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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K



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

For the fiscal year ended December 31,
2002

or



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

For the transition period
from                               to



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Commission file number 001-31266



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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(Address of principal executive
    offices) |  | 06183(Zip Code)                                   

(860) 277-0111

(Registrants telephone number, including
area code)




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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, per value $.01 per
    share      |  | New York Stock Exchange                  
|Class B Common Stock, per value $.01 per
    share      |  | New York Stock Exchange                  
|4.5% Convertible Junior Subordinated Notes due
    2032 |  | 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 þ     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.     þ

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

As of June 28, 2002 the aggregate market
value of the registrants voting and non-voting common
equity held by non-affiliates was $4,072,628,595 (this amount
reflects 230,092,011 shares of class A common stock then
held by non-affiliates; class B common stock was not then
trading on any securities exchange or market.)

As of February 21, 2003, 506,143,855 shares
of the registrants class A common stock, par value
$.01 per share, and 499,928,212 shares of the registrants
class B common stock, par value $.01 per share, were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrants Proxy
Statement for the 2003 Annual Meeting of Shareholders to be held
on April 24, 2003 are incorporated by reference into
Part III of this Form 10-K.



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##### 



Travelers Property Casualty Corp.

Annual Report on Form 10-K

For Fiscal Year Ended December 31, 2002



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Table of Contents

|            |  |                                                                                                    |  |  |     | 
|----------- |  | -------------------------------------------------------------------------------------------------- |  |  | --- | 
|            |  |                                                                                                    |  | 
|            |  | Page                                                                                              
|Item Number |  |                                                                                                   
|            |  |                                                                                                   
|            |  | Part I                                                                                             |  |  |     | 
|           
|1.          |  | Business                                                                                           |  |  | 1   | 
|2.          |  | Properties                                                                                         |  |  | 29  | 
|3.          |  | Legal Proceedings                                                                                  |  |  | 29  | 
|4.          |  | Submission of Matters to a Vote of Security
    Holders                                            |  |  | 31  | 
|            |  | Part II                                                                                            |  |  |     | 
|           
|5.          |  | Market for Registrants Common Equity and
    Related Stockholder Matters                          |  |  | 32  | 
|6.          |  | Selected Financial Data                                                                            |  |  | 33  | 
|7.          |  | Managements Discussion and Analysis of
    Financial Conditions and Results of Operations         |  |  | 34  | 
|7A.         |  | Quantitative and Qualitative Disclosures About
    Market Risk                                     |  |  | 62  | 
|8.          |  | Financial Statements and Supplementary Data                                                        |  |  | 64  | 
|9.          |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |  |  | 104 | 
|            |  | Part III                                                                                           |  |  |     | 
|           
|10.         |  | Directors and Executive Officers of the Registrant                                                 |  |  | 104 | 
|11.         |  | Executive Compensation                                                                             |  |  | 104 | 
|12.         |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |  |  | 104 | 
|13.         |  | Certain Relationships and Related Transactions                                                     |  |  | 104 | 
|14.         |  | Controls and Procedures                                                                            |  |  | 104 | 
|            |  | Part IV                                                                                            |  |  |     | 
|           
|15.         |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                               |  |  | 105 | 
|            |  | Signatures                                                                                         |  |  | 106 | 
|            |  | Certifications                                                                                     |  |  | 108 | 
|            |  | Index to Consolidated Financial Statements and
    Schedules                                       |  |  | 110 | 
|            |  | Exhibit Index                                                                                      |  |  | 120 | 



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##### 



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 130 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 May 31, 2000, the Company completed the
acquisition of the surety business of Reliance Group Holdings,
Inc. (Reliance Surety). In connection with the acquisition, the
Company entered into a reinsurance arrangement for pre-existing
business. Accordingly, the results of operations and the assets
and liabilities acquired from Reliance Surety are included in
the financial statements beginning June 1, 2000. In the
third quarter of 2000, the Company purchased the renewal rights
to a portion of Reliance Group Holdings, Inc.s commercial
lines middle-market book of business. The Company also acquired
the renewal rights to Frontier Insurance Group, Inc.s
environmental, excess and surplus lines casualty businesses and
certain classes of surety business. 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 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 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.

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, 2002, Citigroup was a holder
of 9.95% of TPCs common equity and 9.98% 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 is 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.

1



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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)

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, trucking 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 serves all sizes of customers through
    specialty programs, with particular emphasis on executive and
    professional liability products.                                                                                                                                                                                             

In 2002, Commercial Lines generated net written
premiums of approximately $7.370 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 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 management, loss control and risk
management information services, and are generally offered in
connection with a 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:

|                                              |  |            |         |      |  |      |         |      |  |   |         |  |  |  |       |  
|--------------------------------------------- |  | ---------- | ------- | ---- |  | ---- | ------- | ---- |  | - | ------- |  |  |  | ----- | -
|                                             
|                                             
|                                              |  | % of Total
|(for the year ended December 31, in millions) |  | 2002       |         | 2001 |  | 2000 |         | 2002
|                                             
|                                             
|Net written premiums
    by product line:     |  |            |         |      |  |      |         |      |  |   |         | 
|Commercial multi-peril                        |  | $          | 2,113.9 |      |  | $    | 1,757.9 |      |  | $ | 1,644.0 |  |  |  | 28.7  | %
|Workers compensation                         |  |            | 1,135.0 |      |  |      | 1,030.6 |      |  |   | 1,062.1 |  |  |  | 15.4  |  
|Commercial automobile                         |  |            | 1,454.7 |      |  |      | 914.3   |      |  |   | 778.4   |  |  |  | 19.7  |  
|Property                                      |  |            | 1,088.8 |      |  |      | 833.1   |      |  |   | 639.6   |  |  |  | 14.8  |  
|Fidelity and surety                           |  |            | 541.9   |      |  |      | 506.6   |      |  |   | 475.4   |  |  |  | 7.4   |  
|General liability                             |  |            | 1,035.2 |      |  |      | 695.1   |      |  |   | 431.0   |  |  |  | 14.0  |  
|                                             
|Total                                         |  | $          | 7,369.5 |      |  | $    | 5,737.6 |      |  | $ | 5,030.5 |  |  |  | 100.0 | %
|                                             
|Net written premiums
    by market:           |  |            |         |      |  |      |         |      |  |   |         | 
|National Accounts                             |  | $          | 734.6   |      |  | $    | 418.9   |      |  | $ | 352.3   |  |  |  | 10.0  | %
|Commercial Accounts                           |  |            | 3,556.1 |      |  |      | 2,407.1 |      |  |   | 2,098.9 |  |  |  | 48.2  |  
|Select Accounts                               |  |            | 1,869.5 |      |  |      | 1,713.2 |      |  |   | 1,575.4 |  |  |  | 25.4  |  
|Bond                                          |  |            | 629.9   |      |  |      | 590.2   |      |  |   | 486.5   |  |  |  | 8.5   |  
|Gulf                                          |  |            | 579.4   |      |  |      | 608.2   |      |  |   | 517.4   |  |  |  | 7.9   |  
|                                             
|Total                                         |  | $          | 7,369.5 |      |  | $    | 5,737.6 |      |  | $ | 5,030.5 |  |  |  | 100.0 | %
|                                             





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(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 and currency values, the
impact of current or pending legislation and regulation and the
other risks and uncertainties detailed in the section under the
heading Outlook and in the Forward-Looking
Statements section of the MD&A.


2



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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 plans 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.

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, severe winter weather and other
events such as theft and vandalism, fires, explosions, and
storms, and financial loss due to business interruption
resulting from covered property damage. 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 second
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 ser-

3



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##### 



vices 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 guaranteed cost or a retrospectively rated
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 74% of sales to National Accounts customers
during 2002, based on gross written premiums and fee income.


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, which operate nationally. Assigned risk
plan contracts generated approximately $137.3 million in
service fee income in 2002.

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 lines, 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, offers 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 E&S  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 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.

Personnel in the Companys field offices and
other points of local service, which are located throughout the
United States, work closely with agents to ensure a strong local
presence in the marketplace. The Company offers its independent
agents a small business system that helps them connect all
aspects of sales and service through a comprehensive service
platform. Select Accounts is an industry leader in its array of
agency interface alternatives; more than 85% of all its eligible
business volume is processed by 4,000 agencies using its
Issue Express systems, which allow agents to quote and issue
policies from agency offices.

The Company also provides its agents with a
comprehensive selection of online service capabilities, packaged
together in an easy-to-use agency service portal, including
customer service, marketing and claim functionality. For
example, online eBillservices allow customers to pay
bills and view billing history online. Also, approximately 2,500
of Select Accounts agencies have chosen to take advantage
of the Companys state-of-the-art industry direct service
center that functions as an extension of an agencys
customer service operations, offering a wide range of services,
including coverage and billing inquiry, policy changes,
certificates of insurance, coverage counseling and audit
processing, provided by licensed service professionals with
extended hours of operation.

Select Accounts has 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.

4



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##### 



Bondunderwrites and
markets its products to national, mid-sized and small businesses
and organizations as well as individuals, and distributes them
through both national and wholesale brokers, and retail agents
and regional brokers 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, excess Securities Investors Protection
Corporation (SIPC) insurance, 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
diverse product and program portfolio of specialty insurance
lines, with particular emphasis on executive and professional
liability. Products include various types of directors and
officers liability insurance, fiduciary, and employment
practices liability for all sectors of commercial companies and
financial institutions. Errors and omissions coverages are
provided for numerous professional exposures including
architects and engineers, lawyers, accountants, insurance
agents, mutual fund advisors and investment counselors. Gulf
provides fidelity and commercial crime coverages for nearly all
classes of business. Gulf also offers excess and umbrella
coverages for various industries. In 2001, Gulf began reducing
its exposure to the assumed reinsurance, property and
transportation lines of business and completely exited these
non-core business lines during 2002.

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.

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, 2002, contractholder receivables
and payables on unpaid losses associated with large deductible
policies were each approximately $2.544 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 $266.6 million at
December 31, 2002. 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 unnatural 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.

