup. From 1993 to 2000, he was Chairman and Chief
Executive Officer of Travelers Insurance Group Inc., a Travelers predecessor
company. From 1991 to 1998, he was a Vice-Chairman and Director of Travelers
Group, Inc. and from 1991 to 1993, he was Chairman and Chief Executive Officer
of CitiFinancial Credit Company. Prior to joining Citigroup in 1986, Mr. Lipp
spent 23 years with Chemical New York Corporation. He is a director of
Accenture Ltd. and Bank One Corporation, a trustee of Carnegie Hall, and Chairman
of the Executive Committee at Williams College.

Charles W. Scharf, 38, has been a director of the Company since September 2002.
He has been the Chief Executive Officer of Bank Ones Retail Division since
2002. Prior to this, he was the Chief Financial Officer/Executive Vice
President at Bank One from 20002002; the Chief Financial Officer of the
Corporate and Investment Bank at Citigroup from 19992000; the Chief Financial
Officer at Salomon Smith Barney from 19971999; and the Chief Financial Officer
at Smith Barney from 19951997. Mr. Scharf also held various financial
positions at Travelers Group from 19871995. He is a director of Visa U.S.A.,
Inc., a member of the Financial Services Roundtable and the Economic Club of
Chicago as well as a director of The Lyric Opera and Lookingglass Theater.

Frank J. Tasco,76, has been a director of the Company since May 2002, and has
served as the Lead Director of the Board of Directors since October 2003. He is
the retired Chairman of the Board and Chief Executive Officer of Marsh &
McLennan Companies, Inc. He was a director of TIGHI from 1996 to 2000 and was a
director of Travelers Group from 1992 until 1998. He was a member of President
Bushs Drug Advisory Council and was founder of New York Drugs Dont Work. Mr.
Tasco is a director of Axis Specialty Limited and Phoenix House Foundation. He
is a member of the Council on Foreign Relations, the Lincoln Center
Consolidated Corporate Fund Leadership Committee, the Foreign Policy
Association, a trustee of New York University and a trustee of the Inner-City
Scholarship Fund.

Committees of the Board of Directors

The standing committees of the Board of Directors are as set forth below. All
of the committees are comprised entirely of non-management directors, and the
Audit Committee and the Compensation and Governance Committee are comprised
solely of independent directors.

172



---



##### Table of Contents



Audit Committee The members of the Audit Committee are Mr. Tasco (Chairman),
Mr. Disharoon, Ms. McGarvie, Mr. Otis and Ms. Thomsen. The Audit Committee
reviews the audit plans and findings of the independent auditors and the
Companys internal audit and risk review staff, and the results of regulatory
examinations, and tracks managements corrective action plans where necessary;
reviews the Companys accounting policies and controls, compliance programs,
and significant tax and legal matters; appoints the independent auditors and
evaluates their independence and performance; and reviews the Companys risk
management processes. Each Audit Committee member is independent, as
independence is defined by (i) TPCs Corporate Governance Principles; (ii) the
current rules of the NYSE applicable to audit committees, and the NYSE rules
regarding independence of the Board generally; and (iii) Section 301 of the
Sarbanes-Oxley Act of 2002.

The Board of Directors has determined that Mr. Tasco, Chairman of the Audit
Committee, and Ms. McGarvie, are audit committee financial experts as defined
in applicable SEC rules. The Board based its determination on Mr. Tascos and
Ms. McGarvies professional experience, as previously described, and their
service on the audit committees of other companies.

Compensation and Governance Committee The members of the Compensation and
Governance Committee are Mr. Disharoon (Chairman), Ms. McGarvie, Mr. Peek and
Mr. Tasco. The Compensation and Governance Committee evaluates the efforts of
the Company and the Board of Directors to maintain effective corporate
governance practices and identifies candidates for election to the Board of
Directors. The committee also approves broad-based and special compensation
plans for the Company.

The Compensation and Governance Committee also establishes compensation for the
chief executive officer and certain other senior executives, and has the
exclusive authority to approve all compensation for those persons covered by
Section 16(a) of the Securities Exchange Act of 1934 (Section 16
Persons). The Compensation and
Governance Committee also administers the Companys equity and incentive
compensation programs. Under the Stock Incentive Plan, only the committee can
grant stock awards, including options to purchase common stock, to Section 16
Persons. Awards of stock options and other stock grants are subject to the
terms of the Stock Incentive Plan and any other plans that the Company may
adopt. The committee also has the exclusive authority to administer certain
other elements of the Stock Incentive Plan and the Executive Performance
Compensation Plan intended to comply with Section 162(m) of the Internal
Revenue Code.

Investment and Finance Committee The members of the Investment and Finance
Committee are Mr. Peek (Chairman), Ms. Hartzband, Ms. Roseman and Mr. Scharf.
The Investment and Finance Committee assists the Board in (i) the supervision
and oversight of the management and investment of the Companys invested
assets, and (ii) financial and capital matters including debt and equity.
Specifically, the committee (a) establishes and reviews the overall investment
philosophy of the Company; (b) reviews and approves on an annual basis
corporate goals and objectives relevant to investments and evaluates asset
allocations and the performance of investment managers in light of those goals
and objectives; (c) reviews the capital position of TPC and its subsidiaries
periodically; (d) monitors and oversees the Companys outstanding debt and
equity; (e) authorizes new debt or equity issuance or acquisitions or
divestitures subject to limits upon the authority delegated to the committee by
the Board of Directors; and (f) authorizes repayment, redemption, refinancing
or other modifications to existing debt and equity.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act requires TPC executive officers
and directors, and persons who own more than 10% of a registered class of the
Companys equity securities, to file reports of ownership and changes in
ownership with the SEC and the NYSE, and to furnish the Company with copies of
the forms. Based on its review of the forms it received, or written
representations from reporting persons, in the opinion of the Companys
management, during 2003, each of the Companys executive officers, directors
and greater than 10% shareholders complied with these requirements.

173



---



##### Table of Contents



Code of Ethics

The Company has adopted a Code of Business Conduct and Ethics that applies to
all employees, including executive officers, and to directors. The Company
also adopted a Code of Ethics for Senior Financial Officers that applies to the
Companys principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions.
These codes of ethics are available on the Companys Internet site at
www.Travelers.com/ governance. If the Company amends these codes of
ethics as they apply to such Senior Financial Officers, or grants any
Senior Financial Officer a waiver from these codes of ethics, and
such amendment or waiver would otherwise require disclosure
on a Form 8-K, the Company intends to satisfy such disclosure
requirement by posting such information on its Internet site set
forth above rather than by filing a Form 8-K.




Item 11. EXECUTIVE COMPENSATION

Set forth below is information regarding the compensation of the Companys
executive officers and directors.

Compensation Tables

The tables below profile the Companys compensation for its Chief Executive
Officer and the other four most highly compensated executive officers in 2003
(the Covered Executives), including salaries and bonuses paid during the last
three years and 2003 restricted stock grants and option grants and exercises.

Summary Compensation Table

The following table shows the compensation of the Covered Executives for 2001,
2002 and 2003. Each of the Covered Executives, except for Ms. Olivo, received
awards of restricted Citigroup common stock and/or Citigroup stock options in
addition to awards of restricted TPC common stock and stock options for some of
the three years covered by the table. The Citigroup stock option numbers have
been restated to give effect to the conversion of Citigroup stock options to
TPC stock options that occurred as part of the Citigroup Distribution of TPC (see
note (c) to the table).

174



---



##### Table of Contents



SUMMARY COMPENSATION TABLE

|                  |                            |      |                     |      |                               |        |         |         |  |              |           |             |  |            |        |              |  |               |         |           |  |  |            |           |  |  |       |         | 
|----------------- | -------------------------- | ---- | ------------------- | ---- | ----------------------------- | ------ | ------- | ------- |  | ------------ | --------- | ----------- |  | ---------- | ------ | ------------ |  | ------------- | ------- | --------- |  |  | ---------- | --------- |  |  | ----- | ------- | 
|                  |                            |      | Annual Compensation |      | Long-Term Compensation Awards
|                  |                            |      |                     |      |                              
|                  |                            |      |                     |      |                               |        |         |         |  |              |           |             |  |            |        |              |  |               |         |           |  |  | Securities |           |  |  |      
|Name and          |                            |      |                     |      |                               |        |         |         |  |              |           |             |  | Other      |        | Restricted   |  | Underlying    |         |           |  | 
|Principal         |                            |      |                     |      |                               |        |         |         |  |              |           |             |  | Annual     |        | Stock        |  | Stock Options |         | All Other
|Position at       |                            |      |                     |      |                               | Salary |         | Bonus   |  | Compensation |           | Awards      |  | (number of |        | Compensation
|December 31, 2003 |                            | Year |                     | ($)  |                               | ($)    |         | ($) (a) |  | ($) (b)      |           | shares) (c) |  | ($) (d)   
|                  |                            |      |                     |      |                               |        |         |         |  |              |           |             |  |           
|Robert I. Lipp    |                            |      | 2003                |      |                               |        | 737,500 |         |  |              | 1,500,000 |             |  |            | 33,871 |              |  |               | 666,667 |           |  |  |           |           |  |  | 3,786 |        
|                  | Chairman and Chief         |      |                     | 2002 |                               |        |         | 600,000 |  |              |           | 1,200,000   |  |            |        | 47,174       |  |               |         | 533,333   |  |  |            | 4,324,324 |  |  |       | 1,188   | 
|                  | Executive Officer (e)      |      |                     | 2001 |                               |        |         | 22,728  |  |              |           |            |  |            |        |             |  |               |         |          |  |  |            |          |  |  |       | 183,666 | 
|Charles J. Clarke |                            |      | 2003                |      |                               |        | 500,000 |         |  |              | 750,000   |             |  |            | 17,716 |              |  |               | 333,333 |           |  |  | 52,281     |           |  |  | 3,786 |        
|                  | President                  |      |                     | 2002 |                               |        |         | 500,000 |  |              |           | 675,000     |  |            |        | 14,732       |  |               |         | 300,000   |  |  |            | 226,740   |  |  |       | 2,286   | 
|                  |                            |      | 2001                |      |                               |        | 500,000 |         |  |              | 262,500   |             |  |            | 5,653  |              |  |               | 116,667 |           |  |  | 96,054     |           |  |  | 6,858 |        
|Douglas G. Elliot |                            |      | 2003                |      |                               |        | 495,833 |         |  |              | 750,000   |             |  |            | 18,889 |              |  |               | 333,333 |           |  |  | 37,827     |           |  |  | 1,680 |        
|                  | Chief Operating            |      |                     | 2002 |                               |        |         | 433,750 |  |              |           | 675,000     |  |            |        | 10,667       |  |               |         | 300,000   |  |  |            | 214,940   |  |  |       | 180     | 
|                  | Officer                    |      |                     | 2001 |                               |        |         | 302,500 |  |              |           | 262,500     |  |            |        |             |  |               |         | 116,667   |  |  |            | 56,940    |  |  |       | 540     | 
|Jay S. Benet      |                            |      | 2003                |      |                               |        | 425,000 |         |  |              | 750,000   |             |  |            | 59,661 |              |  |               | 333,333 |           |  |  | 30,464     |           |  |  | 1,914 |        
|                  | Chief Financial            |      |                     | 2002 |                               |        |         | 389,583 |  |              |           | 675,000     |  |            |        | 14,101       |  |               |         | 300,000   |  |  |            | 219,536   |  |  |       | 380     | 
|                  | Officer (f)                |      |                     | 2001 |                               |        |         |        |  |              |           |            |  |            |        |             |  |               |         |          |  |  |            |          |  |  |       |        | 
|Maria Olivo       |                            |      | 2003                |      |                               |        | 400,000 |         |  |              | 600,000   |             |  |            | 19,102 |              |  |               | 266,667 |           |  |  |           |           |  |  | 1,662 |        
|                  | Executive Vice President   |      |                     | 2002 |                               |        |         | 220,000 |  |              |           | 525,000     |  |            |        | 10,667       |  |               |         | 233,333   |  |  |            | 350,000   |  |  |       | 409,058 | 
|                  | Business Development       |      |                     | 2001 |                               |        |         |        |  |              |           |            |  |            |        |             |  |               |         |          |  |  |            |          |  |  |       |        | 
|                  | and Investor Relations (g) |      |                     |      |                               |        |         |         |  |              |           |             |  |            |        |              |  |               |         |           |  |  |            |           |  |  |       |         | 



|(a) |  | For all Covered Executives, includes amounts that the Company paid for
financial consulting services and reimbursement for the payment of taxes
on the associated imputed income for 2002 and 2003. For Mr. Lipp, amounts
also include his personal use of Company aircraft in 2002 and 2003 (See
Item 13 Certain Relationships and Related TransactionsAircraft Lease
below). For Mr. Benet, also includes amounts the Company paid for housing
expenses and reimbursement for the payment of taxes on the associated
imputed income for 2002 and 2003 ($40,495 was paid for housing expenses in
2003). For Mr. Clarke for 2001, represents amounts reimbursed for the
payment of taxes on income imputed to him for Company-provided financial
consulting services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Restricted stock awards granted in January 2004 with respect to the 2003
compensation year, and restricted stock awards granted in January 2003
with respect to the 2002 compensation year, were made in TPC class A
common stock. Restricted stock awards granted in February 2002 with
respect to the 2001 compensation year were made in Citigroup common stock.
Restricted stock awards of Citigroup common stock were made under
Citigroups capital accumulation program and awards of restricted TPC
class A common stock were made under the Companys capital accumulation
program, or CAP. The dollar values of the restricted stock grants in the
table reflect the fair market value of the Citigroup common stock (for
2001) and TPC class A common stock (for 2002 and 2003) as of the dates of
grant. However, in connection with the Citigroup Distribution on August 20, 2002, all
Citigroup restricted stock awards were converted to TPC restricted stock
awards (class A and class B common stock). The conversion was based on a
formula intended to maintain the economic value of the Citigroup
restricted stock based on the market prices of Citigroup common stock and
TPC class A common stock as of the Citigroup Distribution date. The converted TPC
restricted stock grants included shares of class A and class B common
stock that Citigroup distributed to all Citigroup shareholders, including
restricted shareholders, in the Citigroup Distribution. The converted TPC restricted
stock grants have substantially the same terms and conditions, including
vesting, as the Citigroup restricted stock grants had. The 2002
restricted stock grants reported in the table do not include any of the
converted Travelers restricted stock grants. The dollar value of the
converted TPC restricted stock grants as of the August 20, 2002 Citigroup Distribution
date for each of the Covered Executives was $0 for Mr. Lipp, $394,502 for
Mr. Clarke, $285,394 for Mr. Elliot, $248,534 for Mr. Benet and $0 for Ms.
Olivo.