5



---



##### 



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, 2002:

|              |  |       |       |  
|------------- |  | ----- | ----- | -
|             
|             
|              |  | % of 
|State         |  | Total
|             
|             
|California    |  |       | 11.3  | %
|New York      |  |       | 10.9  |  
|Texas         |  |       | 6.4   |  
|Illinois      |  |       | 5.1   |  
|Massachusetts |  |       | 5.1   |  
|Florida       |  |       | 4.6   |  
|New Jersey    |  |       | 4.0   |  
|Pennsylvania  |  |       | 3.6   |  
|All Others(1) |  |       | 49.0  |  
|             
|Total         |  |       | 100.0 | %
|             



|    |                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------
|(1) | No other single state accounted for 3.0% or more
    of the total direct written premiums written in 2002 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 2002, Personal Lines
generated net written premiums of approximately
$4.575 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:

|                                                      |  |            |         |      |  |      |         |      |  |   |         |  |  |  |       |  
|----------------------------------------------------- |  | ---------- | ------- | ---- |  | ---- | ------- | ---- |  | - | ------- |  |  |  | ----- | -
|                                                     
|                                                     
|                                                      |  | % of Total
|(for the year ended December 31, in millions)         |  | 2002       |         | 2001 |  | 2000 |         | 2002
|                                                     
|                                                     
|Net written premiums
    by product line:             |  |            |         |      |  |      |         |      |  |   |         | 
|Personal automobile                                   |  | $          | 2,842.9 |      |  | $    | 2,590.7 |      |  | $ | 2,366.3 |  |  |  | 62.1  | %
|Homeowners and other                                  |  |            | 1,732.1 |      |  |      | 1,517.2 |      |  |   | 1,446.5 |  |  |  | 37.9  |  
|                                                     
|Total                                                 |  | $          | 4,575.0 |      |  | $    | 4,107.9 |      |  | $ | 3,812.8 |  |  |  | 100.0 | %
|                                                     
|Net written premiums
    by distribution
    channel: |  |            |         |      |  |      |         |      |  |   |         | 
|Independent agents                                    |  | $          | 3,735.6 |      |  | $    | 3,307.9 |      |  | $ | 3,027.9 |  |  |  | 81.6  | %
|Additional distribution                               |  |            | 735.5   |      |  |      | 687.1   |      |  |   | 633.7   |  |  |  | 16.1  |  
|Other                                                 |  |            | 103.9   |      |  |      | 112.9   |      |  |   | 151.2   |  |  |  | 2.3   |  
|                                                     
|Total                                                 |  | $          | 4,575.0 |      |  | $    | 4,107.9 |      |  | $ | 3,812.8 |  |  |  | 100.0 | %
|                                                     

Product Lines

The Company writes most types of property and
casualty insurance covering personal risks. Personal Lines had
approximately 5.5 million policies in force at
December 31, 2002. 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 12 marketing regions and six customer 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

6



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##### 



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 provides technological alternatives
to agents to maximize their ease of doing business. Personal
Lines agents quote and issue 93% 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 facilitate and make
it possible for 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 introduce new Internet-based proprietary
systems, and agents have transitioned approximately 90% 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 3,000
agents each day with updated new and existing 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. More than 800 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
20.6% of Personal Lines direct written premiums in 2002. 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.

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 write the majority of
GEICOs homeowners business and to receive referrals from
GEICO for new 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 and estimated losses, the
expenses of producing business and administering 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.

The Company has developed a product management
methodology that incorporates underwriting, claims, actuarial
and product development disciplines. This approach is designed
to maintain high quality underwriting and pricing discipline.
Proprietary data is gathered and 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 underwriting
segmentation. These models use customer supplied and third-party
data sources, including credit bureau data. 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.

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 expected claim costs, and
obtaining approval of the state regulatory authorities for
indicated 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,

7



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##### 



the profitability and pricing of homeowners
insurance is affected by the incidence of natural disasters,
particularly hurricanes, winter storms, wind and hail,
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, tightened
underwriting standards and implemented price increases in some
catastrophe-prone areas, and instituted deductibles in hurricane
and wind and hail prone areas. In California, the Company has an
endorsement that reduces its exposure to catastrophic earthquake
claims by increasing the deductible and limiting other policy
coverages in the event of an earthquake loss. The Company uses
computer-modeling techniques to assess its level of exposure to
loss in hurricane and earthquake catastrophe-prone areas.
Changes to methods of marketing and underwriting in California
and in coastal areas of New York are subject to state-imposed
restrictions, which makes it more difficult for an insurer to
significantly reduce exposures.


Insurers writing personal lines property casualty
policies are generally 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 competition
or 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 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, 2002:

|               |  |       |       |  
|-------------- |  | ----- | ----- | -
|              
|              
|               |  | % of 
|State          |  | Total
|              
|              
|New York       |  |       | 19.4  | %
|Texas          |  |       | 9.3   |  
|Massachusetts  |  |       | 8.1   |  
|New Jersey     |  |       | 7.4   |  
|Pennsylvania   |  |       | 7.1   |  
|Florida        |  |       | 5.1   |  
|Connecticut    |  |       | 4.6   |  
|Georgia        |  |       | 4.4   |  
|Virginia       |  |       | 4.1   |  
|North Carolina |  |       | 3.1   |  
|All Others(1)  |  |       | 27.4  |  
|              
|Total          |  |       | 100.0 | %
|              



|    |                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------
|(1) | No other single state accounted for 3.0% or more
    of the total direct written premiums written in 2002 by the
    Company.

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

8



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##### 



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
for the benefit of customers and shareholders is its leadership
position in the continuing 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 van fleet. The
Companys proven catastrophe response strategy and its
catastrophe claim handling teams were instrumental in its
industry-leading response to the terrorist attack on
September 11th. 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.

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 improved
medical, wage replacement costs, and loss adjustment expenses.

Asbestos, environmental and other cumulative
injury claims are separately managed by the Companys
Special Liability Group. See  Asbestos,
Environmental and Other Cumulative Injury Claims.

REINSURANCE

The Company reinsures a portion of the risks it
underwrites in order to control its exposure to losses,
stabilize earnings and protect capital resources. The Company
cedes to reinsurers a portion of these risks and pays premiums
based upon the risk and exposure of the policies subject to such
reinsurance. Reinsurance involves credit risk and is 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 5 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.

9



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##### 



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, 2002 (in millions):

|                                      |  |             |       |                     |  |  |     |  |  |                             
|------------------------------------- |  | ----------- | ----- | ------------------- |  |  | --- |  |  | ----------------------------
|                                     
|                                     
|                                      |  |            
|                                      |  | Reinsurance |       | A.M. Best          
|Reinsurer                             |  | Recoverable |       | Rating of Reinsurer
|                                     
|                                     
|American Re-Insurance Company         |  | $           | 865.2 |                     |  |  | A+  |  |  | second highest of 16 ratings
|General Reinsurance Corporation       |  |             | 625.4 |                     |  |  | A++ |  |  | highest of 16 ratings       
|Employers Reinsurance Corporation     |  |             | 338.4 |                     |  |  | A+  |  |  | second highest of 16 ratings
|Swiss Reinsurance America Corporation |  |             | 287.5 |                     |  |  | A++ |  |  | highest of 16 ratings       
|Transatlantic Reinsurance Company     |  |             | 235.8 |                     |  |  | A++ |  |  | highest of 16 ratings       
|                                     

As of December 31, 2002, the Company had
reinsurance recoverables from Lloyds of
$573.4 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 $296.5 million of the Companys
Lloyds reinsurance recoverable at December 31, 2002
relates to Equitas liabilities. The remaining recoverables of
$276.9 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. The Company
believes 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, the Company
believes 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, 2002, the Company had
$10.978 billion in reinsurance recoverables. Of this
amount, $2.095 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. Also, $2.482 billion 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
$6.401 billion ceded to reinsurers at December 31,
2002, $1.357 billion is attributable to environmental,
asbestos and other cumulative injury claims and the remainder
principally reflects reinsurance in support of ongoing business.
At December 31, 2002, $765.6 million of reinsurance
recoverables were collateralized by letters of credit, trust
agreements and escrow funds. Also at December 31, 2002, the
allowance for estimated uncollectible reinsurance recoverables
was $329.1 million.

Current Net Retention Policy

The descriptions below relate to the
Companys reinsurance arrangements in effect at
January 1, 2003. Most casualty and property reinsurance
agreements that renewed on or after January 1, 2002 and
subsequent now 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
$28.5 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.

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, a reinsurance
agreement covers 67% of total losses between $450.0 million
and $750.0 million. This agreement excludes nuclear,
chemical, and biochemical terrorism losses for Personal Lines
and all terrorism losses for Commercial Lines.

For multiple workers compensation losses
arising from a single occurrence, a reinsurance agreement covers
100% of losses between $20.0 million and
$250.0 million. Effective May 1, 2002, this agreement
is in run-off. Coverage is provided for all policies in effect
at April 30, 2002 until expiration.

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

10



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##### 



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 is 7% for 2003, 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
$570.0 million for 2003 subject to final rules to be
established by the U.S. Treasury.

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.

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.

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, Environmental and Other Cumulative
Injury 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, 2002, 2001 and
2000, the combined amounts of discount on the consolidated
balance sheet were $802.9 million, $792.4 million

11



---



##### 



and $799.6 million, respectively, of which
95%, 100% and 100%, respectively, related to workers
compensation.


Other Factors

The table on page 13 sets forth the year-end
reserves from 1992 through 2002 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 1992 to 2001 and 1992 to 1995 have not
been restated to reflect the acquisition of the Northland and
Associates insurance companies 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 of Aetna, 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 1992 to 2002 year-end reserves and the
subsequent changes in those reserves.

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
1992 included $4.0 million for a loss that is finally paid
in 2002 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 1992 to 2001 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, environmental and other
cumulative injury claims. In the post-1984 period, the Company
has developed more stringent underwriting standards and policy
exclusions and has significantly contracted or terminated the
writing of these risks. See  Asbestos,
Environmental and Other Cumulative Injury Claims. General
conditions and trends that have affected the development of
these liabilities in the past will not necessarily recur in the
future.

Other factors that affect the data in the
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 $(12.1) million, $(17.2) million
and $9.2 million for 2002, 2001 and 2000, respectively.