175



---



##### Table of Contents





| |  | Under CAP, a recipient may not transfer restricted stock for three years
after the award. If the recipient is still employed by the Company or an
affiliate at the end of three years, the restricted stock becomes fully vested
and freely transferable, subject to the Companys stock ownership commitment
for senior officers. From the date of award, the recipient can vote the
restricted stock and receives full dividends. Under the Companys stock
ownership commitment, the Companys senior officers must accumulate, over a
specified period of time, and then retain, between 15,000 shares and 25,000
shares of TPC common stock, depending upon their management position. The only
exception to the stock ownership commitment is for transactions with the
Company itself in connection with exercising options or paying withholding
taxes under stock option and restricted or deferred stock grants. Senior
managers also must retain at least 50% of the shares they receive in excess of
these minimum share requirements, subject to certain limited exceptions.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | All of the Covered Executives participate in the CAP program, with a
portion of their bonus awarded in restricted stock. Generally, awards of
restricted stock under CAP are discounted 25% from market value to reflect
restrictions on transfer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | As of December 31, 2003 (excluding awards that vested in January 2004, but
including awards made in January 2004 with respect to the 2003 compensation
year), total holdings of restricted stock of TPC and the market value of
these shares as of December 31, 2003 for the Covered Executives were:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|           |  |         |        |           |  |                  |     |  |  |  |           | 
|---------- |  | ------- | ------ | --------- |  | ---------------- | --- |  |  |  | --------- | 
|           |  | Shares  |        |           |  |                 
|           |  |         |        | Aggregate
|Executive  |  | Class A |        | Class B   |  | Market Value ($)
|           |  |         |        |           |  |                 
|Mr. Lipp   |  |         | 70,153 |           |  |                  |    |  |  |  | 1,177,159 | 
|Mr. Clarke |  |         | 42,274 |           |  |                  | 231 |  |  |  | 713,268   | 
|Mr. Elliot |  |         | 42,274 |           |  |                  | 231 |  |  |  | 713,268   | 
|Mr. Benet  |  |         | 42,274 |           |  |                  | 231 |  |  |  | 713,268   | 
|Ms. Olivo  |  |         | 29,297 |           |  |                  |    |  |  |  | 491,603   | 



|(c) |  | Shares of class A common stock underlying stock options granted in 2002
reported in the table do not include Citigroup stock options that were
converted to stock options to purchase TPC class A common stock on the
August 20, 2002 Citigroup Distribution date. The number of shares shown in the table for
2001 has been adjusted to reflect the Citigroup Distribution conversion of Citigroup
stock options to TPC stock options to purchase class A common stock. The
2002 and 2003 stock options were originally granted as TPC stock options
to purchase class A common stock. The Citigroup stock options were
converted to TPC stock options based on a formula intended to maintain the
economic value of each unexercised Citigroup stock option. Accordingly,
the number of shares underlying each Citigroup stock option was adjusted,
and the option exercise price was adjusted based on a formula related to
the market price of Citigroup common stock and the market price of TPC
class A common stock on the August 20, 2002 Citigroup Distribution date. The other terms
and conditions of the converted stock options, including exercise dates
and expiration dates, remained the same as the Citigroup options.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(d) |  | With respect to Mr. Lipp, the amount for 2001 is the amount paid and the
value of certain benefits provided in consideration for his services to
the Company as Chairman of the Board from January 2001 to October 2001.
For all other Covered Executives these amounts represent (i) supplemental
life insurance paid by the Company in each year, and (ii) for 2003, a
$1,500 Company match under the Travelers 401(k) Savings Plan. For Ms.
Olivo the amount for 2002 is a one-time sign-on bonus and a payment to
compensate her for the value of unvested equity-based awards she held at
her prior employer but she forfeited when she joined the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(e) |  | Mr. Lipp became Chairman and Chief Executive Officer of the Company on
December 18, 2001. Mr. Lipps 2001 compensation is for the period from
December 18, 2001 to December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

176



---



##### Table of Contents





|(f) |  | Mr. Benet joined the Company on February 1, 2002, and the salary reported
for 2002 reflects the period from February 1, 2002 to December 31, 2002.
In 2001, Mr. Benet served in various capacities at Citigroup, but did not
perform services for the Company. Therefore, no compensation is reported
in the table for 2001.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(g) |  | Ms. Olivo joined the Company on June 13, 2002, and the salary reported
for 2002 reflects the period from June 13, 2002 to December 31, 2002. No
compensation is reported in the table for 2001 as Ms. Olivo did not serve
the Company in any capacity during 2001.                                                          

Stock Options Granted Table

The following table shows 2003 grants to the Covered Executives of options to
purchase class A common stock. The value of stock options depends upon a
long-term increase in the market price of the class A common stock: if the
stock price does not increase, the options will be worthless; if the stock
price does increase, the increase will benefit all shareholders.

The table describes options as either initial or reload. Unless a
particular option is given different terms, the per share exercise price of all
options is the composite closing price on the NYSE on the trading day
immediately before the option grant date, and initial options generally vest in
cumulative installments of 20% on each anniversary of the grant date, so that
the options become fully exercisable five years after the grant, and remain
exercisable until the tenth anniversary of the grant.

Reload Options

The reload program was eliminated for initial option grants made on or after
January 23, 2003. Under reload program policies currently in effect for options
initially granted before January 23, 2003, option holders can use class A
common stock that they have owned for at least six months to pay the exercise
price of their options and have shares withheld to pay income taxes on the
exercise. They then receive a new reload option to purchase the same number of
shares they used to pay the exercise price and/or had withheld for taxes.

Reload options are subject to several restrictions, including: (i) the option
holder cannot receive a reload option unless the market price of the class A
common stock on the exercise date is at least 20% greater than the exercise
price (an option holder can exercise an option at a lower price, but he or she
will not receive a reload option); (ii) if the option holder receives a reload
option, the shares acquired must be held for two years, other than a small
portion to account for the difference between the statutory minimum tax
withholding rate and the highest marginal tax rate; (iii) the reload option
does not vest (i.e., become exercisable) for six months; and (iv) the
expiration date of the reload option is the same as that of the initial option
grant.

During 2003, there were no initial option grants.

177



---



##### Table of Contents



2003 Option Grants

|                  |  |                     |   |                   |  |         |        |        |  |               |       |      |  |         |       |   |  |             |       |            |  |               |            |            |  |  |        | 
|----------------- |  | ------------------- | - | ----------------- |  | ------- | ------ | ------ |  | ------------- | ----- | ---- |  | ------- | ----- | - |  | ----------- | ----- | ---------- |  | ------------- | ---------- | ---------- |  |  | ------ | 
|                  |  |                     |   |                   |  |         |        |        |  | % of total    |       |      |  |         |       |   |  |             |       |            |  |              
|                  |  | Number of           |   | options granted   |  |         |        |        |  |               |       |      |  |         |       |  
|                  |  | shares underlying   |   | to all Travelers  |  |         |        |        |  |               |       |      |  |         |       |  
|                  |  | options granted (a) |   | employees in 2003 |  |         |        |        |  |               |       |      |  |         |       |  
|                  |  |                     |   |                   |  |         |        |        |  |               |       |      |  |         |       |  
|                  |  |                     |   |                   |  |         |        |        |  |               |       |      |  |         |       |   |  | Exercise or |       |            |  |               |            | Grant date
|                  |  |                     |   |                   |  |         |        |        |  |               |       |      |  |         |       |   |  | base price  |       | Expiration |  | present value
|Name              |  | Initial             |   | Reload            |  | Initial |        | Reload |  | ($ per share) |       | date |  | ($) (b)
|                  |  |                     |   |                   |  |         |        |        |  |               |       |      |  |        
|Robert I. Lipp    |  |                     |  |                   |  |         |       |        |  |               | 0.000 | %    |  |         | 0.000 | % |  |             |      |            |  |               | n/a        |            |  |  |       | 
|Charles J. Clarke |  |                     |  |                   |  |         | 2,323  |        |  |               | 0.000 | %    |  |         | 0.210 | % |  |             | 16.30 |            |  |               | 11/2/2008  |            |  |  | 8,628  | 
|                  |  |                     |   |                   |  |         | 12,032 |        |  |               | 0.000 | %    |  |         | 1.090 | % |  |             | 16.30 |            |  |               | 11/2/2008  |            |  |  | 29,622 | 
|                  |  |                     |   |                   |  |         | 2,979  |        |  |               | 0.000 | %    |  |         | 0.270 | % |  |             | 16.32 |            |  |               | 11/2/2008  |            |  |  | 7,344  | 
|                  |  |                     |   |                   |  |         | 23,591 |        |  |               | 0.000 | %    |  |         | 2.140 | % |  |             | 16.67 |            |  |               | 11/2/2008  |            |  |  | 68,413 | 
|                  |  |                     |   |                   |  |         | 11,356 |        |  |               | 0.000 | %    |  |         | 1.030 | % |  |             | 16.03 |            |  |               | 11/2/2008  |            |  |  | 27,428 | 
|Douglas G. Elliot |  |                     |  |                   |  |         | 5,429  |        |  |               | 0.000 | %    |  |         | 0.490 | % |  |             | 16.30 |            |  |               | 11/2/2008  |            |  |  | 13,366 | 
|                  |  |                     |   |                   |  |         | 1,465  |        |  |               | 0.000 | %    |  |         | 0.130 | % |  |             | 16.30 |            |  |               | 10/27/2005 |            |  |  | 3,021  | 
|                  |  |                     |   |                   |  |         | 1,099  |        |  |               | 0.000 | %    |  |         | 0.100 | % |  |             | 15.38 |            |  |               | 9/24/2007  |            |  |  | 2,473  | 
|                  |  |                     |   |                   |  |         | 1,083  |        |  |               | 0.000 | %    |  |         | 0.100 | % |  |             | 16.70 |            |  |               | 9/24/2007  |            |  |  | 3,049  | 
|                  |  |                     |   |                   |  |         | 994    |        |  |               | 0.000 | %    |  |         | 0.090 | % |  |             | 16.80 |            |  |               | 9/24/2007  |            |  |  | 2,533  | 
|                  |  |                     |   |                   |  |         | 2,613  |        |  |               | 0.000 | %    |  |         | 0.240 | % |  |             | 14.35 |            |  |               | 11/2/2008  |            |  |  | 8,767  | 
|                  |  |                     |   |                   |  |         | 2,723  |        |  |               | 0.000 | %    |  |         | 0.250 | % |  |             | 14.35 |            |  |               | 11/2/2008  |            |  |  | 9,008  | 
|                  |  |                     |   |                   |  |         | 2,888  |        |  |               | 0.000 | %    |  |         | 0.260 | % |  |             | 16.30 |            |  |               | 11/2/2008  |            |  |  | 10,727 | 
|                  |  |                     |   |                   |  |         | 5,482  |        |  |               | 0.000 | %    |  |         | 0.500 | % |  |             | 16.32 |            |  |               | 11/2/2008  |            |  |  | 13,515 | 
|                  |  |                     |   |                   |  |         | 6,861  |        |  |               | 0.000 | %    |  |         | 0.620 | % |  |             | 16.67 |            |  |               | 11/2/2008  |            |  |  | 19,897 | 
|                  |  |                     |   |                   |  |         | 1,639  |        |  |               | 0.000 | %    |  |         | 0.150 | % |  |             | 16.70 |            |  |               | 11/2/2008  |            |  |  | 4,600  | 
|                  |  |                     |   |                   |  |         | 5,551  |        |  |               | 0.000 | %    |  |         | 0.500 | % |  |             | 16.03 |            |  |               | 11/2/2008  |            |  |  | 13,407 | 
|Jay S. Benet      |  |                     |  |                   |  |         | 1,456  |        |  |               | 0.000 | %    |  |         | 0.130 | % |  |             | 16.46 |            |  |               | 10/27/2005 |            |  |  | 2,958  | 
|                  |  |                     |   |                   |  |         | 2,921  |        |  |               | 0.000 | %    |  |         | 0.270 | % |  |             | 16.94 |            |  |               | 9/24/2007  |            |  |  | 8,621  | 
|                  |  |                     |   |                   |  |         | 95     |        |  |               | 0.000 | %    |  |         | 0.010 | % |  |             | 14.35 |            |  |               | 11/2/2008  |            |  |  | 319    | 
|                  |  |                     |   |                   |  |         | 1,930  |        |  |               | 0.000 | %    |  |         | 0.180 | % |  |             | 16.03 |            |  |               | 11/2/2008  |            |  |  | 4,662  | 
|                  |  |                     |   |                   |  |         | 11,216 |        |  |               | 0.000 | %    |  |         | 1.020 | % |  |             | 16.30 |            |  |               | 11/2/2008  |            |  |  | 27,613 | 
|                  |  |                     |   |                   |  |         | 12,846 |        |  |               | 0.000 | %    |  |         | 1.170 | % |  |             | 16.67 |            |  |               | 11/2/2008  |            |  |  | 37,253 | 
|Maria Olivo       |  |                     |  |                   |  |         |       |        |  |               | 0.000 | %    |  |         |      |   |  |             |      |            |  |               | n/a        |            |  |  |       | 



|(a) |  | The total options outstanding at the end of 2003 for each Covered Executive
is shown as number of shares
underlying unexercised options at 2003 year-end in the table 2003
aggregated option exercises and year-
end option values below.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | The grant date present value numbers in the table were derived by
application of a variation of the Black-
-Scholes option pricing model. The following assumptions were used in
employing the model.                                      

178



---



##### Table of Contents





| |  | Stock price volatility was calculated using the average historical
volatility of the common stock of an
industry peer group over the estimated option life based on the mid-month
of the option grant.                                                                              
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | The risk-free interest rate for each option grant was the interpolated
market yield for the mid-month of
the option grant on a Treasury bill with a term identical to the subject
estimated option life, as reported by the Federal Reserve.                                        
| 
| |  | The dividend yield was based upon TPCs actual 2003 annual dividend rate which was assumed to be
constant over the life of the option.                                                                                                                                              
| 
| |  | For reload options, which vest six months after the date of grant, exercise was assumed to occur
approximately one to three years after the grant date, based on the assumption that exercise would occur
evenly throughout the period between the vesting date and expiration date.

Option Exercises Table

The following table shows the aggregate number of shares underlying options for
class A common stock exercised in 2003 and the value at year-end of outstanding
in-the-money options for class A common stock, whether or not exercisable.

2003 AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUES

|                  |  |                 |        |          |  |             |         |               |  |                      |         |                          |  |  |           |  |  |  |        |  |  |  |        | 
|----------------- |  | --------------- | ------ | -------- |  | ----------- | ------- | ------------- |  | -------------------- | ------- | ------------------------ |  |  | --------- |  |  |  | ------ |  |  |  | ------ | 
|                  |  |                 |        |          |  |             |         |               |  | Number of shares     |         |                          |  |  |           |  |  | 
|                  |  |                 |        |          |  |             |         |               |  | underlying           |         | Value of unexercised    
|                  |  |                 |        |          |  |             |         |               |  | unexercised options  |         | in-the-money options    
|                  |  |                 |        |          |  |             |         |               |  | at 2003 year-end (c) |         | at 2003 year-end ($) (d)
|                  |  | Shares          |        | Value    |  |             |         |              
|                  |  | Acquired        |        | Realized |  |             |         |               |  |                      |         |                          |  |  |           |  |  |  |        | 
|Name              |  | on exercise (a) |        | ($) (b)  |  | Exercisable |         | Unexercisable |  | Exercisable          |         | Unexercisable           
|                  |  |                 |        |          |  |             |         |               |  |                      |         |                         
|Robert I. Lipp    |  |                 |       |          |  |             |        |               |  |                      | 864,865 |                          |  |  | 3,459,459 |  |  |  |       |  |  |  |       | 
|Charles J. Clarke |  |                 | 62,851 |          |  |             | 254,719 |               |  |                      | 267,794 |                          |  |  | 229,088   |  |  |  | 3,735  |  |  |  | 15,669 | 
|Douglas G. Elliot |  |                 | 45,550 |          |  |             | 183,247 |               |  |                      | 184,938 |                          |  |  | 251,878   |  |  |  | 18,929 |  |  |  | 17,935 | 
|Jay S. Benet      |  |                 | 36,244 |          |  |             | 140,312 |               |  |                      | 139,105 |                          |  |  | 210,914   |  |  |  | 5,228  |  |  |  | 6,837  | 
|Maria Olivo       |  |                 |       |          |  |             |        |               |  |                      | 70,000  |                          |  |  | 280,000   |  |  |  |       |  |  |  |       | 



|(a) |  | This column shows the number of shares underlying options exercised in
2003 by the Covered Executives. The actual number of shares of class A
common stock received by these individuals from options exercised in 2003
(net of shares used to cover the exercise price and withheld to pay income
tax) was:
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  |  |        |        | 
|----------------- |  | ------ | ------ | 
|Executive         |  | Shares
|                  |  |       
|Robert I. Lipp    |  |        |       | 
|Charles J. Clarke |  |        | 10,570 | 
|Douglas G. Elliot |  |        | 7,724  | 
|Jay S. Benet      |  |        | 5,781  | 
|Maria Olivo       |  |        |       | 

179



---



##### Table of Contents





|(b) |  | Value realized is the difference between the exercise price of the option
and the market price of the class A
common stock on the exercise date, multiplied by the number of option
shares exercised. Value realized numbers do not necessarily reflect what
the executive might receive if he sells the shares acquired by the option
exercise, since the market price of the shares at the time of sale may be
higher or lower than the price on the exercise date of the option. Each of
the Covered Executives is subject to the Companys stock ownership
commitment (described above) that requires that each Covered Executive
acquire and retain at least 25,000 shares of TPC common stock based on his
or her management position.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(c) |  | The number of shares underlying unexercised options includes all stock
options granted, including the Citigroup stock options that were converted
to TPC stock options on the August 20, 2002 Citigroup
Distribution date, that remained
unexercised at the end of 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(d) |  | Value of unexercised in the money options is the aggregate, calculated
on a grant-by-grant basis, of the product of the number of unexercised
options at the end of 2003 multiplied by the difference between the
exercise price for the grant and the year-end market price, excluding
grants for which the difference is equal to or less than zero.                                                                                                                                                                                                                                                                                                                                                                                        

Retirement Plans

Pension Plan

The company sponsors and maintains a pension plan that covers domestic
employees. Employees become eligible to participate in the pension plan after
one year of service, and benefits generally vest after 5 years of service. The
normal form of benefit under the Companys pension plan is a joint and survivor
annuity, payable over the life of the participant and spouse, for married
participants, and a single life annuity, payable for the participants life
only, for single participants. Other forms of payment are also available.

The pension plan provides for a cash balance benefit that is expressed in the
form of a hypothetical account balance. Benefit credits accrue annually at a
rate between 1.5% and 6% of covered compensation; the rate increases with age
and service. Interest credits are applied annually to the prior years balance;
these credits are based on the yield on 30-year Treasury bonds (as published by
the Internal Revenue Service). Although the normal form of the benefit is an
annuity, the hypothetical account balance is also payable as a single lump sum.

Mr. Clarke accrues benefits in accordance with a prior plan formula in effect
through March 31, 2003. Under this formula, the benefit is generally equal to
2% of final average salary over a five-year period for each year of service up
to 25 years plus two-thirds of 1% for each year of service over 25 years, up to
a maximum of 15 additional years, less a portion of the primary Social Security
amount, plus, if elected, adjustments for cost of living increases of up to 3%
each year. Minimum benefit provisions also apply under this plan formula.

Nonqualified Pension Plan

In addition to the pension plan, the Company has a nonqualified retirement plan
which provides benefit accruals in respect of compensation or benefits
exceeding Internal Revenue Code limitations. Compensation covered by the
nonqualified plan is limited to $200,000 for 2003, or in respect of benefits
accrued in excess of the Internal Revenue Code benefit limit which is $160,000
for 2003, less amounts covered by the Companys qualified pension plan. The
formula governing these nonqualified accruals mirrors the applicable formula in
the qualified pension plan. The benefits payable under the nonqualified plans
are unfunded, and will be paid from the Companys general assets.

The Companys nonqualified programs were frozen effective January 1, 2002, and
no further cash balance benefits were accrued under these programs for most of
the covered population. Therefore, except for Mr. Clarke, no Covered Executive
had a nonqualified benefit accrual in 2003. Mr. Clarke continued to accrue
nonqualified benefits under the grandfathered formula applicable to the
qualified pension plan described above, using compensation limited to $300,000
for 2003, less amounts covered by the qualified pension plan.

180



---



##### Table of Contents



Estimated Annual Benefits Under All Plans

The estimated annual benefit provided in total by all plans described above, expressed in the form of a single life annuity, is as follows:

|           |  |                           |    |                  |  |  |         |    
|---------- |  | ------------------------- | -- | ---------------- |  |  | ------- | ---
|           |  | Years of service          |    | Estimated annual
|Name       |  | through December 31, 2003 |    | benefit ($)     
|           |  |                           |    |                 
|Mr. Lipp   |  |                           | 16 |                  |  |  | 2,171   | (a)
|Mr. Clarke |  |                           | 45 |                  |  |  | 482,664 | (b)
|Mr. Elliot |  |                           | 16 |                  |  |  | 84,107  |    
|Mr. Benet  |  |                           | 13 |                  |  |  | 86,700  |    
|Ms. Olivo  |  |                           | 8  |                  |  |  | 56,317  |    



|(a) |  | Mr. Lipp retired from Citigroup effective December 31, 2000, and he is
currently receiving a benefit from the Citigroup pension and nonqualified
plans. These amounts are not included in the table above, as they are not
obligations of the Company.                                                
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | In addition to retirement benefits under a prior Company retirement plan,
the Company pays a retirement allowance of up to 13 weeks of base salary,
based upon age at retirement, to employees who attained age 50 on or
before December 31, 1989. This additional benefit is available to Mr.
Clarke.
|   
|    |  | These estimates are based on the following assumptions:                                                                                                                                                                                                                                               



| |  |  | The benefit is determined as of age 65 or current age if older;                                                                     
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Covered compensation for each Covered Executive remains constant at 2003 levels;                                                    
|
| |  |  | Regulatory limits on compensation and benefits, and the Social
Security Wage Base remain constant at 2003 levels;                   
|
| |  |  | The interest credit rate for cash balance benefits for 2003 was
5.1% and 5.3% for years after 2003; and                             
|
| |  |  | The interest rate used to convert hypothetical account balances
to annual annuities for 2003 was 5.1% and 5.3% for years after 2003.

Employment Agreement

Mr. Lipp has an employment agreement with the Company dated March 7, 2002,
pursuant to which he serves as TPCs Chairman and Chief Executive Officer, for
a period of 5 years from the March 22, 2002 IPO, subject to early termination.
This agreement will be amended and restated upon completion of the merger
between the Company and St. Paul, as discussed below. Mr. Lipps annual base
salary will be not less than $600,000 and he participates in the Companys
bonus and other incentive plans intended for the Companys senior management.
Under the agreement, in 2002 the Company granted to Mr. Lipp a stock option to
purchase 4,324,324 shares of class A common stock at an exercise price equal to
the initial public offering price of $18.50. The option vests in 20% annual
increments beginning on March 22, 2003. In addition, the option will be fully
vested and immediately exercisable if Mr. Lipps employment is terminated by
the Company without cause or by him for a good reason, or in the event of
death, disability or a change in control. Mr. Lipp is also entitled to certain
benefits and perquisites.

The agreement also provides that if during the term of the agreement:

Mr. Lipps employment is terminated by the Company without cause or by him for
a good reason, he will be entitled to (1) a lump sum payment in an amount equal
to two times the sum of (a) his annual salary and (b) the highest annual bonus
paid to him for the three performance years prior to his termination and (2)
all accrued benefits; and

181



---



##### Table of Contents



Mr. Lipps employment is terminated by him for any reason during a 60-day
period beginning 6 months after a change in control or if his employment is
terminated by the Company without cause or by him with good reason during the
period beginning on the later of 6 months prior to such change of control and
ending two years after such change of control, he will be entitled to (1) a
lump sum payment in an amount equal to three times the sum of (a) his annual
salary and (b) the highest annual bonus paid to him for the three performance
years prior to his termination and (2) all accrued benefits.

As a condition to receiving the above described payments and benefits, Mr. Lipp
will be subject to a non-solicitation agreement for one year following the
termination of the agreement.

In connection with the signing of the merger agreement with St. Paul, the
Company has entered into an amended and restated executive employment agreement
with Mr. Lipp which will become effective upon completion of the merger and
will supersede and replace his existing employment agreement described above.
At the time of the merger, St. Paul Travelers, as the parent corporation
following the merger, will assume and agree to perform the amended and restated
employment agreement.

Pursuant to the amended and restated agreement, Mr. Lipp will serve as chairman
of the St. Paul Travelers Board of Directors, an executive officer position,
for a term commencing on the closing date of the merger and ending on December
31, 2005. Mr. Lipps annual base salary will be not less than his current base
salary of $750,000, and he will participate in bonus and other incentive plans
intended for senior management.

The amended and restated agreement preserves provisions of Mr. Lipps existing
employment agreement providing that the option granted to Mr. Lipp by the
Company on March 22, 2002 will be converted in accordance with the terms of the
merger agreement into an option to purchase shares of the common stock of St.
Paul Travelers, and will be fully vested upon completion of the merger. The
agreement adds a provision that the converted option generally will remain
exercisable until the expiration of its stated 10-year term. However, if Mr.
Lipp becomes an employee or director of certain specified competitors of St.
Paul Travelers following the termination of his employment, the converted
option will remain exercisable for period of 30 days after he commences such
employment or directorship, but not beyond its stated term.

Pursuant to the amended and restated agreement, Mr. Lipp will be eligible for
additional annual grants of options and other equity awards. Any future equity
grant will be fully vested and remain exercisable for the shorter of two years
or the stated term if Mr. Lipps employment is terminated by the combined
company without cause or by him for good reason or in the event of a future
change in control (as defined in St. Paul Travelers then equity plan) that
occurs after the merger. Mr. Lipp is also entitled to certain benefits and
perquisites.

The amended and restated agreement also provides that if Mr. Lipps employment
is terminated by St. Paul Travelers without cause or by him for good reason
(as defined therein and which includes any termination by Mr. Lipp during the
30-day period following the six-month anniversary of a future change in control
that occurs after the merger), he will be entitled to:



| |  |  | a lump sum payment in an amount equal to three times the sum of (a)
his annual salary and (b) the highest annual bonus paid to him for the
three performance years prior to his termination; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | all accrued benefits.                                                                                                                                                                           

Pursuant to Mr. Lipps existing employment agreement, Mr. Lipp may terminate
his employment for any reason during a 60-day period beginning six months
following completion of the merger and receive the severance benefits described
in the preceding paragraph. In connection with the merger and the amendment and
restatement of his employment agreement, Mr. Lipp has agreed to waive this
right and, consequently, the provision as it relates to the merger has been
eliminated in the amended and restated agreement.

Under the amended and restated agreement, Mr. Lipp will be entitled to a
gross-up payment in the event that any amount payable to him becomes subject to
excise tax under Section 4999 of the Code.

182



---



##### Table of Contents



Change In Control Agreement

The Company entered into an offer letter agreement dated May 22, 2002 with
Maria Olivo, executive vice president of the Company. Pursuant to the letter
agreement, if, within the first two years of Ms. Olivos employment, the
Company experiences a change in control (which includes the merger with St.
Paul) and Ms. Olivo leaves within one year, or Mr. Lipps employment with the
Company terminates and Ms. Olivo leaves within one year, or Ms. Olivo is
terminated without cause, or Ms. Olivo leaves the Company because she has
been demoted or her responsibilities have been significantly diminished without
her consent or she becomes disabled and is unable to perform her duties for six
months or longer, Ms. Olivo will be entitled to:



| |  |  | receive her pro-rated bonus for that year,                                                                                                                      
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | receive a severance payment in the amount of $500,000 and                                                                                                       
|
| |  |  | become vested in any 401(k) and pension which she has participated in
or receive a payment of equivalent value if vesting thereunder is not
legally permissible.

If, within the third year of Ms. Olivos employment, the Company experiences
such a change in control and Ms. Olivo leaves within one year, or Mr. Lipps
employment with the Company terminates and Ms. Olivo leaves within one year, or
Ms. Olivo is terminated without cause, or Ms. Olivo leaves the Company
because she has been demoted or her responsibilities have been significantly
diminished without her consent or she becomes disabled and is unable to perform
her duties for six months or longer, she will be entitled to the benefits and
payments described in the preceding sentence, plus an amount equal to one half
of the average bonus amounts, if any, awarded to her during the previous two
years pursuant to the Companys incentive program.

In addition, if Ms. Olivos employment terminates as described above, Ms.
Olivos unvested capital accumulation program awards will be treated as if her
employment has been terminated without cause and she will be entitled to such
portion of the award as the capital accumulation program provisions establish
for employees who experience a termination without cause.

Directors Compensation

The Board determines directors compensation. Under the Travelers Property
Casualty Corp. Compensation Plan for Non-Employee Directors (the Directors
Plan), non-employee directors currently receive an annual retainer of
$100,000, payable quarterly either 100% in class A common stock, or up to 50%
in cash, with the remainder in class A common stock. A director may defer
receipt of his or her stock. In October 2003, the Board appointed Frank J.
Tasco as the Lead Director of the Board and increased his annual retainer to
$125,000. The Directors Plan allows an annual stock option grant to
non-employee directors. In 2003, each non-employee director was granted a stock
option to purchase 5,000 shares of class A common stock at an exercise price
that was not less than the closing price of the class A common stock on the
NYSE on the day immediately prior to the grant date. The option vests in 20%
annual increments until fully vested after five years, and expires after ten
years unless exercised. Directors receive no additional compensation for
participation on Board committees.

Directors who are employees of the Company or its affiliates do not receive any
compensation for their services as directors.

183



---



##### Table of Contents






Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Stock Ownership of Executive Officers and Directors

The following table shows the beneficial ownership of the class A and class B
common stock by the Companys directors and the executive officers who are
Covered Executives as of January 31, 2004.

|                                                             |  |                |  |         |         |                              |           |                   |           |              |           |         |           |                    |           |  |        |  |         | 
|------------------------------------------------------------ |  | -------------- |  | ------- | ------- | ---------------------------- | --------- | ----------------- | --------- | ------------ | --------- | ------- | --------- | ------------------ | --------- |  | ------ |  | ------- | 
|                                                             |  |                |  |         |         |                              |           |                   |           |              |           |         |           | Total Common Stock
|                                                             |  |                |  |         |         |                              |           |                   |           |              |           |         |           | Beneficially Owned
|                                                             |  |                |  |         |         | Class A                      |           |                   |           |              |           |        
|                                                             |  |                |  |         |         | Common Stock                 |           | Class A           |           | Class A      |           |         |           |                   
|                                                             |  |                |  |         |         | Beneficially                 |           | Stock Options     |           | Common Stock |           |         |           |                   
|                                                             |  |                |  |         |         | Owned                        |           | Exercisable       |           | Beneficially |           | Class B
|                                                             |  |                |  |         |         | Excluding                    |           | Within 60         |           | Owned        |           | Common 
|Name                                                         |  | Position       |  | Options |         | Days of January 31, 2004 (a) |           | Including Options |           | Stock       
|                                                             |  |                |  |         |         |                              |           |                   |           |             
|Jay S. Benet                                                 |  | Chief          |  |         |         |                              |           |                   |           |              |           |         |           |                    |           |  |        | 
|                                                             |  | Financial      |  |         | 75,306  |                              |           |                   | 179,010   |              |           |         | 254,316   |                    |           |  | 6,264  | 
|                                                             |  | Officer        |  |         |         |                              |           |                   |           |              |           |         |           |                    |           |  |        | 
|Howard P. Berkowitz                                          |  | Director       |  |         | 17,692  |                              |           |                   | 8,674     | (b)          |           |         | 26,366    |                    |           |  |       | 
|Kenneth J. Bialkin                                           |  | Director       |  |         | 53,202  |                              |           |                   | 1,000     |              |           |         | 54,202    |                    |           |  | 85,586 | 
|Charles J. Clarke                                            |  | President and  |  |         | 95,542  |                              |           |                   | 307,794   |              |           |         | 403,336   |                    |           |  | 2,857  | 
|                                                             |  | Director       |  |         |         |                              |           |                   |           |              |           |         |           |                    |           |  |        | 
|Leslie B. Disharoon                                          |  | Director       |  |         | 19,710  |                              |           |                   | 1,000     |              |           |         | 20,710    |                    |           |  | 16,776 | 
|Douglas G. Elliot                                            |  | Chief          |  |         | 72,621  |                              |           |                   | 226,940   |              |           |         | 299,561   |                    |           |  | 5,311  | 
|                                                             |  | Operating      |  |         |         |                              |           |                   |           |              |           |         |           |                    |           |  |        | 
|                                                             |  | Officer        |  |         |         |                              |           |                   |           |              |           |         |           |                    |           |  |        | 
|Meryl D. Hartzband                                           |  | Director       |  |         | 9,092   |                              |           |                   | 1,000     |              |           |         | 10,092    |                    |           |  |       | 
|Robert I. Lipp                                               |  | Chairman of    |  |         | 912,261 |                              |           |                   | 1,729,730 |              |           |         | 2,641,991 |                    |           |  | 12,779 | 
|                                                             |  | the Board      |  |         |         |                              |           |                   |           |              |           |         |           |                    |           |  |        | 
|                                                             |  | and Chief      |  |         |         |                              |           |                   |           |              |           |         |           |                    |           |  |        | 
|                                                             |  | Executive      |  |         |         |                              |           |                   |           |              |           |         |           |                    |           |  |        | 
|                                                             |  | Officer        |  |         |         |                              |           |                   |           |              |           |         |           |                    |           |  |        | 
|Blythe J. McGarvie                                           |  | Director       |  |         | 1,562   |                              |           |                   |          |              |           |         | 1,562     |                    |           |  |       | 
|Maria Olivo                                                  |  | Executive Vice |  |         | 29,701  |                              |           |                   | 70,000    |              |           |         | 99,701    |                    |           |  | 830    | 
|                                                             |  | President      |  |         |         |                              |           |                   |           |              |           |         |           |                    |           |  |        | 
|Clarence Otis, Jr.                                           |  | Director       |  |         | 9,092   |                              |           |                   | 1,000     |              |           |         | 10,092    |                    |           |  |       | 
|Jeffrey M. Peek                                              |  | Director       |  |         | 18,135  |                              |           |                   | 1,000     |              |           |         | 19,135    |                    |           |  | 88     | 
|Nancy A. Roseman                                             |  | Director       |  |         | 4,006   |                              |           |                   | 1,000     |              |           |         | 5,006     |                    |           |  |       | 
|Charles W. Scharf                                            |  | Director       |  |         | 10,355  |                              |           |                   | 1,000     |              |           |         | 11,355    |                    |           |  | 4,650  | 
|Frank J. Tasco                                               |  | Director       |  |         | 12,526  |                              |           |                   | 1,000     |              |           |         | 13,526    |                    |           |  | 1,227  | 
|Laurie J. Thomsen                                            |  | Director       |  |         | 11,792  |                              |           |                   | 1,000     |              |           |         | 12,792    |                    |           |  |       | 
|All Directors and
Executive Officers
as a group
(23 persons) |  |                |  |         |         |                              | 1,623,577 |                   |           |              | 3,429,141 |         |           |                    | 5,052,718 |  |        |  | 219,724 | 