12



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##### 



|                                                                        |                   |                 |       |         |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |            |  |            |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |  | 
|----------------------------------------------------------------------- | ----------------- | --------------- | ----- | ------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | ------- | ------ | ---------- |  | ---------- | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ |  | 
|                                                                        |                   |                
|                                                                        |                   | At December 31,
|                                                                       
|                                                                       
|(in millions)                                                           |                   | 1992(a)         |       | 1993(a) |  | 1994(a) |        | 1995(a) |  | 1996(a) |        | 1997(a) |  | 1998(a) |        | 1999(a) |  | 2000(a) |        | 2001(a)(b) |  | 2002(a)(b)
|                                                                       
|                                                                       
|Reserves for loss and loss adjustment expense
    originally estimated: |                   | $               | 8,955 |         |  | $       | 9,319  |         |  | $       | 9,712  |         |  | $       | 10,090 |         |  | $       | 21,816 |            |  | $          | 21,406 |        |  | $ | 20,763 |        |  | $ | 19,983 |        |  | $ | 19,435 |        |  | $ | 20,197 |        |  | $ | 23,268 | 
|Cumulative amounts paid as of                                           |                   |                 |       |         |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |            |  |            |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        | 
|                                                                        | One year later    |                 |       | 2,005   |  |         |        | 1,706   |  |         |        | 1,595   |  |         |        | 1,521   |  |         |        | 3,704      |  |            |        | 4,025  |  |   |        | 4,159  |  |   |        | 4,082  |  |   |        | 4,374  |  |   |        | 5,018  |  |   |        |  | 
|                                                                        | Two years later   |                 |       | 3,199   |  |         |        | 2,843   |  |         |        | 2,631   |  |         |        | 2,809   |  |         |        | 6,600      |  |            |        | 6,882  |  |   |        | 6,879  |  |   |        | 6,957  |  |   |        | 7,517  |  |   |        |        |  |   |        |  | 
|                                                                        | Three years later |                 |       | 4,063   |  |         |        | 3,610   |  |         |        | 3,798   |  |         |        | 3,903   |  |         |        | 8,841      |  |            |        | 8,850  |  |   |        | 9,006  |  |   |        | 9,324  |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                        | Four years later  |                 |       | 4,662   |  |         |        | 4,563   |  |         |        | 4,676   |  |         |        | 4,761   |  |         |        | 10,355     |  |            |        | 10,480 |  |   |        | 10,809 |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                        | Five years later  |                 |       | 5,465   |  |         |        | 5,274   |  |         |        | 5,388   |  |         |        | 5,322   |  |         |        | 11,649     |  |            |        | 11,915 |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                        | Six years later   |                 |       | 6,078   |  |         |        | 5,882   |  |         |        | 5,855   |  |         |        | 5,842   |  |         |        | 12,893     |  |            |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                        | Seven years later |                 |       | 6,618   |  |         |        | 6,289   |  |         |        | 6,324   |  |         |        | 6,146   |  |         |        |            |  |            |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                        | Eight years later |                 |       | 6,983   |  |         |        | 6,718   |  |         |        | 6,485   |  |         |        |         |  |         |        |            |  |            |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                        | Nine years later  |                 |       | 7,383   |  |         |        | 6,879   |  |         |        |         |  |         |        |         |  |         |        |            |  |            |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                        | Ten years later   |                 |       | 7,541   |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |            |  |            |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |  | 
|Reserves reestimated as of                                              |                   |                 |       |         |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |            |  |            |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        | 
|                                                                        | One year later    |                 |       | 9,058   |  |         |        | 9,270   |  |         |        | 9,486   |  |         |        | 9,848   |  |         |        | 21,345     |  |            |        | 21,083 |  |   |        | 20,521 |  |   |        | 19,736 |  |   |        | 19,394 |  |   |        | 23,228 |  |   |        |  | 
|                                                                        | Two years later   |                 |       | 9,139   |  |         |        | 9,234   |  |         |        | 9,310   |  |         |        | 9,785   |  |         |        | 21,160     |  |            |        | 20,697 |  |   |        | 20,172 |  |   |        | 19,600 |  |   |        | 22,233 |  |   |        |        |  |   |        |  | 
|                                                                        | Three years later |                 |       | 9,183   |  |         |        | 9,108   |  |         |        | 9,395   |  |         |        | 9,789   |  |         |        | 20,816     |  |            |        | 20,417 |  |   |        | 19,975 |  |   |        | 22,302 |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                        | Four years later  |                 |       | 9,189   |  |         |        | 9,271   |  |         |        | 9,427   |  |         |        | 9,735   |  |         |        | 20,664     |  |            |        | 20,168 |  |   |        | 22,489 |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                        | Five years later  |                 |       | 9,405   |  |         |        | 9,298   |  |         |        | 9,463   |  |         |        | 9,711   |  |         |        | 20,427     |  |            |        | 22,570 |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                        | Six years later   |                 |       | 9,440   |  |         |        | 9,349   |  |         |        | 9,441   |  |         |        | 9,661   |  |         |        | 22,851     |  |            |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                        | Seven years later |                 |       | 9,508   |  |         |        | 9,370   |  |         |        | 9,445   |  |         |        | 10,562  |  |         |        |            |  |            |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                        | Eight years later |                 |       | 9,555   |  |         |        | 9,374   |  |         |        | 10,286  |  |         |        |         |  |         |        |            |  |            |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                        | Nine years later  |                 |       | 9,569   |  |         |        | 10,280  |  |         |        |         |  |         |        |         |  |         |        |            |  |            |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |  | 
|                                                                        | Ten years later   |                 |       | 10,536  |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |            |  |            |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |  | 
|Cumulative deficiency(a)                                                |                   |                 | 1,581 |         |  |         | 961    |         |  |         | 574    |         |  |         | 472    |         |  |         | 1,035  |            |  |            | 1,164  |        |  |   | 1,726  |        |  |   | 2,319  |        |  |   | 2,798  |        |  |   | 3,031  |        |  |   |        | 
|Gross liability  end of year                                           |                   |                 |       |         |  | $       | 14,638 |         |  | $       | 15,013 |         |  | $       | 15,213 |         |  | $       | 30,969 |            |  | $          | 30,138 |        |  | $ | 29,411 |        |  | $ | 28,854 |        |  | $ | 28,312 |        |  | $ | 30,617 |        |  | $ | 33,628 | 
|Reinsurance recoverables                                                |                   |                 |       |         |  |         | 5,319  |         |  |         | 5,301  |         |  |         | 5,123  |         |  |         | 9,153  |            |  |            | 8,732  |        |  |   | 8,648  |        |  |   | 8,871  |        |  |   | 8,877  |        |  |   | 10,420 |        |  |   | 10,360 | 
|                                                                       
|Net liability  end of year                                             |                   |                 |       |         |  | $       | 9,319  |         |  | $       | 9,712  |         |  | $       | 10,090 |         |  | $       | 21,816 |            |  | $          | 21,406 |        |  | $ | 20,763 |        |  | $ | 19,983 |        |  | $ | 19,435 |        |  | $ | 20,197 |        |  | $ | 23,268 | 
|                                                                       
|Gross reestimated liability  latest                                    |                   |                 |       |         |  | $       | 15,935 |         |  | $       | 16,149 |         |  | $       | 15,797 |         |  | $       | 32,417 |            |  | $          | 31,638 |        |  | $ | 31,677 |        |  | $ | 31,879 |        |  | $ | 32,180 |        |  | $ | 34,071 |        |  |   |        | 
|Reestimated reinsurance recoverables 
    latest                       |                   |                 |       |         |  |         | 5,655  |         |  |         | 5,863  |         |  |         | 5,235  |         |  |         | 9,566  |            |  |            | 9,068  |        |  |   | 9,188  |        |  |   | 9,577  |        |  |   | 9,947  |        |  |   | 10,843 |        |  |   |        | 
|                                                                       
|Net reestimated liability  latest                                      |                   |                 |       |         |  | $       | 10,280 |         |  | $       | 10,286 |         |  | $       | 10,562 |         |  | $       | 22,851 |            |  | $          | 22,570 |        |  | $ | 22,489 |        |  | $ | 22,302 |        |  | $ | 22,233 |        |  | $ | 23,228 |        |  |   |        | 
|                                                                       
|Gross cumulative deficiency                                             |                   |                 |       |         |  | $       | 1,297  |         |  | $       | 1,136  |         |  | $       | 584    |         |  | $       | 1,448  |            |  | $          | 1,500  |        |  | $ | 2,266  |        |  | $ | 3,025  |        |  | $ | 3,868  |        |  | $ | 3,454  |        |  |   |        | 
|                                                                       



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 re-estimated 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, as follows, in millions:

|     |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- |  |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|1992 |       | 1993 |  | 1994 |       | 1995 |  | 1996 |       | 1997 |  | 1998 |       | 1999 |  | 2000 |       | 2001
|     |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |      |       |     
|$    | 1,888 |      |  | $    | 1,656 |      |  | $    | 1,605 |      |  | $    | 1,562 |      |  | $    | 3,376 |      |  | $ | 3,307 |  |  | $ | 3,241 |  |  | $ | 3,184 |  |  | $ | 3,134 |  |  | $ | 2,945 | 



|    |                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

13



---



##### 



Asbestos, Environmental and Other Cumulative Injury Claims

Asbestos, environmental and other cumulative
injury 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, environmental and other cumulative injury 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, 2002, 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

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 and the Companys Personal Lines single
state companies, by A.M. Best, Fitch, Moodys and
Standard & Poors. The table also presents the
position of each rating in the applicable agencys rating
scale.

|                                       |  |            |                  |         |  |        |                 |       |  |  |                 |  |  |  |                | 
|-------------------------------------- |  | ---------- | ---------------- | ------- |  | ------ | --------------- | ----- |  |  | --------------- |  |  |  | -------------- | 
|                                      
|                                      
|                                       |  | Standard & |                  |        
|                                       |  | A.M. Best  |                  | Moodys |  | Poors |                 | 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+  (2nd of 16)  |         |  |        | A2 (6th of 21)  |       |  |  | AA- (4th of 21) |  |  |  |               | 
|                                      
|Northland pool(c)                      |  |            | A+  (2nd 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) | 
|                                      



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 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, 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 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 consists of Associates
Insurance Company, Commercial Guaranty Insurance Company and
Associates Lloyds Insurance Company. Commercial Guaranty
Insurance Company and Associates Lloyds had ceded all of their
business to Associates Insurance Company. Since these entities
are no longer writing new business, A.M. Best no longer
rates them. Previously these entities were rated A+ by
A.M. Best.

14



---



##### 



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, 2002, the carrying value of
the Companys investment portfolio was
$38.425 billion, of which 91% was invested in fixed
maturity investments and short-term investments (of which 38%
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. Adjusting for the effect of securities in the
process of settlement, invested assets were $34.826 billion
at December 31, 2002, of which 90% was invested in fixed
maturity investments and short-term investments (of which 42%
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 7% in
other investments. The average duration of the fixed maturity
portfolio, including short-term investments, was 5.0 years
at December 31, 2002. The average duration of the fixed
maturity portfolio excluding short-term investments was
5.8 years. Non-investment grade securities totaled
approximately $1.945 billion, representing approximately 6%
of the Companys fixed maturity investment portfolio as of
December 31, 2002.

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 to the Companys notes to
consolidated financial statements for information regarding the
Companys investment portfolio.

|                                              |  |      |          |      |  |      |          |   |  |   |          |  
|--------------------------------------------- |  | ---- | -------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                                             
|                                             
|(for the year ended December 31, in millions) |  | 2002 |          | 2001 |  | 2000
|                                             
|                                             
|Average investments(a)                        |  | $    | 32,505.0 |      |  | $    | 30,434.9 |   |  | $ | 29,599.0 |  
|                                             
|Net investment income                         |  | $    | 1,880.5  |      |  | $    | 2,034.0  |   |  | $ | 2,161.6  |  
|                                             
|Average pretax yield(b)                       |  |      | 6.0      | %    |  |      | 6.9      | % |  |   | 7.6      | %
|                                             
|Average pretax equivalent yield(b)            |  |      | 6.8      | %    |  |      | 7.7      | % |  |   | 8.4      | %
|                                             
|Average aftertax yield(b)                     |  |      | 4.4      | %    |  |      | 5.0      | % |  |   | 5.5      | %
|                                             



|    |                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 realized and unrealized investment
    gains and losses.                                                                                                                     

DERIVATIVES

See note 14 of 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, in the case of personal
property and casualty business, method of distribution, i.e.,
use of independent agents, exclusive agents and/or salaried
employees. According to A.M. Best, there are approximately
950 property casualty organizations in the United States,
comprising approximately 2,400 property casualty companies. Of
those organizations, the top 150 accounted for approximately 91%
of the consolidated industrys total net written premiums
in 2001. 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 to set the price charged for
insurance products and the level of service provided within the
insurance regulatory framework. Growth is driven by a
companys ability to provide insurance and services at a
price that is reasonable and acceptable to the customer. In
addition, the marketplace is affected by available capacity of
the insurance industry as measured by policyholders
surplus. Surplus expands and contracts primarily in conjunction
with profit levels generated by the industry. Growth in premium
and service business is also measured by a companys
ability to retain existing customers and to attract new
customers.

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

15



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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 boiler and machinery,
commercial agribusiness, inland and ocean marine, trucking
industry and national large commercial property.

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 back-office 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 wholesale brokers and retail agents
and brokers throughout the United States. It derives a
competitive advantage through its underwriting practices,
claim-handling expertise and broad product offering base.

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 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

16



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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

Although as a holding company, the Company is not
regulated as an insurance company, the Company owns capital
stock in insurance subsidiaries and therefore 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.

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.
During 2003, a portion of dividends from the Companys
insurance subsidiaries is likely to be subject to approval from
the Connecticut Insurance Department, depending upon the amount
and timing of the payments.

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

17



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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 $147.6 million,
$143.9 million and $117.1 million in 2002, 2001 and
2000, respectively. The related combined underwriting losses for
the Company were $38.5 million, $47.8 million and
$53.4 million in 2002, 2001 and 2000, 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.

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 future 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.

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 12 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.

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 14.9% of the companies included in the IRIS
system have reported results outside the usual range on four or
more ratios.

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 asbes-

18



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tos 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 outside the usual range 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 33% 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 and 2000, two of the Companys
principal subsidiaries had ratios outside the usual ranges. In
2001, 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.
For 2000, Travelers Casualty and Surety Company of America had a
change in net writings that was 138%, compared to the usual
range of 33% to (33%). Travelers Casualty and Surety Company had
a change in surplus ratio that was unusual (13%) compared to the
usual range of 50% to (10%).

For 2000, the change in net writings ratio for
the Travelers Casualty and Surety Company of America was outside
of the usual range due to the acquisition of the surety
business of Reliance Group Holdings, Inc. by Travelers Casualty
and Surety Company. Simultaneous with the recording of the
business acquired, Travelers Casualty and Surety Company
recognized the effects of the cross-business reinsurance
agreement with Travelers Casualty and Surety Company of America.
Travelers Casualty and Surety Company capitalized and
nonadmitted costs to recognize the acquisition which, together
with dividends paid to TIGHI, caused the change in surplus ratio
for Travelers Casualty and Surety Company to be outside the
usual range.

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 2002 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,
2001 and 2000.

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.

19



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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, 2002, 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.

INTEREST EXPENSE AND OTHER

Interest Expense and Other consists primarily of
interest expense.

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, 2002, the Company had 19,837
full-time and 754 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 consolidated financial statements.

Taxation

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

Financial Information about Industry Segments

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

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 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.

20



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Executive Officers of the Company

Set forth below is information concerning the
Companys executive officers as of February 28, 2003.

|                      |  |     |    |        |  |                                                                                         
|--------------------- |  | --- | -- | ------ |  | ----------------------------------------------------------------------------------------
|                     
|                     
|Name                  |  | Age |    | Office
|                     
|                     
|Robert I. Lipp        |  |     | 64 |        |  | Chairman of the board of directors, chief
    executive officer                         
|Charles J. Clarke     |  |     | 67 |        |  | President and a director                                                                
|Irwin R. Ettinger     |  |     | 64 |        |  | Vice chairman                                                                           
|Douglas G. Elliot     |  |     | 42 |        |  | Chief operating officer                                                                 
|Jay S. Benet          |  |     | 50 |        |  | Chief financial officer                                                                 
|James M. Michener     |  |     | 50 |        |  | General counsel, secretary                                                              
|Diana E. Beecher      |  |     | 57 |        |  | Chief information officer                                                               
|Stewart R. Morrison   |  |     | 46 |        |  | Chief investment officer                                                                
|Maria Olivo           |  |     | 38 |        |  | Executive vice president  business and
    corporate development and investor relations
|Peter N. Higgins      |  |     | 55 |        |  | Executive vice president  Underwriting                                                 
|Brian W. MacLean      |  |     | 49 |        |  | Executive vice president  Claim
    Services                                           
|Joseph P. Lacher, Jr. |  |     | 33 |        |  | Executive vice president  Personal
    Lines                                           
|Douglas K. Russell    |  |     | 45 |        |  | Chief accounting officer and treasurer                                                  
|                     

Robert I. Lipp, 64, has been chairman and chief
executive officer of the Company 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 TPC 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., president of the New York City Ballet, a trustee
of Carnegie Hall and the Massachusetts Museum of Contemporary
Art, chairman of the executive committee at Williams College,
and chairman of Dance-On Inc.

Charles J. Clarke, 67, is president 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 from January 2001
to October 2001. Prior to that time he had been vice chairman
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 has held other executive and management
positions with the Company for many years, and he has been with
the Company since 1958.

Irwin R. Ettinger, 64, 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, 42, 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 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 Corporators Board of Hartford Hospital.

Jay S. Benet, 50, has been the 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 served
10 years in various executive positions with Travelers Life
& Annuity, including chief financial officer 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 in
1990, Mr. Benet was a partner of Coopers & Lybrand (now
Pricewaterhouse Coopers).

James M. Michener, 50, is the general counsel and
secretary of the Company. From April 2001 to January 2002,
Mr. Michener served as general counsel of Citigroups
Emerging Markets business. Prior to joining Citigroups
Emerging Markets business, Mr. Michener was general counsel
of Travelers Insurance from April 2000 to April 2001. He began
his career as a lawyer with the Company and held several
positions, including general counsel of the Managed Care and
Employee Benefits Division from March 1994 to December 1994. From

21



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##### 



January 1995 to October 1995, Mr. Michener
served as general counsel of The MetraHealth Companies, Inc. In
May 1996, after the sale of MetraHealth to United Healthcare
Corporation, Mr. Michener rejoined the Company as the
general counsel of TIGHI.


Diana E. Beecher, 57, is senior vice president
and chief information officer for the Company. Ms. Beecher
joined the Company in 1995 as vice president for Technical
Engineering in the Information Systems Core Technology area. She
was promoted to her current position in July 1997. Prior to
joining the Company, Ms. Beecher served as senior vice
president of Brokerage Operations for
S.G. Warburg & Co., Inc., and had previously spent
13 years at Morgan Stanley & Co., Inc., serving in
various positions of increasing responsibility in the technology
and equity divisions. Ms. Beecher is a trustee of the
Shippensburg University Foundation, trustee of the New Canaan
Congregational Church, and the treasurer and director of Nutmeg
Big Brothers Big Sisters.

Stewart R. Morrison, 46, 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, 38, 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.

Peter N. Higgins, 55, 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 with the Company in 1969, was promoted to
senior vice president, Commercial Lines in 1992, and chief
underwriting officer in 2000.

Brian W. MacLean, 49, 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, Jr., 33, is executive vice
president  Personal Lines. Prior to this position,
Mr. Lacher served as senior vice president, product and
actuarial for Personal Lines since April 2001. Immediately prior
to this Mr. Lacher was senior vice president of Strategic
Distribution for Personal Lines from April 1999 to April 2001.
From April 1996 to April 1999, Mr. Lacher was chief
financial officer for Select Accounts. He has held other
executive and management positions with the Company for several
years, and he has been with the Company since 1991.

Douglas K. Russell, 45, is the 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 with
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.

22



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##### 



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.                                                                                                                                                                                                                                                                                                                                                                                                   
|                           
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                          

23



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##### 





|                                             |  |                                                                                                                                                                                                                                                                                                                                                  
|-------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                        
|                                            
|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.                                                                                                                                                                                                   
|                                            
|Excess SIPC                                  |  | A type of surety protection provided for broker
    dealer firms, excess of primary protection programs such as that
    provided by the Securities Investors Protection Corporation
    (SIPC), which may respond in favor of broker dealer customers in
    the event of missing customer property following a broker
    dealers liquidation.
|                                            
|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.                                                                                                                                                                                                                

24



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##### 





|                                                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                                                                                                                                                                
|                                                          
|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.
|                                                          
|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 net realized
    investment gains (losses), restructuring charges, the cumulative
    effect of changes in accounting principles and TPCs
    minority interest in 2000.                                                                                                                                                                                                                                                               
|                                                          
|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.                                                                                                                                                                                                                                                                              

25



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|                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Premiums                               |  | The amount charged during the year on policies
    and contracts issued, renewed or reinsured by an insurance
    company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                      
|Producer                               |  | Contractual entity which directs insureds to the
    insurer for coverage. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                      
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

26



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

27



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##### 





|                                       |  |                                                                                                                                                                                                                                                                                                                                                  
|-------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Underwriting gain or underwriting loss |  | The pre-tax profit or loss experienced by a
    property casualty insurance company after deducting loss and
    loss adjustment expenses and operating 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.                                                                                                                             

28



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##### 





|        |           
|------- | ----------
|Item 2. | PROPERTIES




The Company currently owns six buildings in
Hartford, Connecticut, which comprises its headquarters. The
Company currently occupies approximately 1,030,000 square feet
of office space in such buildings. The Company also owns other
real property in Connecticut, office buildings in Fall River,
Massachusetts and in Irving, Texas and a data center located in
Norcross, Georgia. In addition, the Company leases 146 field and
claim offices totaling approximately 3,425,000 square feet
throughout the United States under leases or subleases with
third parties.

The Company leases 284,225 square feet of office
space in its headquarters buildings to Citigroup. The Company
leases approximately 373,000 square feet of office space at
CityPlace, located in Hartford, Connecticut. The Company has
agreed to exchange office space with Citigroup and, as a result,
will relocate its operations from the office space at CityPlace
to the six headquarters buildings and assign the lease for
CityPlace to Citigroup effective April 2003. The lease with
Citigroup for office space in the headquarters buildings will
terminate at the same time that the exchange of office space
occurs.

On September 1, 2001, the Company vacated
the 50 Prospect Street complex in Hartford, Connecticut in
order to undertake a complete renovation thereof, which is
expected to be completed by the end of 2003. Therefore, the
Company has entered into the following lease arrangements in
Hartford, Connecticut to temporarily house the displaced
operations: 93,500 square feet at 90 State House Square,
82,000 square feet at 10 State House Square, 79,400 square
feet at 50/58 State House Square, 79,800 square feet at One
Constitution Plaza, and 100,200 square feet at Connecticut River
Plaza. By year-end 2002, the Company completed its renovations
to seven floors, which were in turn, occupied by its employees
previously housed at CityPlace.

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.

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.).