|(a) |  | Stock options have been granted to purchase shares of class A common stock
only.                                                                                    
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Includes 7,674 shares that may be acquired upon the conversion of the
Companys 4.5% Convertible Junior Subordinated Debentures into shares of
class A common stock.
|   
|    |  | As of January 31, 2004, no director or executive officer beneficially owned
as much as 1% of class A or class B common stock.                                       

184



---



##### Table of Contents



Some of the TPC shares shown in the preceding table are considered as
beneficially owned under SEC rules, including shares (i) for which receipt has
been deferred under the Directors Plan, described in Item 11 above, (ii) held
in trusts, (iii) owned by a family member, (iv) for which the director or
executive officer has direct or indirect voting power but that are subject to
forfeiture and restrictions on disposition, or (v) underlying stock options
that may be exercised within sixty days of January 31, 2004. The following
table shows the nature of the beneficial ownership, except for stock options,
which are reported in the table above.

|                            |                                  |              |         |        |         |                 |                |                 |                 |                 |               |                |   |                |                |  | 
|--------------------------- | -------------------------------- | ------------ | ------- | ------ | ------- | --------------- | -------------- | --------------- | --------------- | --------------- | ------------- | -------------- | - | -------------- | -------------- |  | 
|                            |                                  |              |         |        |         |                 |                |                 |                 |                 |               |                |   |                | Voting power, 
|                            |                                  |              |         |        |         |                 |                |                 |                 |                 |               |                |   |                | but subject to
|                            |                                  |              |         |        |         |                 |                |                 |                 |                 |               |                |   |                | forfeiture and
|                            |                                  |              | Receipt |        | Held in |                 | Owned by       |                 | restrictions on
|Director/Officer            |                                  | Deferred (a) |         | trusts |         | family member   |                | disposition (b)
|                            |                                  |              |         |        |         |                 |                |                
|Jay S. Benet                |                                  |              |        |        |         |                 |               |                 |                 |                 |              |                |   | 42,274 class A
|                            |                                  |              |         |        |         |                 |                |                 |                 |                 |               |                |   | 231 class B   
|Howard P. Berkowitz         |                                  |              | 8,092   |        |         |                 |               |                 |                 |                 |              |                |   |                |               | 
|Kenneth J. Bialkin          |                                  |              | 11,546  |        |         |                 |               |                 |                 | 295 class A     |               |                |  |               
|                            |                                  |              |         |        |         |                 |                |                 |                 | 608 class B     |               |                |   |               
|Charles J. Clarke           |                                  |              |        |        |         |                 |               |                 |                 |                 |              |                |   | 42,274 class A
|                            |                                  |              |         |        |         |                 |                |                 |                 |                 |               |                |   | 231 class B   
|Leslie B. Disharoon         |                                  |              | 11,546  |        |         |                 |               |                 |                 | 362 class A     |               |                |  |               
|                            |                                  |              |         |        |         |                 |                |                 |                 | 745 class B     |               |                |   |               
|Douglas G. Elliot           |                                  |              |        |        |         |                 |               |                 |                 |                 |              |                |   | 42,274 class A
|                            |                                  |              |         |        |         |                 |                |                 |                 |                 |               |                |   | 231 class B   
|Meryl D. Hartzband          |                                  |              | 8,092   |        |         |                 |               |                 |                 |                 |              |                |   |                |               | 
|Robert I. Lipp              |                                  |              |        |        |         | 284,598 class A |                |                 |                |                 |               | 70,153 class A
|                            |                                  |              |         |        |         | 12,262 class B  |                |                 |                 |                 |               |                |   |               
|Blythe J. McGarvie          |                                  |              | 1,562   |        |         |                 |               |                 |                 |                 |              |                |   |                |               | 
|Maria Olivo                 |                                  |              |        |        |         |                 |               |                 |                 |                 |              |                |   | 29,297 class A
|Clarence Otis, Jr.          |                                  |              | 8,092   |        |         |                 |               |                 |                 |                 |              |                |   |                |               | 
|Jeffrey M. Peek             |                                  |              | 8,092   |        |         |                 |               |                 |                 |                 |              |                |   |                |               | 
|Nancy A. Roseman            |                                  |              |        |        |         |                 |               |                 |                 |                 |              |                |   |                |               | 
|Charles W. Scharf           |                                  |              | 8,092   |        |         |                 |               |                 |                 |                 |              |                |   |                |               | 
|Frank J. Tasco              |                                  |              | 11,929  |        |         |                 |               |                 |                 |                 |              |                |   |                |               | 
|Laurie J. Thomsen           |                                  |              | 8,092   |        |         |                 |               |                 |                 | 1,700 class A   |               |                |  |               
|All Directors and Executive |                                  |              | 85,137  |        |         | 285,246 class A |                | 4,789 class A   |                 | 390,255 class A
|                            | Officers as a group (23 persons) |              |         |        |         |                 | 13,593 class B |                 | 5,514 class B   |                 | 1,680 class B



|(a) |  | Represents shares of unissued class A common stock granted under the
Directors Plan (see Directors Compensation in Item 11 above). Receipt
of the shares is deferred and credited to an account that the Company
maintains for each non-employee director.                                                      
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Represents shares of TPC restricted common stock granted under the
Travelers Property Casualty Corp. 2002 Stock Incentive Plan, including
shares that were granted to replace Citigroup restricted common stock in
the Citigroup Distribution (see footnote (b) to the Summary Compensation Table in Item
11 above).

185



---



##### Table of Contents



Stock Ownership of 5% or More Shareholders

Based on Schedules 13G filed with the Securities and Exchange Commission
(SEC) and/or information available to the Company, the only shareholders
known to the Company to control as much as 5% of the class A or class B common
stock are:

|                                                                |                                                     |         |                    |         |                    |         |            |         |  |     |                     |     |  |  |      |   |  |  |                   |   |                   |  |      |   | 
|--------------------------------------------------------------- | --------------------------------------------------- | ------- | ------------------ | ------- | ------------------ | ------- | ---------- | ------- |  | --- | ------------------- | --- |  |  | ---- | - |  |  | ----------------- | - | ----------------- |  | ---- | - | 
|                                                                |                                                     |         |                    |         |                    |         |            |         |  |     | Percentage of class |     |  |  |      |   |  |  |                  
|                                                                |                                                     |         | Number of shares   |         | beneficially owned |         |            |         |  |     |                     |     | 
|                                                                |                                                     |         | beneficially owned |         | (a)                |         |            |         |  |     |                     |     | 
|                                                                |                                                     |         |                    |         |                    |         |            |         |  |     |                     |     | 
|                                                                |                                                     |         |                    |         |                    |         |            |         |  |     |                     |     |  |  |      |   |  |  | Percentage of     |   | Percentage voting
|                                                                |                                                     |         |                    |         |                    |         |            |         |  |     |                     |     |  |  |      |   |  |  | shares of both    |   | power of both    
|                                                                |                                                     |         |                    |         |                    |         |            |         |  |     |                     |     |  |  |      |   |  |  | classes of common |   | classes of common
|                                                                |                                                     |         |                    |         |                    |         |            |         |  |     |                     |     |  |  |      |   |  |  | stock outstanding |   | stock outstanding
|Beneficial owner                                                |                                                     | Class A |                    | Class B |                    | Class A |            | Class B |  | (a) |                     | (a)
|                                                                |                                                     |         |                    |         |                    |         |            |         |  |     |                     |    
|Citigroup Inc.                                                  |                                                     |         | 50,605,768         |         |                    |         | 50,158,684 |         |  |     | 10.0                | %   |  |  | 10.0 | % |  |  | 10.0              | % |                   |  | 10.0 | %
|                                                                | 399 Park Avenue
New York, NY 10043 (b)              |         |                    |         |                    |         |            |         |  |     |                     |     |  |  |      |   |  |  |                   |   |                   |  |      |   | 
|AXA Financial, Inc.                                             |                                                     |         | 40,839,228         |         |                    |         |           |         |  |     | 8.0                 | %   |  |  |     |   |  |  | 4.1               | % |                   |  | 1.0  | %
|                                                                | 1290 Avenue of the
Americas,
New York, NY 10104 (c) |         |                    |         |                    |         |            |         |  |     |                     |     |  |  |      |   |  |  |                   |   |                   |  |      |   | 
|State Street Bank and                                           |                                                     |         |                   |         |                    |         | 27,894,532 |         |  |     |                    |     |  |  | 5.6  | % |  |  | 2.7               | % |                   |  | 4.9  | %
|Trust Company, Trustee
225 Franklin Street
Boston, MA 02110 (d) |                                                     |         |                    |         |                    |         |            |         |  |     |                     |     |  |  |      |   |  |  |                   |   |                   |  |      |  
|FMR Corp.                                                       |                                                     |         | 32,492,237         |         |                    |         |           |         |  |     | 6.4                 | %   |  |  |     |   |  |  | 3.2               | % |                   |  | 0.8  | %
|                                                                | 82 Devonshire Street
Boston, MA 02109 (e)           |         |                    |         |                    |         |            |         |  |     |                     |     |  |  |      |   |  |  |                   |   |                   |  |      |   | 
|Barclays Global Investors, NA                                  |                                                     |         |                   |         |                    |         | 38,284,243 |         |  |     |                    |     |  |  | 7.7  | % |  |  | 3.8               | % |                   |  | 6.7  | %
|                                                                | 45 Fremont Street
San Francisco, CA
94105 (f)       |         |                    |         |                    |         |            |         |  |     |                     |     |  |  |      |   |  |  |                   |   |                   |  |      |   | 

186



---



##### Table of Contents





|(a) |  | Based on the number of shares of common stock outstanding as of January 31,
2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | These numbers are based upon the beneficial ownership, as of December 31,
2003, that Citigroup has reported in its Schedule 13G filings. Of the
class A and class B shares Citigroup beneficially owns, 655,433 shares of
class A common stock and 849,516 shares of class B common stock are
primarily held in a fiduciary or similar capacity by various Citigroup
subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(c) |  | A Schedule 13G, as amended, was filed with the SEC by AXA Financial, Inc.
and the following affiliates as a group: AXA Assurances I.A.R.D Mutuelle,
AXA Assurances Vie Mutuelle, AXA Courtage Assurance Mutuelle, and AXA. The
shares of class A common stock beneficially owned as of December 31, 2003
are held by various affiliates of the foregoing AXA entities, including
40,810,827 shares held by Alliance Capital Management L.P. in client
discretionary investment advisory accounts. Of the 40,839,228 shares
beneficially owned, the group had sole voting power as to 25,207,952
shares, shared voting power as to 3,158,087 shares, sole power to dispose
as to 40,832,428 shares and shared power to dispose as to 6,800 shares.                                                                                                                                                                                                                                                                                                                                                                           
|   
|(d) |  | Of the shares reported in its Schedule 13G as of December 31, 2003, State
Street Bank and Trust Company had sole voting power as to 23,478,107
shares, shared voting power as to 2,377,223 shares, sole power to dispose
as to 25,470,703 shares, and shared power to dispose as to 2,423,829
shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(e) |  | FMR Corp. (FMR), Edward C. Johnson, 3rd and Abigail P. Johnson filed a
Schedule 13G, as amended, with the SEC to report that as of December 31,
2003, they were the beneficial owners of 32,492,237 shares of class A
common stock, which amount included 1,457,999 shares that may be converted
from the ownership of the Companys 4.5% Convertible Junior Subordinated
Notes due 2032. The Schedule 13G disclosed that FMR had sole power to vote
as to 346,514 of such shares, and sole power to dispose of 32,492,237 of
such shares. FMR is the parent to various subsidiaries that are
beneficial owners of class A common stock, including Fidelity Management &
Research Company that serves as an investment adviser to various
investment companies, Fidelity Management Trust Company, an institutional
investment manager, and Strategic Advisers, Inc., an investment adviser
that provides investment advisory services to individuals. Members of the
Edward C. Johnson, 3rd family own approximately 49% of the voting power of
FMR. Mr. Johnson is Chairman of FMR and Ms. Johnson is a director of FMR.
|   
|(f) |  | Of the shares reported in its Schedule 13G as of December 31, 2003,
Barclays Global Investors, NA had sole voting power as to 33,298,876
shares, and sole power to dispose as to 33,322,052 shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

Change In Control

The consummation of the proposed
merger with St. Paul will result in a change in control of the
Company.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides certain information regarding outstanding stock
options to purchase class A common stock, weighted average exercise prices and
shares remaining available under the Travelers Property Casualty Corp. 2002
Stock Incentive Plan (the Stock Incentive Plan), as of December 31, 2003. The
Stock Incentive Plan is the Companys only plan pursuant to which shares may be
issued (120 million shares of shares of class A Common Stock are authorized for
issuance, and class A Common Stock issued under the Directors Plan comes from
the Stock Incentive Plan). The Board of Directors adopted the Stock Incentive
Plan in March 2002, and the Companys shareholders approved the Stock Incentive
Plan at the 2003 annual meeting of shareholders. The Directors
Plan is described in Item 11  Directors Compensation.