The trial courts ordered dismissal of the
California, Pennsylvania and New York cases and, in February
2003, one of the two Florida cases (Bristol Hotel Asset
Company, et al.v.Allianz Insurance Company, et
al.).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, Kentucky, 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. 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. The New Jersey
appellate court denied plaintiffs request to appeal. After
the rulings described above, the plaintiffs withdrew the New
York and Michigan cases. The Company is vigorously defending all
of the pending cases and Company management believes the Company
has meritorious defenses; however the outcome of these disputes
is uncertain.

29



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##### 



In litigation with JPMorgan Chase commenced in
federal district court in New York (JPMorgan Chase Bankv.Liberty Mutual Insurance Company, et al.,
S.D.N.Y.), JPMorgan Chase claimed that the Company and eight
other sureties were obligated to perform under certain surety
bonds issued with respect to performance obligations of two
subsidiaries of Enron. On January 2, 2003, the Company and
the other sureties settled with JPMorgan Chase resolving all
obligations under the bonds. The Company paid
$138.8 million, before reinsurance, and conveyed related
bankruptcy rights to JPMorgan Chase.

The Company is increasingly becoming subject to
more aggressive asbestos-related litigation, and the Company
expects this trend to continue. 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 violated unfair trade practices requirements and
inappropriately handled and settled 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 (2002,
not served). 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 and Texas state courts.

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 former
Travelers policyholder Johns Manville. In August 2002, the
bankruptcy court conducted a hearing on Travelers 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. In January 2003, the same bankruptcy court
extended the existing injunction to apply to an additional set
of cases filed in various state courts in Texas 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 Company is vigorously defending all of the
direct action cases and Company management believes the Company
has meritorious defenses. These 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.

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 conditions
surrounding the final resolution of these claims and the related
litigation continue to change.

The Company is involved in a number of
proceedings relating to ACandS, Inc. (ACandS), formerly a
national installer of products containing asbestos. ACandS filed
for bankruptcy in September 2002 (In re: ACandS, Inc.,
pending in the U.S. Bankruptcy Court for the District of
Delaware). At the time of its filing, ACandS asserted that it
had settled or was in the process of settling the large number
of asbestos-related claims pending against it by negotiating
with the claimants and assigning them ACandS rights to
recover under insurance policies issued by the Company. ACandS
has asserted that the Company is responsible for the financial
obligations created by these settlements as well as for any
future claims brought against it, and that insurance policy
aggregate limits do not apply. In August 2002, in a pending
insurance coverage arbitration (commenced in January 2001), the
panel of arbitrators scheduled the presentation of the case to
commence in April 2003. In January 2003, ACandS filed a proposed
Plan of Reorganization in its Bankruptcy proceeding. Pursuant to
that plan, ACandS seeks to establish a trust for the handling
and disposition of asbestos claims. That trust, according to the
proposed plan, will be assigned ACandS rights to its
insurance policies issued by the Company. In addition to the
bankruptcy and the arbitration proceedings, the Company and
ACandS are also involved in insurance coverage litigation
(ACandS, Inc. v. Travelers Casualty & Surety Co.,
USDC, E.D.Pa, commenced in September 2000). No trial date has
been set in this case. The Company is vigorously defending these
cases, and Company management believes the Company has
meritorious

30



---



##### 



defenses. In the bankruptcy, arbitration and
litigation proceedings, the Company has asserted or will assert
numerous defenses, including that the claims against ACandS are
subject to aggregate limits which have already been exhausted
because the relevant policies were issued after ACandS ceased
installing asbestos-related materials; that even if not subject
to aggregate limits, the occurrence limits in the policies
substantially reduce or eliminate the Companys
obligations; that the settlements entered into between ACandS
and the asbestos claimants are not binding on the Company; and
that any 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 deprive the
Company of its right to litigate the claims against ACandS.


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
and legislative outcomes and their impact on the future
development of claims and litigation relating to asbestos and
other hazardous waste and toxic substances. 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.

The Company is involved in numerous lawsuits,
other than asbestos and environmental claims, arising mostly in
the ordinary course of business operations either as a liability
insurer defending third-party claims brought against insureds 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.



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




NONE

31



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##### 



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 following table presents the high and low
closing prices on the NYSE of the class A common stock and
the class B common stock for each quarter in 2002 in which
each class of common stock was trading:

|                           |      |                |   |             |  |                |   |             |  |  |   |       |  |  |   |       | 
|-------------------------- | ---- | -------------- | - | ----------- |  | -------------- | - | ----------- |  |  | - | ----- |  |  | - | ----- | 
|                          
|                          
|                           |      |               
|                           |      | 2002          
|                           |      |               
|                           |      | 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.                              
|(2) | Since August 21, 2002 for class B
    common stock.

As of February 21, 2003, the Company had
approximately 122 thousand and 139 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.

During 2001, the Company paid dividends of
$526.0 million to Citigroup, its then sole shareholder.
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. On January 23,
2003, the Company declared its first quarterly dividend of
$0.06 per share on the class A and class B common
stock payable February 28, 2003 to shareholders of record
on February 5, 2003. In 2003, the Company expects to
continue to pay quarterly cash dividends on the class A and
class B common stock of $0.06 per share. However,
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.

32



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##### 



Item 6. SELECTED FINANCIAL DATA

|                                                                                                                                           |  |      |          |      |  |      |          |      |  |      |          |  |  |   |          |   |  |   |          | 
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | -------- | ---- |  | ---- | -------- | ---- |  | ---- | -------- |  |  | - | -------- | - |  | - | -------- | 
|                                                                                                                                          
|                                                                                                                                          
|At and for the year ended                                                                                                                 
|December 31,(1)                                                                                                                           
|(in millions, except per share amounts)                                                                                                    |  | 2002 |          | 2001 |  | 2000 |          | 1999 |  | 1998
|                                                                                                                                          
|                                                                                                                                          
|Total revenues                                                                                                                             |  | $    | 14,269.7 |      |  | $    | 12,230.5 |      |  | $    | 11,071.0 |  |  | $ | 10,573.0 |   |  | $ | 10,454.1 | 
|                                                                                                                                          
|Income before cumulative effect of changes in
    accounting principles                                                                    |  | $    | 215.6    |      |  | $    | 1,062.2  |      |  | $    | 1,312.2  |  |  | $ | 1,136.4  |   |  | $ | 1,104.1  | 
|Cumulative effect of changes in accounting
    principles, net of tax(2)                                                                   |  |      | (242.6   | )    |  |      | 3.2      |      |  |      |         |  |  |   | (112.1   | ) |  |   |         | 
|                                                                                                                                          
|Net income (loss)                                                                                                                          |  | $    | (27.0    | )    |  | $    | 1,065.4  |      |  | $    | 1,312.2  |  |  | $ | 1,024.3  |   |  | $ | 1,104.1  | 
|                                                                                                                                          
|Total investments                                                                                                                          |  | $    | 38,425.2 |      |  | $    | 32,618.6 |      |  | $    | 30,754.3 |  |  | $ | 29,842.6 |   |  | $ | 31,900.6 | 
|Total assets                                                                                                                               |  |      | 64,137.5 |      |  |      | 57,777.8 |      |  |      | 53,850.4 |  |  |   | 50,795.1 |   |  |   | 51,751.0 | 
|Claims and claim adjustment expense reserves                                                                                               |  |      | 33,736.0 |      |  |      | 30,736.6 |      |  |      | 28,442.4 |  |  |   | 29,002.9 |   |  |   | 29,588.9 | 
|Notes payable to former affiliates                                                                                                         |  |      | 700.0    |      |  |      | 1,697.7  |      |  |      | 2,155.5  |  |  |   | 1,298.0  |   |  |   | 1,942.7  | 
|Long-term debt                                                                                                                             |  |      | 926.2    |      |  |      | 379.8    |      |  |      | 849.8    |  |  |   | 849.8    |   |  |   | 1,249.6  | 
|Convertible junior subordinated notes payable                                                                                              |  |      | 867.8    |      |  |      |         |      |  |      |         |  |  |   |         |   |  |   |         | 
|Convertible notes payable                                                                                                                  |  |      | 49.7     |      |  |      |         |      |  |      |         |  |  |   |         |   |  |   |         | 
|Total liabilities(3)                                                                                                                       |  |      | 53,100.2 |      |  |      | 46,191.5 |      |  |      | 43,736.4 |  |  |   | 43,455.5 |   |  |   | 45,080.0 | 
|TIGHI-obligated mandatorily redeemable securities
    of subsidiary trusts holding solely junior subordinated debt
    securities of TIGHI |  |      | 900.0    |      |  |      | 900.0    |      |  |      | 900.0    |  |  |   | 900.0    |   |  |   | 900.0    | 
|Shareholders equity                                                                                                                       |  |      | 10,137.3 |      |  |      | 10,686.3 |      |  |      | 9,214.0  |  |  |   | 6,439.6  |   |  |   | 5,771.0  | 
|                                                                                                                                          
|Basic and diluted earnings per share:                                                                                                      |  |      |          |      |  |      |          |      |  |      |          |  |  |   |          |   |  |   |          | 
|Income before cumulative effect of changes in
    accounting principles                                                                    |  | $    | 0.23     |      |  | $    | 1.38     |      |  | $    | 1.71     |  |  | $ | 1.48     |   |  | $ | 1.44     | 
|Cumulative effect of changes in accounting
    principles, net of tax                                                                      |  |      | (0.26    | )    |  |      | 0.01     |      |  |      |         |  |  |   | (0.15    | ) |  |   |         | 
|                                                                                                                                          
|Reported net income (loss)                                                                                                                 |  |      | (0.03    | )    |  |      | 1.39     |      |  |      | 1.71     |  |  |   | 1.33     |   |  |   | 1.44     | 
|Goodwill amortization                                                                                                                      |  |      |         |      |  |      | 0.09     |      |  |      | 0.08     |  |  |   | 0.06     |   |  |   | 0.05     | 
|                                                                                                                                          
|Adjusted earnings (loss) per share                                                                                                         |  | $    | (0.03    | )    |  | $    | 1.48     |      |  | $    | 1.79     |  |  | $ | 1.39     |   |  | $ | 1.49     | 
|                                                                                                                                          
|Year-end common shares outstanding(4)                                                                                                      |  |      | 1,003.9  |      |  |      | 769.0    |      |  |      | 769.0    |  |  |   | 769.0    |   |  |   | 769.0    | 
|Per common share data:                                                                                                                     |  |      |          |      |  |      |          |      |  |      |          |  |  |   |          |   |  |   |          | 
|Cash dividends(5)                                                                                                                          |  | $    | 5.23     |      |  | $    | 0.53     |      |  | $    |         |  |  | $ |         |   |  | $ |         | 
|Book value                                                                                                                                 |  | $    | 10.10    |      |  | $    | 13.90    |      |  | $    | 11.98    |  |  | $ | 8.37     |   |  | $ | 7.50     | 
|                                                                                                                                          



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 merger and acquired all of Travelers Insurance Group
    Holdings Inc.s outstanding shares of common stock that
    were not already owned by TPC for approximately
    $2.413 billion in cash 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 a minority interest
    liability of $87.0 million, $1.368 billion and
    $1.487 billion at December 31, 2002, 1999 and 1998,
    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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

33



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##### 





|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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 corporate reorganization for
all periods presented.

TPC 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
    Travelers Insurance Group Holdings Inc. (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.

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, 2002, Citigroup held
9.95% of TPCs common equity and 9.98% 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 is 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 11 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. In the case of Citigroup Capital Accumulation Plan
awards of restricted stock and deferred shares, the unvested
outstanding awards were cancelled and replaced by awards
comprising 3.1 million of newly issued shares of TPC class
A common stock at a total market value of $53.3 million
based on the closing price of TPC class A common stock on
August 20, 2002. The value of these newly issued shares
along with TPC 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 the case of Citigroup
stock option awards, all outstanding vested and unvested awards
held by Company employees were cancelled and replaced with
options to purchase TPC class A common stock. The total
number of TPC class A common stock subject to the
replacement option awards was 56.9 million shares of which
24.6 million shares were then exercisable. The number of
shares of TPC class A common stock to which the replacement
options relates and

34



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##### 



the per share exercise price of the replacement
options 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 option for TPC class A common stock, and                                                                   
| 
| | the ratio of the exercise price of the
    replacement option to the closing price of TPC 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.

Other TPC Corporate Reorganization, Offerings and Citigroup
Distribution Transactions

The following transactions were completed in
conjunction with the 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.

In February 2002, the Company 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 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.

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 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
$47.2 million for the period from April 1, 2002
through December 31, 2002. Either party may terminate the
agreement effective on the end of a month upon 90 days
prior notice. 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

35



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##### 



opinion of management, were not significant to
the Companys results of operations or financial condition.


Other Transactions

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 $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 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 CIRI 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 business.

In the third quarter of 2000, the Company
purchased the renewal rights to a portion of Reliance
Suretys commercial lines middle-market book of business
(Reliance Middle Market). The Company also acquired the renewal
rights to Frontier Insurance Group, Inc.s environmental,
excess and surplus lines casualty businesses and some classes of
surety business.

On May 31, 2000, the Company completed the
acquisition of the surety business of Reliance Group Holdings,
Inc. (Reliance Surety), for $580.0 million. In connection
with the acquisition, the Company entered into a reinsurance
arrangement for pre-existing business, and the resulting net
cash outlay for this transaction was approximately $278.4
million. This transaction included the acquisition of an
intangible asset of approximately $450.0 million, which is
being amortized over 15 years. Accordingly, the results of
operations and the assets and liabilities acquired from Reliance
Surety are included in the financial statements beginning
June 1, 2000. This acquisition was accounted for as a
purchase.

During April 2000, TPC completed a cash tender
offer and merger, as a result of which TIGHI became TPCs
wholly-owned subsidiary. In the tender offer and merger, TPC
acquired all of TIGHIs outstanding shares of common stock
that were not already owned by TPC, representing approximately
14.8% of TIGHIs outstanding common stock, for
approximately $2.413 billion in cash financed by a loan
from Citigroup.

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)                            |  | 2002 |          | 2001 |  | 2000
|                                                                                               
|                                                                                               
|Revenues                                                                                        |  | $    | 14,269.7 |      |  | $    | 12,230.5 |  |  | $ | 11,071.0 | 
|                                                                                               
|Income before minority interest and cumulative
    effect of changes in accounting principles   |  | $    | 216.7    |      |  | $    | 1,062.2  |  |  | $ | 1,372.3  | 
|Minority interest, net of tax                                                                   |  |      | 1.1      |      |  |      |         |  |  |   | 60.1     | 
|Cumulative effect of changes in accounting
    principles, net of tax                           |  |      | (242.6   | )    |  |      | 3.2      |  |  |   |         | 
|                                                                                               
|Net income (loss)                                                                               |  | $    | (27.0    | )    |  | $    | 1,065.4  |  |  | $ | 1,312.2  | 
|                                                                                               
|Basic and diluted earnings per share:                                                           |  |      |          |      |  |      |          |  |  |   |          | 
|Income before minority interest and cumulative
    effect of changes in accounting principles   |  | $    | 0.23     |      |  | $    | 1.38     |  |  | $ | 1.78     | 
|Minority interest, net of tax                                                                   |  |      |         |      |  |      |         |  |  |   | 0.07     | 
|Cumulative effect of changes in accounting
    principles, net of tax                           |  |      | (0.26    | )    |  |      | 0.01     |  |  |   |         | 
|                                                                                               
|Net income (loss)                                                                               |  | $    | (0.03    | )    |  | $    | 1.39     |  |  | $ | 1.71     | 
|                                                                                               
|Weighted average number of common shares
    outstanding (basic)                                |  |      | 949.5    |      |  |      | 769.0    |  |  |   | 769.0    | 
|Weighted average number of common shares
    outstanding and common stock equivalents (diluted) |  |      | 951.2    |      |  |      | 769.0    |  |  |   | 769.0    | 
|                                                                                               

36



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##### 



The Companys discussions related to net
income (loss) and operating income (loss) are presented on an
after tax basis. All other discussions are presented on a pretax
basis, unless otherwise noted.

Net income (loss) was $(27.0) million in 2002,
$1.065 billion in 2001 and $1.312 billion in 2000 or
$(0.03) per share in 2002, $1.39 per share in 2001 and
$1.71 per share in 2000 (basic and diluted). Net loss for
2002 includes a $1.394 billion charge for strengthening
asbestos reserves, net of the benefit from the Citigroup
indemnification agreement. Net loss for 2002 also includes a
charge 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), which has been accounted
for as a cumulative effect of a change in accounting principle.
Net income for 2001 includes losses of $489.5 million related to
the terrorist attack on September 11, 2001. Included in
2000 was minority interest of $60.1 million related to the
January through April 2000 period when approximately 14.8% of
TIGHIs outstanding common stock was not owned by TPC.
During April 2000, TPC completed a cash tender offer and merger,
as a result of which TIGHI became TPCs wholly-owned
subsidiary. Net income (loss) also includes net realized
investment gains of $99.0 million, $209.9 million and
$30.6 million in 2002, 2001 and 2000, respectively.
Included in net realized investment gains were impairment
charges related to other than temporary declines in value of
$184.7 million, $95.0 million and $20.2 million
in 2002, 2001 and 2000, respectively.

Operating income is defined by the Company as net
income (loss) excluding net realized investment gains
(losses), restructuring charges, the cumulative effect of the
changes in accounting principles and TPC minority interest in
2000. Operating income is considered a more appropriate
indicator of underwriting results and results of operations. Net
realized investment gains (losses) are significantly impacted by
both discretionary and other economic factors and are not
necessarily indicative of operating trends. The major components
of operating income and a reconciliation of operating income to
net income are as follows:

|                                                                                                                   |                   |      |         |          |   |      |         |        |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------------ | ----------------- | ---- | ------- | -------- | - | ---- | ------- | ------ | - | - | ------- | ----- | -
|                                                                                                                  
|                                                                                                                  
|(for the year ended December 31, in millions)                                                                      |                   | 2002 |         | 2001     |   | 2000
|                                                                                                                  
|                                                                                                                  
|Underwriting gain (loss), excluding
    catastrophes, prior year reserve development and goodwill
    amortization |                   | $    | 317.1   |          |   | $    | 48.1    |        |   | $ | (14.9   | )    
|Catastrophes:                                                                                                      |                   |      |         |          |   |      |         |        |   |   |         |      
|                                                                                                                   | Natural           |      |         | (54.7    | ) |      |         | (67.1  | ) |   |         | (53.6 | )
|                                                                                                                   | September 11      |      |         |         |   |      |         | (489.5 | ) |   |         |      |  
|Prior year reserve development:                                                                                    |                   |      |         |          |   |      |         |        |   |   |         |      
|                                                                                                                   | Asbestos(1)       |      |         | (1,394.3 | ) |      |         | (122.7 | ) |   |         | (32.5 | )
|                                                                                                                   | All other         |      |         | (121.7   | ) |      |         | 132.1  |   |   |         | 81.9  |  
|Goodwill amortization                                                                                              |                   |      |        |          |   |      | (68.8   | )      |   |   | (57.9   | )    
|                                                                                                                  
|                                                                                                                   | Underwriting loss |      |         | (1,253.6 | ) |      |         | (567.9 | ) |   |         | (77.0 | )
|Net investment income                                                                                              |                   |      | 1,402.5 |          |   |      | 1,491.9 |        |   |   | 1,571.4 |      
|Other, including interest expense                                                                                  |                   |      | (30.7   | )        |   |      | (68.3   | )      |   |   | (152.7  | )    
|                                                                                                                  
|Operating income                                                                                                   |                   |      | 118.2   |          |   |      | 855.7   |        |   |   | 1,341.7 |      
|Realized investment gains                                                                                          |                   |      | 99.0    |          |   |      | 209.9   |        |   |   | 30.6    |      
|Restructuring charge                                                                                               |                   |      | (1.6    | )        |   |      | (3.4    | )      |   |   |        |      
|Cumulative effect of changes in accounting
    principles                                                          |                   |      | (242.6  | )        |   |      | 3.2     |        |   |   |        |      
|Minority interest                                                                                                  |                   |      |        |          |   |      |        |        |   |   | 60.1    |      
|                                                                                                                  
|Net income (loss)                                                                                                  |                   | $    | (27.0   | )        |   | $    | 1,065.4 |        |   | $ | 1,312.2 |      
|                                                                                                                  



|    |                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------
|(1) | Net of benefit of $520.0 million related to
    asbestos incurrals subject to the Citigroup indemnification
    agreement in 2002.