187



---



##### Table of Contents



Equity Compensation Plan Information

|                                                               |  |                   |            |                   |  |                      |       |                 |  |            |            |    
|-------------------------------------------------------------- |  | ----------------- | ---------- | ----------------- |  | -------------------- | ----- | --------------- |  | ---------- | ---------- | ---
|                                                               |  |                   |            |                   |  |                      |       |                 |  | Number of 
|                                                               |  |                   |            |                   |  |                      |       |                 |  | securities
|                                                               |  |                   |            |                   |  |                      |       |                 |  | remaining 
|                                                               |  | Number of         |            |                   |  |                      |       | available for  
|                                                               |  | securities to     |            |                   |  |                      |       | future issuance
|                                                               |  | be issued upon    |            | Weighted-average  |  | under equity        
|                                                               |  | exercise of       |            | exercise price    |  | compensation        
|                                                               |  | outstanding       |            | of outstanding    |  | plans (excluding    
|                                                               |  | options, warrants |            | options, warrants |  | securities reflected
|                                                               |  | and rights        |            | and rights        |  | in column (a))      
|Plan Category                                                  |  | (a)               |            | (b)               |  | (c)                 
|                                                               |  |                   |            |                   |  |                     
|Equity compensation plans approved by
security holders (1)     |  |                   | 70,195,061 | (2)               |  | $                    | 17.85 |                 |  |            | 40,907,188 | (3)
|Equity compensation plans not approved
by security holders (1) |  |                   |           |                   |  |                      |      |                 |  |            |           |    
|                                                               |  |                   |            |                   |  |                      |       |                 |  |            |            |    
|Total                                                          |  |                   | 70,195,061 | (2)               |  | $                    | 17.85 |                 |  |            | 40,907,188 | (3)
|                                                               |  |                   |            |                   |  |                      |       |                 |  |            |            |    



|(1) |  | The Stock Incentive Plan is the Companys only equity compensation plan
and has been approved by shareholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes 56,894,116 shares underlying stock options that were granted to
replace Citigroup stock options that were cancelled in the Citigroup
Distribution. See
footnote (c) to the Summary Compensation Table in Item 11 above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(3) |  | Under the Stock Incentive Plan, shares covered by outstanding awards may
become available for new awards if, among other things, the outstanding
awards are forfeited or otherwise are terminated before the awards vest
and shares are issued. The number reported in this column represents the
number of shares of class A common stock remaining for the grant of awards
as of December 31, 2003. This amount was computed by (A) first adding back
to the 120 million shares authorized under the Stock Incentive Plan,
shares as available for grant, which shares were used to pay option
exercise prices or tax withholdings; and (B) then subtracting from the 120
million shares of class A common stock authorized: (i) the 70,195,061
shares underlying outstanding options reported in column (a) in the table;
(ii) outstanding shares of restricted stock; (iii) shares issued pursuant
to options that were exercised; (iv) shares under the Directors Plan; and
(v) shares that were issued upon the vesting of restricted stock awards.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Aircraft Lease

LCG Enterprises LLC, a limited liability company of which Mr. Lipp is the sole
member, owns and leases to the Company a Falcon 50 aircraft on a month-to-month
basis for business purposes. Pursuant to the lease, the Company is responsible
for the operation and maintenance of the aircraft and pays to LCG $989 per hour
of actual flight time. The Company does not incur an hourly charge when the
aircraft is not used or when Mr. Lipp uses the aircraft for personal reasons.
Mr. Lipp may use the aircraft and other Company-owned aircraft for personal
travel and has agreed to reimburse the Company for his personal use of any of
the aircraft at the maximum non-charter rate permitted by the Federal Aviation
Administration rules. In May 2002, the independent members of the Board
Directors at the time determined that the terms of the lease are more favorable
to the Company than those under which the Company could obtain the use of a
comparable aircraft from an unaffiliated third party. In 2003, the Company paid
$321,118 to LCG for use of the aircraft and Mr. Lipp reimbursed the Company
$249,044 for his personal use of aircraft.

188



---



##### Table of Contents



Investment Management Agreement

Howard P. Berkowitz, a director of TPC, is the CEO of BlackRock HPB Management
LLC (Blackrock HPB), an investment management company that is majority-owned by
BlackRock, Inc., a public investment company. Mr. Berkowitz is a minority
equity owner of BlackRock HPB and is a managing director of BlackRock, Inc.
The Company entered into an investment management agreement with BlackRock HPB
dated as of September 30, 2003, pursuant to which BlackRock HPB is managing a
portion of the Companys investment portfolio. The investment management fees
that will be paid to BlackRock HPB are based upon percentages of the net asset
value of the assets being managed, plus an incentive fee if Blackrock HPB
achieves certain minimum investment performance results. For 2003, the Company
incurred approximately $550,000 in investment advisory fees payable to
Blackrock HPB.

Investment In Subsidiary

On August 1, 2002, Commercial Insurance Resources, Inc. (CIRI), a Company
subsidiary and the holding company for the Gulf Insurance Group (Gulf),
completed an investment transaction with a group of outside investors and
senior employees of Gulf. Trident II, L.P. (Trident) and its related
co-investment funds, Marsh & McLennan Capital Professionals Fund, L.P., Marsh &
McLennan Employees Securities Company, L.P. and Trident Gulf Holding, LLC
invested $125.0 million in the aggregate, and a group of senior employees of
Gulf invested $14.2 million. Meryl D. Hartzband, a director of TPC, is a Senior
Principal and the Investment Director of MMC Capital, Inc. (MMC Capital), the
manager of Trident, and also a member of the investment committee of the
general partner of Trident. MMC Capital is a wholly owned subsidiary of Marsh &
McClennan Companies, Inc.

The investments made in CIRI by Trident, its related co-investment funds and
the Gulf employees included $85.9 million of mandatory convertible preferred
stock, $49.7 million of convertible notes and $3.6 million of common equity,
representing a 24% ownership interest, on a fully diluted basis. The dividend
rate on the preferred stock is 6.0%. The interest rate on the notes is 6.0%
payable on an interest-only basis. The notes mature on December 31, 2032. The
investment agreements provide for registration rights and transfer rights and
restrictions and other matters customarily addressed in agreements with
minority investors.

Legal Services

Skadden, Arps, Slate, Meagher & Flom LLP provided legal services to the Company
during 2003, and continues to provide services in 2004. Kenneth J. Bialkin, a
director of the Company, is a partner in this law firm.

Relationships With Citigroup

Until the Citigroup Distribution was completed on August 20, 2002, TPC remained a
majority-owned subsidiary of Citigroup, and the Company and Citigroup had
agreements between them that addressed various business relationships. However,
in connection with the IPO, the Company and Citigroup terminated these
agreements and entered into new agreements, including a new intercompany
agreement dated as of March 26, 2002, as amended on August 19, 2002. Certain
terms of the intercompany agreement and other agreements and arrangements
between the Company and Citigroup and its affiliates are summarized below to
the extent that they remained in effect or transactions occurred pursuant to
them in 2003.

189



---



##### Table of Contents



Intercompany Agreement

Intellectual Property.The Company owns the Travelers name and mark, but the
Company granted Citigroup the right to make various uses of the Travelers
name and mark for two years from March 22, 2002, subject to certain conditions.
Citigroup owns the umbrella mark and granted the Company a right to make
various uses of the umbrella mark and other Citigroup marks for two years
from March 22, 2002. In addition, the Company agreed to enter into a License
Agreement with The Travelers Insurance Company, a Citigroup subsidiary (TIC)
pursuant to which the Company would grant TIC the right to use the Travelers
Life and Annuity, The TIC and The Travelers Life and Annuity Company names
and marks and other names and marks containing Travelers for use in
Citigroups life insurance and annuity business, subject to certain conditions.

Indemnification.The Company will indemnify Citigroup and its officers,
directors, employees and agents against losses arising from certain actions by
the Company. Citigroup will indemnify the Company and its officers, directors,
employees and agents against losses arising from certain actions by Citigroup.

Registration Rights.Citigroup can demand that the Company register the
distribution of TPC shares of common stock that Citigroup owned after the IPO.
Citigroup also has so-called piggyback registration rights, which means that
Citigroup may include its shares in any future registrations of the Companys
common equity securities. The Company will pay all costs and expenses in
connection with each such registration, except underwriting discounts and
commissions applicable to the shares of common stock sold by Citigroup. The
Company will also register sales of shares of TPC common stock owned by
employees of Citigroup pursuant to employee stock or option plans, but only to
the extent such registration is required for the shares to be freely tradable.

Business Relationships.The Company has an agreement for Citigroup to
distribute the Companys property and casualty insurance products through
Citigroups distribution channels. The Company continues to purchase annuities
for structured settlements from Citigroup on the same economic terms that
existed at the IPO, through 2003, and thereafter on terms to be mutually agreed
upon. During 2004, the Company will use Citigroup as a most preferred provider
of structured settlement annuities for claims, as long as Citigroup maintains
competitive ratings and its products are competitively priced.

Right of First Offer.For a period of two years following the Citigroup Distribution, the
Company has the right of first offer to provide Citigroup property and casualty
coverage that the Company does not currently provide it and Citigroup has the
right of first offer to provide the Company any financial service it did not
provide the Company at the time of the Citigroup Distribution, at market rates, terms and
conditions at the time of the offer. Neither party is required to purchase the
services at rates, terms or conditions less favorable than those offered by any
third party at the time of the offer.

Other Provisions.The intercompany agreement also provides for various other
matters, including: (i) the provision of insurance and allocation and/or
reimbursement of costs and premiums of that insurance; (ii) the provision of
data processing services and allocation and/or reimbursement of costs of those
services; (iii) cross-licensing of computer software; (iv) volume purchasing
arrangements; and (v) provisions governing other relationships among members of
Citigroup, on the one hand, and the Company, on the other hand.

Trademark License Agreement

The Company and TIC entered into a Trademark License Agreement dated as of
August 19, 2002. Under this agreement, except for marks already in use by TIC,
any new corporate or trade name adopted by TIC and its affiliates must contain
the term Travelers Life & Annuity. In addition, any trademark, service mark,
domain name, or other source indicator adopted by TIC and its affiliates must
meet the criteria set forth in certain trademark guidelines. TIC must cease use
of Travelers marks within 2 years after certain events, including Citigroup
ceasing to control TIC.

190



---



##### Table of Contents



Transition Services Agreement

The Company and Citigroup entered into a transition services agreement dated
August 19, 2002 for the provision of certain systems, corporate, administrative
and other shared services and facilities sharing after the Citigroup Distribution. The term
for the provision of each service is one year, except for data processing
services and related support, which is two years, services related to the
accident department of TIC operated for the benefit of the Company, is two
years, and payroll and human resources services, which is two years plus the
remaining portion of the second calendar year. Except for payroll and human
resources services, each service is subject to an extension for another
one-year term upon advance notice from the receiving party. The cost for the
provision of each transition service reflects payment terms consistent with the
cost allocation before the Citigroup Distribution.

Asbestos Indemnification Agreement

The Company entered into an agreement with Citigroup that provided that if in
any fiscal year the Company recorded additional asbestos-related income
statement charges in excess of $150 million, net of any reinsurance, Citigroup
would pay to the Company the amount of any such excess up to a cumulative
aggregate of $800 million, reduced by the tax effect of the highest applicable
federal income tax rate. As a result of the Company adding to its asbestos
reserves through the fourth quarter of 2002, the Company has utilized all of
the benefits under the agreement.

Investment Advisory

The Company entered into an Investment Management and Administrative Services
Agreement dated as of August 6, 2002 with Citigroup Alternative Investments LLC
(CAI), a Citigroup affiliate. CAI provides investment advisory services with
respect to the Companys investment portfolio for a period of two years and at
fees mutually agreed upon, including a component based on performance. Charges
incurred related to this agreement were $59.7 million for 2003. This agreement
terminates on March 31, 2004. The Company intends to arrange an orderly
transition of the investment management and the associated accounting and
administrative services to St. Paul Travelers following the merger with St.
Paul.

Tax Allocation Agreement

The Company and Citigroup are parties to a tax allocation agreement, which
generally provides for the allocation of income tax liabilities between the
Company and Citigroup and certain other matters. The tax allocation agreement
governs these tax-related matters for taxable periods before and after the IPO
and the Citigroup Distribution. Under the tax allocation agreement, the Company will
indemnify Citigroup for tax liabilities that are allocated to the Company.

Brokerage and Investment Banking

In the ordinary course of business, the Company purchases and sells securities
through Citigroups broker-dealers. These transactions are conducted on an
arms-length basis. Commissions are not paid for the purchase and sale of debt
securities. In addition, Salomon Smith Barney Inc., an affiliate of Citigroup
(SSB), performs investment banking and advisory services for the Company. In
March 2003, SSB was one of the initial purchasers of the Companys debt
offering of senior notes, and SSB received customary fees for the transaction.
In addition, in 2003, Citigroup Global Markets, Inc. served as a financial
advisor to the Company in connection with the proposed merger with St. Paul and
received financial advisory fees of $1.0 million, with an additional $3.0
million due if the merger is consummated. SSB is also providing other
investment banking services.

191



---



##### Table of Contents



Credit Facilities

Effective April 17, 2003, TPC entered into the following line of credit
agreements with Citibank, a subsidiary of Citigroup: (i) a $250.0 million
45-month revolving line of credit (the 45-Month Line of Credit), and (ii) a
$250.0 million 364-day revolving line of credit (the 364-Day Line of Credit
and, together with the 45-Month Line of Credit, the Lines of Credit).
Borrowings under the Lines of Credit may be made, at TPCs option, at a
variable interest rate equal to either the lenders base rate plus an
applicable margin or at LIBOR plus an applicable margin. Each Line of Credit
includes a commitment fee and, for any date on which advances exceed 50% of the
total commitment, a utilization fee. The applicable margin and the rates on
which the commitment fee and the utilization fee are based vary based upon
TPCs long-term senior unsecured non-credit-enhanced debt ratings. There were
no amounts outstanding under the Lines of Credit at December 31, 2003.




Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The Audit Committee of the Board of Directors selected KPMG LLP as the
independent auditors of Travelers for 2003, and shareholders ratified this
selection at the 2003 annual meeting of shareholders. KPMG has served as the
independent auditors of the Company and its predecessors since December 1993.

Set forth below is certain information regarding fees billed by KPMG LLP for
various services rendered to the Company during the years ended December 31,
2003 and 2002.

Audit Fees

The aggregate fees billed by KPMG LLP for professional services rendered for
the audit of the Companys annual financial statements for the years ended
December 31, 2003 and 2002 were $2,926,820 and $2,410,360, respectively. Such
amounts include fees for the reviews of the financial statements included in
the Companys quarterly reports on Form 10-Q during 2003 and 2002.

AuditRelated Fees

The aggregate fees billed by KPMG LLP for professional services rendered and
related to audits of the Companys annual financial statements for the years
ended December 31, 2003 and 2002 were $628,414 and $225,000, respectively. Such
amounts are not included in the Audit Fees set forth above. Such services
consisted of: audits of employee benefit plans, due diligence services,
statutory reserve reporting services and reports on internal control.

Tax Fees

The aggregate fees billed by KPMG LLP for professional services rendered for
tax compliance, tax advice and tax planning for the years ended December 31,
2003 and 2002 were $100,250 and $60,587, respectively. Such amounts are not
included in the Audit Fees or Audit-Related Fees set forth above. Such services
consisted of tax return preparation and other tax compliance services.

All Other Fees

The aggregate fees billed for all other services provided to the Company by
KPMG LLP and not otherwise described above for the years ended December 31,
2003 and 2002 were $0 and $1,295, respectively. These services involved
providing certain training services.

Audit Committee Pre-Approval Policies

The Audit Committee of the Board of Directors adopted policies that require its
approval for any audit and non-audit services to be provided to the Company.
The Audit Committee delegated authority to the Chairman of the Audit Committee
to approve certain permissible non-audit services. Pursuant to these
procedures and delegation of authority, the Audit Committee approved all of the
audit and other services described above.