Operating income of $118.2 million for 2002
decreased $737.5 million compared to $855.7 million
for 2001. Operating income for 2002 reflects the impact of the
fourth quarter asbestos charge taken by the Company while 2001
reflects the impact of the effects of the terrorist attack on
September 11th. Operating income in 2002 reflects
unfavorable prior year reserve development of
$1.516 billion, which included $1.394 billion related
to asbestos, net of the benefit from the Citigroup
indemnification agreement, versus $9.4 million of favorable
prior year reserve development in 2001, which included
$122.7 million of unfavorable development related to
asbestos. On January 14, 2003, the Company reported the
results of its asbestos reserve study and the strengthening of
its asbestos reserves to $3.404 billion, after reinsurance
recoverables. The study involved an extensive review and
assessment of the Companys exposure to asbestos losses,
particularly in light of the Companys recent claims
experience and industry-wide trends. The Company has now fully
utilized the $800.0 million pretax benefit under the
Citi-group indemnification agreement. For additional information
see  Asbestos Claims and Litigation.
Separately, the Company strengthened its environmental reserves
in the fourth quarter by $100.0 million, bringing the total
to $385.5 million, and reduced its reserves for cumulative
injuries other than asbestos by $94.8 million to $553.6

37



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##### 



million. These actions were taken as a result of
recent payment and settlement experience. In addition, the
Company strengthened prior year reserves for certain run-off
lines of business including assumed reinsurance, and experienced
favorable development in certain ongoing businesses including
Personal Lines Auto. Run-off lines of business are those
determined to be non-strategic which includes non-renewals of
inforce policies and a cessation of writing new business, where
allowed by law. Despite the benefit of higher average invested
assets resulting from strong cash flows from underwriting, 2002
net investment income of $1.403 billion was down
$89.4 million compared to $1.492 billion in 2001,
reflecting reduced returns in the Companys public equity
investments and the lower interest rate environment. Operating
income in 2002 was favorably impacted by lower weather-related
catastrophe losses of $54.7 million in 2002 compared to
$67.1 million of weather-related catastrophe losses in
2001. Also favorably impacting 2002 was the elimination of
goodwill amortization and lower interest expense. Underwriting
gain (loss), excluding catastrophes, prior year reserve
development and goodwill amortization increased
$269.0 million to $317.1 million in 2002. The 2002
underwriting results reflect the continuing favorable rate
environment significantly in excess of loss cost trends, higher
retention and selective growth in new business.


Operating income of $855.7 million for 2001
decreased $486.0 million compared to $1.342 billion
for 2000. The decrease in operating income in 2001 from 2000
primarily reflects the impact of catastrophe losses of
$489.5 million associated with the terrorist attack on
September 11th. The 2001 operating decrease reflects
unfavorable asbestos prior year reserve development in 2001 of
$122.7 million versus $32.5 million in 2000. This was
offset by $132.1 million of other favorable prior year reserve
development in 2001 compared to $81.9 million of other
favorable prior year reserve development in 2000. Also
contributing to the 2001 decrease in operating income was a
$79.5 million decrease in net investment income from 2000
which largely reflects the increase in dividends and debt
repayments to Citigroup, lower fixed income interest rates and
lower returns for private equity investments. Partially
offsetting this was lower interest expense in 2001. Underwriting
gain (loss), excluding catastrophes, prior year reserve
development and goodwill amortization included in operating
income, increased $63.0 million to $48.1 million in
2001. The 2001 underwriting results reflect the benefit of
premium rate increases, partially offset by increased loss cost
trends, including increased medical costs and auto repair costs
and reinsurance costs.

Revenues of $14.270 billion in 2002
increased $2.039 billion from 2001. The increase was
primarily attributable to higher earned premiums due to premium
rate increases, the inclusion of Northland and Associates for
the full year 2002 versus the fourth quarter of 2001 and the
$520.0 million benefit of the Citigroup indemnification
agreement, offset by a decrease in net realized investment gains
and lower net investment income. Total revenues for Northland
and Associates were $1.070 billion in 2002, an increase of
$815.3 million over 2001. The increase in 2002 revenue
reflects a $1.744 billion increase in earned premiums,
offset by a $175.8 million decrease in net realized
investment gains and a $153.5 million decrease in net
investment income. Net realized investment gains include
$284.1 million of impairments in 2002, compared to
$146.2 million in 2001. The 2002 and 2001 impairments
relate primarily to corporate bonds in the energy and
communications sectors. Revenues of $12.231 billion in 2001
increased $1.160 billion from 2000. The increase in revenue
in 2001 from 2000 was primarily attributable to higher earned
premiums, higher fee income and higher net realized investment
gains, and one quarter of Northland and Associates, partially
offset by a $127.6 million decrease in net investment
income. The increase in 2001 revenue reflects a
$948.7 million increase in earned premiums and a
$275.5 million increase in net realized investment gains
offset by a $127.6 million decrease in net investment
income. Net realized investment gains include $20.2 million
of impairments in 2000. The inclusion of Northland and
Associates in the fourth quarter of 2001 added $254.4 million to
full year 2001 revenues.

Earned premiums increased $1.744 billion to
$11.155 billion in 2002 from $9.411 billion in 2001. The
increase in earned premiums in 2002 was due to rate increases on
renewal business in both Commercial Lines and Personal Lines and
the full-year inclusion of Northland and Associates in 2002.
Earned premiums for Northland and Associates were
$958.2 million in 2002, an increase of $734.1 million
over 2001 which only includes the fourth quarter of 2001. Earned
premiums increased $948.7 million to $9.411 billion in
2001 primarily due to rate increases, the full-year impact of
the acquisitions in 2000 of Reliance Surety and the renewal
rights for the Reliance Middle Market and Frontier businesses,
combined with the inclusion of Northland and Associates in the
fourth quarter of 2001. The inclusion of Northland and
Associates in the fourth quarter of 2001 added
$224.1 million to full-year 2001 earned premiums.

Net investment income was $1.881 billion in
2002, a decrease of $153.5 million from 2001. 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 for Northland and
Associates was $91.5 million in 2002, an increase of
$68.4 million over 2001 which only includes the fourth
quarter of 2001. Net investment income was $2.034 billion
in 2001, a decrease of $127.6 million from 2000. This
decrease largely reflects the increase in

38



---



##### 



dividends and debt repayments to Citigroup, lower
fixed income interest rates and lower returns from private
equity investments. Investment yields declined to 6.9% in 2001
from 7.6% in 2000. The inclusion of Northland and Associates in
the fourth quarter of 2001 added $23.1 million to full year
2001 net investment income.


Fee income was $454.9 million in 2002, a
$107.5 million increase from 2001. Fee income was
$347.4 million in 2001, a $35.0 million increase from
2000. National Accounts within Commercial Lines 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 and automobile assigned risk plans and to self
insurance pools. The increases in fee income were primarily due
to the favorable rate environment and the repopulation of the
involuntary pools. Claim volume under administration increased
to $2.656 billion for 2002, compared to $2.252 billion
for 2001 and $2.024 billion in 2000.

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

Other revenues decreased to $112.3 million
in 2002 from $115.7 million in 2001. Other revenues
increased to $115.7 million in 2001 from $87.8 million
in 2000. Other revenues principally include premium installment
charges.

Claims and expenses were $14.530 billion in
2002 compared to $10.842 billion in 2001 and
$9.207 billion in 2000. The 2002 increase was primarily due
to prior year reserve development principally related to the
asbestos charge taken in the fourth quarter of 2002 upon
completion of the Companys asbestos study, the 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 11th. Unfavorable
prior year reserve development in 2002 was $3.132 billion,
compared to favorable prior year reserve development of
$14.4 million in 2001. The most significant component of
prior year reserve development in 2002 was asbestos-related
incurrals of $2.945 billion, which increased
$2.756 billion, over 2001. For additional information see
 Asbestos Claims and Litigation.
Separately, the Company strengthened its environmental reserves
in the fourth quarter by $100.0 million, bringing the total
to $385.5 million, and reduced its reserves for cumulative
injuries other than asbestos by $94.8 million to $553.6
million. These actions were taken as a result of recent payment
and settlement experience. In addition, the Company strengthened
prior year reserves for certain run-off lines of business
including assumed reinsurance, and experienced favorable
development in certain ongoing businesses including Personal
Lines Auto. Claims and expenses for Northland and Associates
were $1.090 billion in 2002, an increase of $858.2 million
over 2001 which only includes the fourth quarter of 2001. These
increases were also partially offset by the benefit of lower
interest expense, the elimination of goodwill amortization and
natural catastrophe losses of $84.1 million in 2002
compared to $103.3 million in 2001. The increase in claims
and expenses in 2001 was primarily the result of higher
catastrophe losses of $856.3 million primarily associated
with the terrorist attack on September 11th compared to
$82.5 million in 2000, increased loss cost trends, lower
favorable prior year reserve development of $14.4 million
compared to $76.1 million in 2000 and increased claims and
operating expenses related to the growth in premiums, including
the full-year impact of the Reliance Surety acquisition and the
acquisition of the renewal rights for the Reliance Middle Market
and Frontier businesses, and the inclusion of Northland and
Associates in the fourth quarter of 2001, partially offset by
lower interest expense due to lower outstanding debt and lower
interest rates. Results for 2000 also reflect benefits resulting
from legislative actions that changed the manner in which some
states finance their workers compensation second-injury
funds, principally in New York. The inclusion of Northland and
Associates in the fourth quarter of 2001 added
$231.3 million to full year 2001 claims and expenses.

The Companys effective tax
(benefit) rate was (183.4)%, 23.5% and 26.4% in 2002, 2001
and 2000, respectively. The effective tax rate for 2002 reflects
the impact of non-taxable recoveries of $520.0 million
related to the Citigroup indemnification agreement and
non-taxable investment income. The decrease in the 2001
effective tax rate from 2000 was primarily due to the impact of
the losses associated with the terrorist attack on
September 11th, which changed the mix of taxable and
non-taxable income or loss.

Consolidated net written premiums were as follows:

|                                              |  |      |          |      |  |      |         |  |  |   |         | 
|--------------------------------------------- |  | ---- | -------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                             
|                                             
|(for the year ended December 31, in millions) |  | 2002 |          | 2001 |  | 2000
|                                             
|                                             
|Commercial Lines                              |  | $    | 7,369.5  |      |  | $    | 5,737.6 |  |  | $ | 5,030.5 | 
|Personal Lines                                |  |      | 4,575.0  |      |  |      | 4,107.9 |  |  |   | 3,812.8 | 
|                                             
|Total net written premiums                    |  | $    | 11,944.5 |      |  | $    | 9,845.5 |  |  | $ | 8,843.3 | 
|                                             

Net written premiums increased
$2.099 billion to $11.945 billion in 2002 from
$9.846 billion in 2001. The increase in net written
premiums in 2002 was due to rate increases and strong retention
in both Commercial Lines 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
includes the fourth quarter of 2001. Net written premiums
increased $1.002 billion to $9.846 billion in 2001
from $8.843 billion in 2000 primarily due to rate
increases, the full year impact of the acquisitions in 2000 of
Reliance Surety and the

39



---



##### 



renewal rights for the Reliance Middle Market and
Frontier businesses, combined with the inclusion of Northland
and Associates in the fourth quarter of 2001. The inclusion of
Northland and Associates in the fourth quarter of 2001 added
$192.7 million to full year 2001 net written premiums.