192



---



##### Table of Contents






PART IV




Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



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



| | (1) | Financial Statements. See Index to Consolidated Financial
Statements on page 98 hereof.                        
| | --- | ---------------------------------------------------------------------------------------------------------------
|
| | (2) | Financial Statement Schedules. See Index to Consolidated Financial
Statements and Schedules on page 196 hereof.
|
| | (3) | Exhibits:                                                                                                      



|    |  | See Exhibit Index on pages 204-207 hereof.                                                                                                                                                                                                                                                                                                                                                                          
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Reports on Form 8-K:                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | On October 3, 2003, the Company filed a Current Report on Form 8-K,
dated October 3, 2003, (a) reporting under Item 12 thereof a preliminary
estimate for catastrophe losses from Hurricane Isabel during the third
quarter and adjusting the range of full year net and operating income,
and (b) filing under Item 7 thereof the related press release.                                                           
|   
|    |  | On October 16, 2003, the Company furnished in a Current Report on Form
8-K, dated October 16, 2003, under Item 12 thereof a press release and
financial supplement relating to the results of the Companys operations
for the quarter ended September 30, 2003.                                                                                                                                                    
|   
|    |  | On November 17, 2003, the Company filed a Current Report on Form 8-K,
dated November 17, 2003, (a) reporting under Item 5 thereof that the Company
has entered into an Agreement and Plan of Merger among The St. Paul
Companies, Inc., the Company and Adams Acquisition Corp. dated as of
November 16, 2003 (the Merger Agreement) and (b) filing
under Item 7 thereof the Merger Agreement and a press release.
|   
|    |  | On November 24, 2003, the
Company filed a Current Report on Form
8-K, dated November 24, 2003, (a) reporting under Item 5 thereof that
the Company had executed an agreement in principle with asbestos-related
class action claimants, and (b) furnishing under Item 7 thereof the
related press release.                                                                                                          
|   
|    |  | No other reports on Form 8-K were filed during the 2003 fourth quarter;
however;                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | On January 29, 2004, the Company furnished in a Current Report on Form
8-K, dated January 29, 2004, under Item 12 thereof a press release and
financial supplement relating to the results of the Companys operations
for the quarter and full year ended December 31, 2003.                                                                                                                                       

193



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 2nd day of March, 2004.

|                                       
|---------------------------------------
|TRAVELERS PROPERTY CASUALTY CORP.      
|(Registrant)                           
|By: /s/ Robert I. Lipp                 
|                                       
|Robert I. Lipp, Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities indicated on the 2nd day of March, 2004.

|                                            |  |                                                                                 
|------------------------------------------- |  | --------------------------------------------------------------------------------
|Signature                                   |  | Title                                                                           
|                                            |  |                                                                                 
|/s/ Robert I. Lipp
Robert I. Lipp           |  | Chief Executive Officer
(Principal Executive Officer), and
Chairman of the Board
|                                            |  |                                                                                 
|/s/ Jay S. Benet
Jay S. Benet               |  | Chief Financial Officer
(Principal Financial Officer)                           
|                                            |  |                                                                                 
|/s/ Douglas K. Russell
Douglas K. Russell   |  | Chief Accounting Officer
(Principal Accounting Officer)                         
|                                            |  |                                                                                 
|/s/ Howard P. Berkowitz
Howard P. Berkowitz |  | Director                                                                        
|                                            |  |                                                                                 
|/s/ Kenneth J. Bialkin
Kenneth J. Bialkin   |  | Director                                                                        
|                                            |  |                                                                                 
|/s/ Charles J. Clarke
Charles J. Clarke     |  | President and Director                                                          
|                                            |  |                                                                                 
|/s/ Leslie B. Disharoon
Leslie B. Disharoon |  | Director                                                                        
|                                            |  |                                                                                 
|/s/ Meryl D. Hartzband
Meryl D. Hartzband   |  | Director                                                                        

194



---



##### Table of Contents



|                                           |  |         
|------------------------------------------ |  | --------
|Signature                                  |  | Title   
|                                           |  |         
|/s/ Blythe J. McGarvie.
Blythe J. McGarvie |  | Director
|                                           |  |         
|/s/ Clarence Otis, Jr.
Clarence Otis, Jr.  |  | Director
|                                           |  |         
|/s/ Jeffrey M. Peek
Jeffrey M. Peek        |  | Director
|                                           |  |         
|/s/ Nancy A. Roseman
Nancy A. Roseman      |  | Director
|                                           |  |         
|/s/ Charles W. Scharf
Charles W. Scharf    |  | Director
|                                           |  |         
|/s/ Frank J. Tasco
Frank J. Tasco          |  | Director
|                                           |  |         
|/s/ Laurie J. Thomsen
Laurie J. Thomsen    |  | Director

195



---



##### Table of Contents






INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

|                                                                                                               |  |     
|-------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                               |  | Page
|                                                                                                               |  |     
|Independent Auditors Report                                                                                   |  | *   
|Consolidated Statement of Income (Loss) for the years ended
December 31, 2003, 2002 and 2001                   |  | *   
|Consolidated Balance Sheet at December 31, 2003 and 2002                                                       |  | *   
|Consolidated Statement of Changes in Shareholders Equity
for the years ended December 31, 2003, 2002 and 2001 |  | *   
|Consolidated Statement of Cash Flows for the years ended
December 31, 2003, 2002 and 2001                      |  | *   
|Notes to Consolidated Financial Statements                                                                     |  | *   
|Schedules:                                                                                                     |  |     
|Schedule II - Condensed Financial Information of
Registrant (Parent Company Only)                              |  | 198 
|Schedule III - Supplementary Insurance Information                                                             |  | 201 
|Schedule V  Valuation and Qualifying Accounts                                                                 |  | 202 
|Schedule VI - Supplementary Information Concerning
Property-Casualty Insurance Operations                      |  | 203 
|                                                                                                              
|* See index on page 98.                                                                                        |  |     

196



---



##### Table of Contents



Independent Auditors Report

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

Under date of January 28, 2004, we reported on the consolidated balance sheet
of Travelers Property Casualty Corp. and subsidiaries as of December 31, 2003
and 2002, and the related consolidated statements of income (loss), changes in
shareholders equity, and cash flows for each of the years in the three-year
period ended December 31, 2003, which are included in this Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedules as listed
in the accompanying index. These financial statement schedules are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statement schedules based on our audits.

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

As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets in
2002 and its methods of accounting for derivative instruments and hedging
activities and for securitized financial assets in 2001.

/s/ KPMG LLP

Hartford, Connecticut
January 28, 2004

197



---



##### Table of Contents



SCHEDULE II

TRAVELERS PROPERTY CASUALTY CORP.
(Parent Company Only)CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(in millions)

CONDENSED STATEMENT OF INCOME (LOSS)

|                                                                                         |                   |      |         |         |  |      |        |       |   |   |         |         | 
|---------------------------------------------------------------------------------------- | ----------------- | ---- | ------- | ------- |  | ---- | ------ | ----- | - | - | ------- | ------- | 
|For the year ended December 31,                                                          |                   | 2003 |         | 2002    |  | 2001
|                                                                                         |                   |      |         |         |  |     
|Revenues                                                                                 |                   |      |         |         |  |      |        |       |   |   |         |        
|Net investment income                                                                    |                   | $    | 2.1     |         |  | $    | 4.8    |       |   | $ | 2.5     |        
|Net realized investment gains (losses)                                                   |                   |      |        |         |  |      | (.3    | )     |   |   | 19.0    |        
|Recoveries from former affiliate                                                         |                   |      |        |         |  |      | 520.0  |       |   |   |        |        
|Other revenues                                                                           |                   |      | 8.1     |         |  |      |       |       |   |   |        |        
|                                                                                         |                   |      |         |         |  |      |        |       |   |   |         |        
|                                                                                         | Total revenues    |      |         | 10.2    |  |      |        | 524.5 |   |   |         | 21.5    | 
|                                                                                         |                   |      |         |         |  |      |        |       |   |   |         |        
|Expenses                                                                                 |                   |      |         |         |  |      |        |       |   |   |         |        
|Interest                                                                                 |                   |      | 106.6   |         |  |      | 36.9   |       |   |   | 82.7    |        
|Other                                                                                    |                   |      | 4.5     |         |  |      | 81.1   |       |   |   | 5.9     |        
|                                                                                         |                   |      |         |         |  |      |        |       |   |   |         |        
|                                                                                         | Total expenses    |      |         | 111.1   |  |      |        | 118.0 |   |   |         | 88.6    | 
|                                                                                         |                   |      |         |         |  |      |        |       |   |   |         |        
|Income (loss) before federal income tax benefit and equity
in net income of subsidiaries |                   |      | (100.9  | )       |  |      | 406.5  |       |   |   | (67.1   | )      
|Federal income tax benefit                                                               |                   |      | 35.8    |         |  |      | 44.8   |       |   |   | 22.2    |        
|                                                                                         |                   |      |         |         |  |      |        |       |   |   |         |        
|Income (loss) before equity in net income of subsidiaries                                |                   |      | (65.1   | )       |  |      | 451.3  |       |   |   | (44.9   | )      
|Equity in net income (loss) of subsidiaries, net of
minority interest                    |                   |      | 1,761.1 |         |  |      | (478.3 | )     |   |   | 1,110.3 |        
|                                                                                         |                   |      |         |         |  |      |        |       |   |   |         |        
|                                                                                         | Net income (loss) |      | $       | 1,696.0 |  |      | $      | (27.0 | ) |   | $       | 1,065.4 | 
|                                                                                         |                   |      |         |         |  |      |        |       |   |   |         |        

The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto.

198



---



##### Table of Contents



SCHEDULE II

TRAVELERS PROPERTY CASUALTY CORP.
(Parent Company Only)CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(in millions, except shares and per share data)

CONDENSED BALANCE SHEET

|                                                            |                                                                                                                                                                                             |      |          |          |  |   |          |          | 
|----------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | -------- | -------- |  | - | -------- | -------- | 
|At December 31,                                             |                                                                                                                                                                                             | 2003 |          | 2002    
|                                                            |                                                                                                                                                                                             |      |          |         
|Assets                                                      |                                                                                                                                                                                             |      |          |          |  |   |          |         
|Short-term securities                                       |                                                                                                                                                                                             | $    | 188.5    |          |  | $ | 8.9      |         
|Investment in subsidiaries at equity                        |                                                                                                                                                                                             |      | 13,961.8 |          |  |   | 11,142.1 |         
|Receivable from former affiliate                            |                                                                                                                                                                                             |      |         |          |  |   | 360.7    |         
|Goodwill                                                    |                                                                                                                                                                                             |      | 155.0    |          |  |   | 155.0    |         
|Other assets                                                |                                                                                                                                                                                             |      | 108.2    |          |  |   | 133.5    |         
|                                                            |                                                                                                                                                                                             |      |          |          |  |   |          |         
|                                                            | Total assets                                                                                                                                                                                |      | $        | 14,413.5 |  |   | $        | 11,800.2 | 
|                                                            |                                                                                                                                                                                             |      |          |          |  |   |          |         
|Liabilities                                                 |                                                                                                                                                                                             |      |          |          |  |   |          |         
|Long-term debt                                              |                                                                                                                                                                                             | $    | 1,382.1  |          |  | $ | 549.5    |         
|Convertible junior subordinated notes payable               |                                                                                                                                                                                             |      | 868.7    |          |  |   | 867.8    |         
|Other liabilities                                           |                                                                                                                                                                                             |      | 176.0    |          |  |   | 245.6    |         
|                                                            |                                                                                                                                                                                             |      |          |          |  |   |          |         
|                                                            | Total liabilities                                                                                                                                                                           |      |          | 2,426.8  |  |   |          | 1,662.9  | 
|                                                            |                                                                                                                                                                                             |      |          |          |  |   |          |         
|Shareholders equity                                        |                                                                                                                                                                                             |      |          |          |  |   |          |         
|Common stock:                                               |                                                                                                                                                                                             |      |          |          |  |   |          |         
|                                                            | Class A, $.01 par value, 1.5 billion shares authorized, 510.2
million and 504.2 million issued, and 505.7 million and 503.9
million outstanding
at December 31, 2003 and 2002, respectively |      |          | 5.1      |  |   |          | 5.0      | 
|                                                            | Class B, $.01 par value, 1.5 billion shares authorized, 500.0 million
issued, and 499.8 million and 500.0 million outstanding at
December 31, 2003 and 2002, respectively                   |      |          | 5.0      |  |   |          | 5.0      | 
|Additional paid-in capital                                  |                                                                                                                                                                                             |      | 8,705.2  |          |  |   | 8,618.4  |         
|Retained earnings                                           |                                                                                                                                                                                             |      | 2,290.2  |          |  |   | 880.5    |         
|Accumulated other changes in equity from nonowner sources   |                                                                                                                                                                                             |      | 1,085.5  |          |  |   | 656.6    |         
|Treasury stock, at cost (4.7 million and .3 million shares) |                                                                                                                                                                                             |      | (74.4    | )        |  |   | (4.9     | )       
|Unearned compensation                                       |                                                                                                                                                                                             |      | (29.9    | )        |  |   | (23.3    | )       
|                                                            |                                                                                                                                                                                             |      |          |          |  |   |          |         
|                                                            | Total shareholders equity                                                                                                                                                                  |      |          | 11,986.7 |  |   |          | 10,137.3 | 
|                                                            |                                                                                                                                                                                             |      |          |          |  |   |          |         
|                                                            | Total liabilities and shareholders equity                                                                                                                                                  |      | $        | 14,413.5 |  |   | $        | 11,800.2 | 
|                                                            |                                                                                                                                                                                             |      |          |          |  |   |          |         

The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto.

199



---



##### Table of Contents



SCHEDULE II

TRAVELERS PROPERTY CASUALTY CORP.
(Parent Company Only)CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(in millions)CONDENSED STATEMENT OF CASH FLOWS

|                                                                                  |                                       |                                                     |         |       |          |      |          |      |          |   |          |   |          |  
|--------------------------------------------------------------------------------- | ------------------------------------- | --------------------------------------------------- | ------- | ----- | -------- | ---- | -------- | ---- | -------- | - | -------- | - | -------- | -
|For the year ended December 31,                                                   |                                       | 2003                                                |         | 2002  |          | 2001
|                                                                                  |                                       |                                                     |         |       |          |     
|Cash flows from operating activities                                              |                                       |                                                     |         |       |          |      |          |      |          |   |          |  
|Net income (loss)                                                                 |                                       | $                                                   | 1,696.0 |       |          | $    | (27.0    | )    |          | $ | 1,065.4  |  
|Adjustments to reconcile net income to net
cash provided by operating activities: |                                       |                                                     |         |       |          |      |          |      |          |   |          |  
|                                                                                  |                                       | Equity in net income (loss) of subsidiaries         |         |       | (1,761.1 | )    |          |      | 478.3    |   |          |   | (1,110.3 | )
|                                                                                  |                                       | Dividends received from consolidated subsidiaries   |         |       | 761.0    |      |          |      | 60.0     |   |          |   | 1,100.0  |  
|                                                                                  |                                       | Capital contributed to subsidiaries                 |         |       | (1,445.0 | )    |          |      |         |   |          |   |         |  
|                                                                                  |                                       | Deferred federal income tax benefit (expense)       |         |       | 66.6     |      |          |      | (92.8    | ) |          |   | 29.0     |  
|                                                                                  |                                       | Federal income taxes receivable (payable)           |         |       | (35.6    | )    |          |      | (5.8     | ) |          |   | 26.5     |  
|                                                                                  |                                       | Recoveries from former affiliate                    |         |       | 360.7    |      |          |      | 57.7     |   |          |   |         |  
|                                                                                  |                                       | Other                                               |         |       | 31.6     |      |          |      | 33.9     |   |          |   | 87.2     |  
|                                                                                  |                                       |                                                     |         |       |          |      |          |      |          |   |          |  
|                                                                                  |                                       | Net cash provided by (used in) operating activities |         |       | (325.8   | )    |          |      | 504.3    |   |          |   | 1,197.8  |  
|                                                                                  |                                       |                                                     |         |       |          |      |          |      |          |   |          |  
|Cash flows from investing activities                                              |                                       |                                                     |         |       |          |      |          |      |          |   |          |  
|Short-term securities, (purchases) sales, net                                     |                                       |                                                     | (179.6  | )     |          |      | 143.5    |      |          |   | (114.7   | )
|Other investments, net                                                            |                                       |                                                     |        |       |          |      | 402.6    |      |          |   |         |  
|                                                                                  |                                       |                                                     |         |       |          |      |          |      |          |   |          |  
|                                                                                  |                                       | Net cash provided by (used in) investing activities |         |       | (179.6   | )    |          |      | 546.1    |   |          |   | (114.7   | )
|                                                                                  |                                       |                                                     |         |       |          |      |          |      |          |   |          |  
|Cash flows from financing activities                                              |                                       |                                                     |         |       |          |      |          |      |          |   |          |  
|Issuance of convertible notes, net                                                |                                       |                                                     |        |       |          |      | 867.2    |      |          |   |         |  
|Issuance of long-term debt                                                        |                                       |                                                     | 1,381.9 |       |          |      | 549.4    |      |          |   |         |  
|Payment of long-term debt                                                         |                                       |                                                     | (550.0  | )     |          |      |         |      |          |   |         |  
|Payment of note payable to former affiliate                                       |                                       |                                                     |        |       |          |      | (6,299.0 | )    |          |   | (1,040.0 | )
|Initial public offering                                                           |                                       |                                                     |        |       |          |      | 4,089.5  |      |          |   |         |  
|Treasury stock acquired:                                                          |                                       |                                                     |         |       |          |      |          |      |          |   |          |  
|                                                                                  | Purchased                             |                                                     |         | (40.0 | )        |      |          |     |          |   |          |  |         
|                                                                                  | Net employee stock-based compensation |                                                     |         | (17.6 | )        |      |          | (3.7 | )        |   |          |  |         
|Issuance of common stock-employee stock options                                   |                                       |                                                     | 40.4    |       |          |      | 10.1     |      |          |   |         |  
|Dividends to shareholders                                                         |                                       |                                                     | (281.8  | )     |          |      |         |      |          |   |         |  
|Dividends to former affiliate                                                     |                                       |                                                     |        |       |          |      | (157.5   | )    |          |   | (526.0   | )
|Receipts from former subsidiaries, net                                            |                                       |                                                     |        |       |          |      | 157.5    |      |          |   | 474.9    |  
|Payment of dividend on preferred stock of subsidiary                              |                                       |                                                     | (5.2    | )     |          |      | (2.2     | )    |          |   |         |  
|Transfer of employee benefit obligations to former
affiliates                     |                                       |                                                     | (22.7   | )     |          |      | (172.4   | )    |          |   |         |  
|Transfer of lease obligations to former affiliate                                 |                                       |                                                     |        |       |          |      | (87.8    | )    |          |   |         |  
|Return of capital from former subsidiaries                                        |                                       |                                                     |        |       |          |      |         |      |          |   | 8.0      |  
|                                                                                  |                                       |                                                     |         |       |          |      |          |      |          |   |          |  
|                                                                                  |                                       | Net cash provided by (used in) financing activities |         |       | 505.0    |      |          |      | (1,048.9 | ) |          |   | (1,083.1 | )
|                                                                                  |                                       |                                                     |         |       |          |      |          |      |          |   |          |  
|Net increase in cash                                                              |                                       |                                                     | (0.4    | )     |          |      | 1.5      |      |          |   |         |  
|Cash at beginning of period                                                       |                                       |                                                     | 1.5     |       |          |      |         |      |          |   |         |  
|                                                                                  |                                       |                                                     |         |       |          |      |          |      |          |   |          |  
|Cash at end of period                                                             |                                       | $                                                   | 1.1     |       |          | $    | 1.5      |      |          | $ |         |  
|                                                                                  |                                       |                                                     |         |       |          |      |          |      |          |   |          |  
|Supplemental disclosure of cash flow information                                  |                                       |                                                     |         |       |          |      |          |      |          |   |          |  
|Cash received during the period for taxes                                         |                                       | $                                                   | 85.1    |       |          | $    | 24.1     |      |          | $ | 88.4     |  
|Cash paid during the period for interest                                          |                                       | $                                                   | 82.2    |       |          | $    | 22.1     |      |          | $ | 10.5     |  
|                                                                                  |                                       |                                                     |         |       |          |      |          |      |          |   |          |  

The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto.

200



---



##### Table of Contents



SCHEDULE III

TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES

Supplementary Insurance Information
2001 - 2003
(in millions)



|                           |  |             |       |            |  |            |          |         |  |            |         |  |  |     |          |  |  |   |         | 
|-------------------------- |  | ----------- | ----- | ---------- |  | ---------- | -------- | ------- |  | ---------- | ------- |  |  | --- | -------- |  |  | - | ------- | 
|                           |  |             |       |            |  | Claims and |          |         |  |            |         |  |  |     |          |  |  |  
|                           |  | Deferred    |       | Claim      |  |            |          |         |  |            |         |  |  |     |          | 
|                           |  | Policy      |       | Adjustment |  |            |          |         |  |            |         |  |  | Net
|                           |  | Acquisition |       | Expense    |  | Unearned   |          | Premium |  | Investment
|Segment                    |  | Costs       |       | Reserves   |  | Premiums   |          | Revenue |  | Income (a)
|                           |  |             |       |            |  |            |          |         |  |           
|2003                       |  |             |       |            |  |            |          |         |  |            |         |  |  |     |          |  |  |   |         | 
|Commercial Lines           |  | $           | 588.5 |            |  | $          | 31,174.3 |         |  | $          | 4,671.8 |  |  | $   | 7,722.8  |  |  | $ | 1,506.9 | 
|Personal Lines             |  |             | 376.4 |            |  |            | 3,299.9  |         |  |            | 2,439.0 |  |  |     | 4,822.6  |  |  |   | 361.1   | 
|                           |  |             |       |            |  |            |          |         |  |            |         |  |  |     |          |  |  |   |         | 
|Total Reportable Segments |  |             | 964.9 |            |  |            | 34,474.2 |         |  |            | 7,110.8 |  |  |     | 12,545.4 |  |  |   | 1,868.0 | 
|Other                      |  |             |      |            |  |            | 98.4     |         |  |            |        |  |  |     |         |  |  |   | .8      | 
|                           |  |             |       |            |  |            |          |         |  |            |         |  |  |     |          |  |  |   |         | 
|Consolidated               |  | $           | 964.9 |            |  | $          | 34,572.6 |         |  | $          | 7,110.8 |  |  | $   | 12,545.4 |  |  | $ | 1,868.8 | 
|                           |  |             |       |            |  |            |          |         |  |            |         |  |  |     |          |  |  |   |         | 
|2002                       |  |             |       |            |  |            |          |         |  |            |         |  |  |     |          |  |  |   |         | 
|Commercial Lines           |  | $           | 540.8 |            |  | $          | 30,593.8 |         |  | $          | 4,292.5 |  |  | $   | 6,801.2  |  |  | $ | 1,495.3 | 
|Personal Lines             |  |             | 332.2 |            |  |            | 3,034.6  |         |  |            | 2,167.4 |  |  |     | 4,354.1  |  |  |   | 384.7   | 
|                           |  |             |       |            |  |            |          |         |  |            |         |  |  |     |          |  |  |   |         | 
|Total Reportable Segments |  |             | 873.0 |            |  |            | 33,628.4 |         |  |            | 6,459.9 |  |  |     | 11,155.3 |  |  |   | 1,880.0 | 
|Other                      |  |             |      |            |  |            | 107.6    |         |  |            |        |  |  |     |         |  |  |   | .5      | 
|                           |  |             |       |            |  |            |          |         |  |            |         |  |  |     |          |  |  |   |         | 
|Consolidated               |  | $           | 873.0 |            |  | $          | 33,736.0 |         |  | $          | 6,459.9 |  |  | $   | 11,155.3 |  |  | $ | 1,880.5 | 
|                           |  |             |       |            |  |            |          |         |  |            |         |  |  |     |          |  |  |   |         | 
|2001                       |  |             |       |            |  |            |          |         |  |            |         |  |  |     |          |  |  |   |         | 
|Commercial Lines           |  | $           | 466.0 |            |  | $          | 27,749.4 |         |  | $          | 3,728.8 |  |  | $   | 5,447.0  |  |  | $ | 1,616.3 | 
|Personal Lines             |  |             | 302.1 |            |  |            | 2,867.0  |         |  |            | 1,938.1 |  |  |     | 3,963.9  |  |  |   | 410.2   | 
|                           |  |             |       |            |  |            |          |         |  |            |         |  |  |     |          |  |  |   |         | 
|Total Reportable Segments |  |             | 768.1 |            |  |            | 30,616.4 |         |  |            | 5,666.9 |  |  |     | 9,410.9  |  |  |   | 2,026.5 | 
|Other                      |  |             |      |            |  |            | 120.2    |         |  |            |        |  |  |     |         |  |  |   | 7.5     | 
|                           |  |             |       |            |  |            |          |         |  |            |         |  |  |     |          |  |  |   |         | 
|Consolidated               |  | $           | 768.1 |            |  | $          | 30,736.6 |         |  | $          | 5,666.9 |  |  | $   | 9,410.9  |  |  | $ | 2,034.0 | 
|                           |  |             |       |            |  |            |          |         |  |            |         |  |  |     |          |  |  |   |         | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                           |  |            |          |              |  |              |         |          |  |   |         |  |  |   |          | 
|-------------------------- |  | ---------- | -------- | ------------ |  | ------------ | ------- | -------- |  | - | ------- |  |  | - | -------- | 
|                           |  | Claims and |          | Amortization |  |              |         |          |  |   |         | 
|                           |  | Claim      |          | of Deferred  |  | Other        |         |          |  |  
|                           |  | Adjustment |          | Acquisition  |  | Operating    |         | Premiums
|Segment                    |  | Expenses   |          | Costs        |  | Expenses (b) |         | Written 
|                           |  |            |          |              |  |              |         |         
|2003                       |  |            |          |              |  |              |         |          |  |   |         |  |  |   |          | 
|Commercial Lines           |  | $          | 5,784.0  |              |  | $            | 1,182.9 |          |  | $ | 1,212.4 |  |  | $ | 8,119.4  | 
|Personal Lines             |  |            | 3,334.4  |              |  |              | 800.8   |          |  |   | 420.0   |  |  |   | 5,081.4  | 
|                           |  |            |          |              |  |              |         |          |  |   |         |  |  |   |          | 
|Total Reportable Segments |  |            | 9,118.4  |              |  |              | 1,983.7 |          |  |   | 1,632.4 |  |  |   | 13,200.8 | 
|Other                      |  |            |         |              |  |              |        |          |  |   | 175.3   |  |  |   |         | 
|                           |  |            |          |              |  |              |         |          |  |   |         |  |  |   |          | 
|Consolidated               |  | $          | 9,118.4  |              |  | $            | 1,983.7 |          |  | $ | 1,807.7 |  |  | $ | 13,200.8 | 
|                           |  |            |          |              |  |              |         |          |  |   |         |  |  |   |          | 
|2002                       |  |            |          |              |  |              |         |          |  |   |         |  |  |   |          | 
|Commercial Lines           |  | $          | 7,932.1  |              |  | $            | 1,072.8 |          |  | $ | 1,034.5 |  |  | $ | 7,369.5  | 
|Personal Lines             |  |            | 3,206.4  |              |  |              | 737.4   |          |  |   | 387.5   |  |  |   | 4,575.0  | 
|                           |  |            |          |              |  |              |         |          |  |   |         |  |  |   |          | 
|Total Reportable Segments |  |            | 11,138.5 |              |  |              | 1,810.2 |          |  |   | 1,422.0 |  |  |   | 11,944.5 | 
|Other                      |  |            |         |              |  |              |        |          |  |   | 158.8   |  |  |   |         | 
|                           |  |            |          |              |  |              |         |          |  |   |         |  |  |   |          | 
|Consolidated               |  | $          | 11,138.5 |              |  | $            | 1,810.2 |          |  | $ | 1,580.8 |  |  | $ | 11,944.5 | 
|                           |  |            |          |              |  |              |         |          |  |   |         |  |  |   |          | 
|2001                       |  |            |          |              |  |              |         |          |  |   |         |  |  |   |          | 
|Commercial Lines           |  | $          | 4,711.7  |              |  | $            | 864.9   |          |  | $ | 932.2   |  |  | $ | 5,737.6  | 
|Personal Lines             |  |            | 3,053.0  |              |  |              | 673.8   |          |  |   | 388.0   |  |  |   | 4,107.9  | 
|                           |  |            |          |              |  |              |         |          |  |   |         |  |  |   |          | 
|Total Reportable Segments |  |            | 7,764.7  |              |  |              | 1,538.7 |          |  |   | 1,320.2 |  |  |   | 9,845.5  | 
|Other                      |  |            |         |              |  |              |        |          |  |   | 217.9   |  |  |   |         | 
|                           |  |            |          |              |  |              |         |          |  |   |         |  |  |   |          | 
|Consolidated               |  | $          | 7,764.7  |              |  | $            | 1,538.7 |          |  | $ | 1,538.1 |  |  | $ | 9,845.5  | 
|                           |  |            |          |              |  |              |         |          |  |   |         |  |  |   |          | 



| | (a) |  | Net investment income for each segment is accounted for separately,
except for the portion earned on the investment of shareholders equity,
which is allocated based on assigned capital.                          
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Expense allocations are determined in accordance with prescribed statutory
accounting practices. These practices make a reasonable allocation of all
expenses to those product lines with which they are associated.

201



---



##### Table of Contents



SCHEDULE V

TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Valuation and Qualifying Accounts
(in millions)

|                          |  |  |      |  |  |            |       |            |  |             |   |               |  |        |       |            |  |   |      |  |  |   |       | 
|------------------------- |  |  | ---- |  |  | ---------- | ----- | ---------- |  | ----------- | - | ------------- |  | ------ | ----- | ---------- |  | - | ---- |  |  | - | ----- | 
|                          |  |  |      |  |  | Balance at |       | Charged to |  | Charged to  |   |               |  |        |       | Balance at
|                          |  |  |      |  |  | beginning  |       | costs and  |  | other       |   |               |  |        |       | end of    
|                          |  |  |      |  |  | of period  |       | expenses   |  | accounts(1) |   | Deductions(2) |  | period
|                          |  |  |      |  |  |            |       |            |  |             |   |               |  |       
|Reinsurance Recoverables: |  |  | 2003 |  |  | $          | 329.1 |            |  | $           |  |               |  | $      | 94.0  |            |  | $ | 36.7 |  |  | $ | 386.4 | 
|                          |  |  | 2002 |  |  | $          | 286.2 |            |  | $           |  |               |  | $      | 49.8  |            |  | $ | 6.9  |  |  | $ | 329.1 | 
|                          |  |  | 2001 |  |  | $          | 213.0 |            |  | $           |  |               |  | $      | 130.5 |            |  | $ | 57.3 |  |  | $ | 286.2 | 



|(1) |  | Charged to claims and claim adjustment expenses in the consolidated
statement of income (loss).
|--- |  | -----------------------------------------------------------------------------------------------
|   
|(2) |  | Credited to the related asset account.                                                         

202



---



##### Table of Contents



SCHEDULE VI

TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES

Supplementary Information Concerning Property-Casualty Insurance Operations (1)
2001-2003
(in millions)



|     |  |                         |  |             |       |            |  |            |          |              |  |          |       |  |  |   |         |  |  |   |          |  |  | 
|---- |  | ----------------------- |  | ----------- | ----- | ---------- |  | ---------- | -------- | ------------ |  | -------- | ----- |  |  | - | ------- |  |  | - | -------- |  |  | 
|     |  |                         |  |             |       |            |  |            |          | Reserves for |  |          |       |  |  |   |         |  |  |   |          | 
|     |  |                         |  |             |       |            |  |            |          | unpaid       |  | Discount |       |  |  |   |         |  |  |  
|     |  |                         |  |             |       | Deferred   |  | claims     |          | from         |  |          |       |  |  |   |         | 
|     |  | Affiliation             |  | policy      |       | and claim  |  | reserves   |          |              |  |          |       |  |  |  
|     |  |                         |  |             |       |            |  |            |          |              |  |          |       |  |  |  
|     |  | with                    |  | acquisition |       | adjustment |  | for unpaid |          | Unearned     |  | Earned  
|     |  | registrant              |  | costs       |       | expenses   |  | claims (2) |          | premiums     |  | premiums
|     |  |                         |  |             |       |            |  |            |          |              |  |         
|2003 |  | Consolidated property - |  |             |       |            |  |            |          |              |  |          |       |  |  |   |         |  |  |   |          | 
|     |  | casualty operations     |  | $           | 964.9 |            |  | $          | 34,474.2 |              |  | $        | 754.3 |  |  | $ | 7,110.8 |  |  | $ | 12,545.4 | 
|2002 |  | Consolidated property - |  |             |       |            |  |            |          |              |  |          |       |  |  |   |         |  |  |   |          | 
|     |  | casualty operations     |  | $           | 873.0 |            |  | $          | 33,628.4 |              |  | $        | 802.9 |  |  | $ | 6,459.9 |  |  | $ | 11,155.3 | 
|2001 |  | Consolidated property - |  |             |       |            |  |            |          |              |  |          |       |  |  |   |         |  |  |   |          | 
|     |  | casualty operations     |  | $           | 768.1 |            |  | $          | 30,616.5 |              |  | $        | 792.4 |  |  | $ | 5,666.9 |  |  | $ | 9,410.9  | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|     |  |                         |  |            |         |                      |  |             |         |               |  |              |         |             |  |   |         |  |  |   |         |  |  |   |          |  |  | 
|---- |  | ----------------------- |  | ---------- | ------- | -------------------- |  | ----------- | ------- | ------------- |  | ------------ | ------- | ----------- |  | - | ------- |  |  | - | ------- |  |  | - | -------- |  |  | 
|     |  |                         |  |            |         |                      |  |             |         | Claims and    |  |              |         |             |  |   |         |  |  |   |         | 
|     |  |                         |  |            |         |                      |  |             |         | claim adjust- |  |              |         |             |  |   |         |  |  |   |         | 
|     |  |                         |  |            |         |                      |  |             |         | ment expenses |  | Amortization |         | Paid claims |  |   |         | 
|     |  | Affiliation             |  | Net        |         | incurred related to: |  | of deferred |         | and claim     |  |              |         |            
|     |  |                         |  |            |         |                      |  |             |         |               |  |              |         |            
|     |  | with                    |  | investment |         | Current              |  | Prior       |         | acquisition   |  | adjustment   |         | Premiums   
|     |  | registrant              |  | income     |         | year                 |  | year        |         | costs         |  | expenses     |         | written    
|     |  |                         |  |            |         |                      |  |             |         |               |  |              |         |            
|2003 |  | Consolidated property - |  |            |         |                      |  |             |         |               |  |              |         |             |  |   |         |  |  |   |         |  |  |   |          | 
|     |  | casualty operations     |  | $          | 1,868.0 |                      |  | $           | 8,554.1 |               |  | $            | 390.0   |             |  | $ | 1,983.7 |  |  | $ | 8,157.3 |  |  | $ | 13,200.8 | 
|2002 |  | Consolidated property - |  |            |         |                      |  |             |         |               |  |              |         |             |  |   |         |  |  |   |         |  |  |   |          | 
|     |  | casualty operations     |  | $          | 1,880.0 |                      |  | $           | 7,872.1 |               |  | $            | 3,031.0 |             |  | $ | 1,810.2 |  |  | $ | 7,832.3 |  |  | $ | 11,944.5 | 
|2001 |  | Consolidated property - |  |            |         |                      |  |             |         |               |  |              |         |             |  |   |         |  |  |   |         |  |  |   |          | 
|     |  | casualty operations     |  | $          | 2,026.5 |                      |  | $           | 7,600.6 |               |  | $            | (41.0   | )           |  | $ | 1,538.7 |  |  | $ | 7,418.9 |  |  | $ | 9,845.5  | 



|(1) |  | Excludes accident and health business.
|--- |  | --------------------------------------
|   
|(2) |  | See Discounting on page 17.         

203



---



##### Table of Contents






EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Number  |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|2.1     |  | Stock Purchase Agreement, dated as of November 28, 1995, between the
Company (then known as The Travelers Insurance Group Inc.) and Aetna Life
and Casualty Company, was filed as Exhibit 10.1 of the Form 10-K for the
year ended December 31, 1995 of Aetna Life and Casualty Company (File No.
15704), and is incorporated herein by reference.                                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|2.2     |  | Agreement and Plan of Merger, dated as of November 16, 2003, as amended,
among The St. Paul Companies, Inc., Travelers Property Casualty Corp. and
Adams Acquisition Corp., along with the related articles of incorporation
amendments and bylaws amendment (Included as Appendices A, B, C and D,
respectively, to the Joint Proxy Statement/Prospectus forming a part of
the registration statement) was filed as Exhibit 2.1 to the Registration
Statement on Form S-4, Amendment No. 1, of the St. Paul Companies, Inc.
filed on February 13, 2004 (Registration No. 333-111072), and is
incorporated herein by reference.
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|3.1.1   |  | Restated Certificate of Incorporation of the Company, effective July 18,
2003, consolidating all prior amendments, was filed as Exhibit 3.1.1 to
the Companys quarterly report on Form 10-Q for the quarter ended June
30, 2003, and is incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|3.2     |  | Amended and Restated Bylaws of the Company, as amended on January 23,
2003, was filed as Exhibit 3.2 to the Companys annual report on Form 10-K
for the fiscal year ended December 31, 2002 and is incorporated herein by
reference.                                                                                                                                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.1     |  | Rights Agreement, dated as of March 21, 2002, between the Company and
EquiServe Trust Company, N.A., as rights agent, was filed as Exhibit 4.1
to the Companys quarterly report on Form 10-Q for the fiscal quarter
ended March 31, 2002, and is incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.2     |  | First Amendment to Rights Agreement, dated as of November 16, 2003,
between the Company and EquiServe Trust Company, N.A., as rights agent,
was filed as Exhibit 4.1 to the Companys registration statement on Form
8-A/A, Amendment No. 1, filed on December 11, 2003, and is incorporated
herein by reference.                                                                                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.3     |  | Restated Certificate of Incorporation of the Company and Amended and
Restated Bylaws of the Company (filed herewith as Exhibits 3.1.1 and 3.2,
respectively).                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.1    |  | Intercompany Agreement, dated as of March 26, 2002, by and among the
Company, The Travelers Insurance Company and Citigroup Inc., was filed as
Exhibit 10.1 to the Companys quarterly report on Form 10-Q for the fiscal
quarter ended March 31, 2002, and is incorporated herein by reference.                                                                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.2    |  | Amendment No. 1 to Intercompany Agreement, dated as of August 19, 2002,
amending that certain Intercompany Agreement dated as of March 26, 2002,
by and among the Company, The Travelers Insurance Company and Citigroup
Inc., was filed as Exhibit 10.1 to the Companys quarterly report on Form
10-Q for the fiscal quarter ended September 30, 2002, and is incorporated
herein by reference.                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.3    |  | Amended and Restated Tax Allocation Agreement, dated as of March 27,
2002, between the Company and Citigroup Inc., was filed as Exhibit 10.2 to
the Companys quarterly report on Form 10-Q for the fiscal quarter ended
March 31, 2002, and is incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.4    |  | Trademark License Agreement dated as of August 19, 2002, by and between
the Company and The Travelers Insurance Company, was filed as Exhibit 10.2
to the Companys quarterly report on Form 10-Q for the fiscal quarter
ended September 30, 2002, and is incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                    

204



---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Number  |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.5    |  | Transition Services Agreement dated as of August 19, 2002 by and between
the Company and Citigroup Inc., was filed as Exhibit 10.3 to the Companys
quarterly report on Form 10-Q for the fiscal quarter ended September 30,
2002, and is incorporated herein by reference.                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.6    |  | Investment Management and Administrative Services Agreement dated as of
August 6, 2002, by and between Travelers Insurance Group Holdings, Inc.
(TIGHI) and Citigroup Alternative Investments LLC, was filed as Exhibit
10.4 to the Companys quarterly report on Form 10-Q for the fiscal quarter
ended September 30, 2002, and is incorporated herein by reference.                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.7    |  | Promissory note dated February 7, 2002, between the Company and Citicorp,
was filed as Exhibit 10.4.1 to the Companys Registration Statement on
Form S-1 (Amendment No. 2) dated March 5, 2002 (Registration No.
333-82388), and is incorporated herein by reference.                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.8    |  | Promissory note dated February 7, 2002, between the Company and PFS
Services, Inc., was filed as Exhibit 10.4.2 to the Companys Registration
Statement on Form S-1 (Amendment No. 2) dated March 5, 2002 (Registration
No. 333-82388), and is incorporated herein by reference.                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.9    |  | Promissory note dated February 7, 2002, between the Company and PFS
Services, Inc., was filed as Exhibit 10.4.3 to the Companys Registration
Statement on Form S-1 (Amendment No. 2) dated March 5, 2002 (Registration
No. 333-82388), and is incorporated herein by reference.                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.10   |  | Indemnification Agreement dated as of March 25, 2002, between the
Company and Citigroup Inc., was filed as Exhibit 10.3 to the Companys
quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2002,
and is incorporated herein by reference.                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.11   |  | First Supplemental Indenture dated May 10, 2002, by and among the
Company, TIGHI and Bank One Trust Company, N.A., as trustee, relating to
$200,000,000 aggregate principal amount of TIGHIs 73⁄4% Notes due 2026
and $150,000,000 aggregate principal amount of TIGHIs 63⁄4% Notes due
2006, was filed as Exhibit 4.1 to TIGHIs current report on Form 8-K dated
May 14, 2002, and is incorporated herein by reference.                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.12   |  | First Supplemental Indenture dated May 10, 2002, by and among the
Company, TIGHI, and JPMorgan Chase Bank, as trustee, relating to TIGHIs
$800,000,000 aggregate principal amount 8.08% Junior Subordinated
Deferrable Interest Debentures due 2036, and $100,000,000 aggregate
principal amount 8.0% Junior Subordinated Deferrable Interest Debentures
due 2036, was filed as Exhibit 4.2 to TIGHIs current report on Form 8-K
dated May 14, 2002, and is incorporated herein by reference.
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.13   |  | Amended and Restated Preferred Securities Guarantee Agreement dated May
10, 2002, by and among the Company, TIGHI and JPMorgan Chase Bank, as
trustee, relating to 32,000,000 preferred securities, designated the 8.08%
Trust Preferred Securities, having an aggregate liquidation amount of
$800,000,000, issued by Travelers P & C Capital I, was filed as Exhibit
4.3 to TIGHIs current report on Form 8-K dated May 14, 2002, and is
incorporated herein by reference.                  

205



---



##### Table of Contents



|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Number   |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.14    |  | Amended and Restated Preferred Securities Guarantee Agreement dated May
10, 2002, by and among the Company, TIGHI, and JPMorgan Chase Bank, as
trustee, relating to 4,000,000 preferred securities, designated the 8.0%
Trust Preferred Securities, having an aggregate liquidation amount of
$100,000,000, issued by Travelers P & C Capital II, was filed as Exhibit
4.4 to TIGHIs current report on Form 8-K dated May 14, 2002, and is
incorporated herein by reference.
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.15    |  | Agreement between the Company and HPB Management LLC dated as of January
1, 2002, and Termination Agreement between the parties dated September 24,
2002, were filed as Exhibit 10.5 to the Companys quarterly report on Form
10-Q for the fiscal quarter ended September 30, 2002, and are incorporated
herein by reference.                                                                                                                                               
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.16 * |  | Travelers Property Casualty Corp. Compensation Plan for Non-Employee
Directors as amended on January 22, 2004.                                                                                                                                                                                                                                                                                                                                                               
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.17*   |  | Travelers Property Casualty Corp. Executive Performance Compensation
Plan was filed as Exhibit 10.9 to the Companys quarterly report on Form
10-Q for the fiscal quarter ended June 30, 2002, and is incorporated
herein by reference.                                                                                                                                                                                                                                      
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.18*   |  | Travelers Property Casualty Corp. 2002 Stock Incentive Plan, as amended
effective January 23, 2003, was filed as Exhibit 10.22 to the Companys
annual report on Form 10-K for the fiscal year ended December 31, 2002,
and is incorporated herein by reference.                                                                                                                                                                                                             
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.19*   |  | Travelers Deferred Compensation Plan, was filed as Exhibit 10.23 to
the Companys annual report on Form 10-K for the fiscal year ended
December 31, 2002, and is incorporated herein by reference.                                                                                                                                                                                                                                                                           
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.20*   |  | Travelers Benefit Equalization Plan, was filed as Exhibit 10.24 to the
Companys annual report on Form 10-K for the fiscal year ended December
31, 2002, and is incorporated herein by reference.                                                                                                                                                                                                                                                                            
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.21*   |  | Employment Agreement between the Company and Robert I. Lipp dated March
7, 2002 was filed as Exhibit 10.11 to the Companys quarterly report on
Form 10-Q for the fiscal quarter ended June 30, 2002, and is incorporated
herein by reference.                                                                                                                                                                                                                               
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.22 * |  | Amended and Restated Executive Employment Agreement between the
Company and Robert I. Lipp, dated as of November 16, 2003.                                                                                                                                                                                                                                                                                                                                                   
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.23*   |  | Employment Letter Agreement dated May 22, 2002 between the Company and
Maria Olivo, Executive Vice President of the Company, was filed as Exhibit
10.12 to the Companys quarterly report on Form 10-Q for the fiscal
quarter ended June 30, 2002, and is incorporated herein by reference.                                                                                                                                                                                  
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.24*   |  | Employment Letter Agreement dated October 25, 2002 between the Company
and Stewart R. Morrison, Chief Investment Officer of the Company, was
filed as Exhibit 10.27 to the Companys annual report on Form 10-K for
the fiscal year ended December 31, 2002, and is incorporated herein by
reference.                                                                                                                                                                        

206



---



##### Table of Contents



|        |  |                                                                                                                                                                                                                   
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                   
|Number  |  | Description of Exhibit                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                   
|12.1   |  | Statement of Ratio of Earnings to Fixed Charges.                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                   
|21.1   |  | Subsidiaries of the Company.                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                   
|23.1   |  | Consent of KPMG LLP, Independent Certified Public Accountants, with
respect to the incorporation by reference of KPMG LLPs audit report into
Forms S-8 of the Company, Registration Nos. 333-98365 and 333-84740.
|        |  |                                                                                                                                                                                                                   
|31.1   |  | Certification of Robert I. Lipp, Chief Executive Officer of the Company,
as required by Section 302 of the Sarbanes-Oxley Act of 2002.                                                                            
|        |  |                                                                                                                                                                                                                   
|31.2   |  | Certification of Jay S. Benet, Chief Financial Officer of the Company,
as required by Section 302 of the Sarbanes-Oxley Act of 2002.                                                                              
|        |  |                                                                                                                                                                                                                   
|32.1   |  | Certification of Robert I. Lipp, Chief Executive Officer of the Company,
as required by Section 906 of the Sarbanes-Oxley Act of 2002.                                                                            
|        |  |                                                                                                                                                                                                                   
|32.2   |  | Certification of Jay S. Benet, Chief Financial Officer of the Company,
as required by Section 906 of the Sarbanes-Oxley Act of 2002.                                                                              

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

Copies of any of the exhibits referred to above will be furnished to security
holders who make written request therefore to Shareholder Relations, Travelers
Property Casualty Corp., One Tower Square, Hartford, Connecticut 06183.



---

| |  | Filed herewith
|- |  | --------------

*Management contract or compensatory plan in which directors and/or executive
officers are eligible to participate.

207