The GAAP combined ratios before policyholder
dividends were as follows:

|                                                                                                                |              |      |       |      |  |      |       |      |   |  |       |       |  
|--------------------------------------------------------------------------------------------------------------- | ------------ | ---- | ----- | ---- |  | ---- | ----- | ---- | - |  | ----- | ----- | -
|                                                                                                               
|                                                                                                               
|(for the year ended December 31,)                                                                               |              | 2002 |       | 2001 |  | 2000
|                                                                                                               
|                                                                                                               
|GAAP combined ratio, excluding catastrophes,
    prior year reserve development, and goodwill
    amortization: |              |      |       |      |  |      |       |      |   |  |       |      
|Loss and loss adjustment expense (LAE) ratio                                                                    |              |      | 68.8  | %    |  |      | 71.5  | %    |   |  | 74.1  | %    
|Underwriting expense ratio                                                                                      |              |      | 26.9  |      |  |      | 27.8  |      |   |  | 26.0  |      
|                                                                                                               
|                                                                                                                | Total        |      |       | 95.7 |  |      |       | 99.3 |   |  |       | 100.1 |  
|Catastrophes:                                                                                                   |              |      |       |      |  |      |       |      |   |  |       |      
|                                                                                                                | Natural      |      |       | 0.8  |  |      |       | 1.1  |   |  |       | 1.0   |  
|                                                                                                                | September 11 |      |       |     |  |      |       | 8.0  |   |  |       |      |  
|Prior year reserve development:                                                                                 |              |      |       |      |  |      |       |      |   |  |       |      
|                                                                                                                | Asbestos(1)  |      |       | 19.2 |  |      |       | 2.0  |   |  |       | 0.6   |  
|                                                                                                                | All other    |      |       | 1.7  |  |      |       | (2.2 | ) |  |       | (1.5  | )
|Goodwill amortization                                                                                           |              |      |      |      |  |      | 0.7   |      |   |  | 0.7   |      
|                                                                                                               
|GAAP combined ratio                                                                                             |              |      | 117.4 | %    |  |      | 108.9 | %    |   |  | 100.9 | %    
|                                                                                                               



|    |                                                                             
|--- | ----------------------------------------------------------------------------
|(1) | Excludes losses recovered under the Citigroup
    indemnification agreement.

Commencing in 2002, the GAAP underwriting expense
ratio has been computed using net earned premiums to provide
more consistency in the underlying components of the
computation. Previously, this ratio for GAAP purposes was
computed using net written premiums. Prior periods have been
restated to conform to this new presentation.

The deterioration in the 2002 GAAP combined ratio
includes the impact of higher prior year reserve development,
primarily due to asbestos-related incurrals, partially offset by
lower catastrophe losses in 2002, especially the impact of the
September 11, 2001 terrorist attack, and the elimination of
goodwill amortization. The improvement in the GAAP combined
ratios, excluding catastrophes, prior year reserve development,
and goodwill amortization, from 2001 to 2002, reflects an
improvement in the loss and LAE ratio and an improvement in the
underwriting expense ratio. The improvement in the loss and LAE
ratio is primarily attributed to the continued disciplined
underwriting that achieved rate increases in excess of loss cost
trends in both Commercial Lines and Personal Lines. The
improvement in the underwriting expense ratio is primarily
attributed to the benefit of premium rate increases.

The deterioration in the 2001 GAAP combined ratio
includes the impact of the terrorist attack on
September 11th and higher asbestos prior year reserve
development, partially offset by higher favorable other prior
year reserve development. The improvement in the GAAP combined
ratio, excluding catastrophes, prior year reserve development,
and goodwill amortization, from 2000 to 2001, reflects an
improvement in the loss and LAE ratio and a deterioration in the
underwriting expense ratio. The improvement in the loss and LAE
ratio is primarily due to premium growth related to rate
increases and the impact of the increase in the Commercial Lines
Bond business, primarily associated with the ongoing business
associated with the Reliance Surety acquisition, which generally
has a lower loss and LAE ratio.

RESULTS OF OPERATIONS BY SEGMENT

Commercial Lines

|                                                                                                     |  |      |         |      |  |      |         |  |  |   |         | 
|---------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                                                                                    
|                                                                                                    
|(for the year ended December 31, in millions)                                                        |  | 2002 |         | 2001 |  | 2000
|                                                                                                    
|                                                                                                    
|Revenues                                                                                             |  | $    | 9,493.6 |      |  | $    | 7,771.2 |  |  | $ | 6,835.6 | 
|                                                                                                    
|Income (loss) before minority interest and
    cumulative effect of changes in accounting principles |  | $    | (2.5    | )    |  | $    | 959.8   |  |  | $ | 1,220.1 | 
|Minority interest, net of tax                                                                        |  |      | 1.1     |      |  |      |        |  |  |   | 48.2    | 
|Cumulative effect of changes in accounting
    principles, net of tax                                |  |      | (242.6  | )    |  |      | 2.7     |  |  |   |        | 
|                                                                                                    
|Net income (loss)                                                                                    |  | $    | (246.2  | )    |  | $    | 962.5   |  |  | $ | 1,171.9 | 
|                                                                                                    

Net income (loss) was $(246.2) million,
$962.5 million and $1.172 billion in 2002, 2001 and
2000, respectively. Net loss for 2002 includes a
$1.394 billion charge for strengthening asbestos reserves,
net of the benefit from the Citigroup indemnification agreement.
Net loss for 2002 also includes a charge of $242.6 million
related to the initial adoption of FAS 142, which has been
accounted for as a cumulative effect of a change in accounting
principle. Net income for 2001 includes losses of
$447.9 million related to the terrorist attack on
September 11, 2001. Included in 2000 was minority interest
of $48.2 million related to the January through April 2000
period when approximately 14.8% of TIGHIs outstanding
common stock was not owned by TPC. During April 2000, TPC
completed a cash tender offer and merger, as a result of which
TIGHI became TPCs wholly-owned subsidiary. Commercial
Lines net income (loss) also includes net realized
investment gains of $122.2 million, $207.6 million and
$30.8 million in 2002, 2001 and 2000, respectively.

40



---



##### 



The major components of operating income and a
reconciliation of operating income to net income is as follows:

|                                                                                                                   |                   |      |         |          |   |      |         |        |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------------ | ----------------- | ---- | ------- | -------- | - | ---- | ------- | ------ | - | - | ------- | ----- | -
|                                                                                                                  
|                                                                                                                  
|(for the year ended December 31, in millions)                                                                      |                   | 2002 |         | 2001     |   | 2000
|                                                                                                                  
|                                                                                                                  
|Underwriting gain (loss), excluding
    catastrophes, prior year reserve development and goodwill
    amortization |                   | $    | 265.5   |          |   | $    | 64.7    |        |   | $ | (11.7   | )    
|Catastrophes:                                                                                                      |                   |      |         |          |   |      |         |        |   |   |         |      
|                                                                                                                   | Natural           |      |         |         |   |      |         | (22.6  | ) |   |         |      |  
|                                                                                                                   | September 11      |      |         |         |   |      |         | (447.9 | ) |   |         |      |  
|Prior year reserve development:                                                                                    |                   |      |         |          |   |      |         |        |   |   |         |      
|                                                                                                                   | Asbestos(1)       |      |         | (1,394.3 | ) |      |         | (122.7 | ) |   |         | (32.5 | )
|                                                                                                                   | All other         |      |         | (141.1   | ) |      |         | 111.9  |   |   |         | 9.7   |  
|Goodwill amortization                                                                                              |                   |      |        |          |   |      | (50.3   | )      |   |   | (41.8   | )    
|                                                                                                                  
|                                                                                                                   | Underwriting loss |      |         | (1,269.9 | ) |      |         | (466.9 | ) |   |         | (76.3 | )
|Net investment income                                                                                              |                   |      | 1,123.3 |          |   |      | 1,192.8 |        |   |   | 1,254.8 |      
|Other                                                                                                              |                   |      | 20.8    |          |   |      | 26.3    |        |   |   | 10.8    |      
|                                                                                                                  
|Operating income (loss)                                                                                            |                   |      | (125.8  | )        |   |      | 752.2   |        |   |   | 1,189.3 |      
|Realized investment gains                                                                                          |                   |      | 122.2   |          |   |      | 207.6   |        |   |   | 30.8    |      
|Cumulative effect of changes in accounting
    principles                                                          |                   |      | (242.6  | )        |   |      | 2.7     |        |   |   |        |      
|Minority interest                                                                                                  |                   |      |        |          |   |      |        |        |   |   | 48.2    |      
|                                                                                                                  
|Net income (loss)                                                                                                  |                   | $    | (246.2  | )        |   | $    | 962.5   |        |   | $ | 1,171.9 |      
|                                                                                                                  



|    |                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------
|(1) | Net of benefit of $520.0 million related to
    asbestos incurrals subject to the Citigroup indemnification
    agreement in 2002.

Operating loss of $125.8 million for 2002
decreased $878.0 million compared to operating income of
$752.2 million for 2001. The decrease in 2002 operating
income reflects unfavorable prior year reserve development in
2002 of $1.535 billion, net of the benefit from the Citigroup
indemnification agreement, versus $10.8 million of
unfavorable prior year reserve development in 2001. The 2002
prior year reserve development includes a $1.394 billion
charge related to asbestos, net of the benefit from the
Citigroup indemnification agreement, versus a charge of
$122.7 million in 2001. On January 14, 2003, the
Company reported the results of its asbestos reserve study and
the strengthening of its asbestos reserves to
$3.404 billion, after reinsurance recoverables. The study
involved an extensive review and assessment of the
Companys exposure to asbestos losses, particularly in
light of the Companys recent claims experience and
industry-wide trends. The Company has now fully utilized the
$800.0 million pretax benefit under the Citigroup
indemnification agreement. For additional information see
 Asbestos Claims and Litigation.
Separately, the Company strengthened its environmental reserves
in the fourth quarter by $100.0 million, bringing the total
to $385.5 million, and reduced its reserves for cumulative
injuries other than asbestos by $94.8 million to
$553.6 million. These actions were taken as a result of
recent payment and settlement experience. In addition, the
Company strengthened prior year reserves for certain run-off
lines of business including assumed reinsurance, and experienced
favorable current year development in certain ongoing
businesses. 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. Operating income 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
elimination of goodwill amortization also benefited 2002
operating income. Underwriting gain (loss), excluding
catastrophes, prior year reserve development and goodwill
amortization increased $200.8 million to
$265.5 million in 2002. The 2002 underwriting results
reflect the benefit of the favorable premium rate environment in
excess of loss cost trends, higher production levels, higher
retention and selective growth in new business.

Operating income of $752.2 million for 2001
was down $437.1 million compared to operating income of
$1.189 billion in 2000. The 2001 decrease in operating
income compared to 2000 reflects the impact of catastrophe
losses of $447.9 million associated with the terrorist attack on
September 11th. Operating income in 2001 was also
unfavorably impacted by weather-related catastrophe losses of
$22.6 million compared to no catastrophe losses in 2000.
The decrease in 2001 operating income reflects unfavorable
asbestos prior year reserve development in 2001 of
$122.7 million versus $32.5 million in 2000. This was
partially offset by $111.9 million of favorable other prior
year reserve development in 2001 compared to $9.7 million
of favorable other prior year reserve development in 2000. Also
contributing to the 2001 decrease in operating income was a
$62.0 million decrease in net investment income from 2000,
which largely reflects the increase in dividends and debt
repayments to Citigroup, lower fixed income interest rates and
lower returns from private equity investments. Underwriting gain
(loss), excluding catastrophes, prior year reserve development
and goodwill amortization increased $76.4 million to $64.7
million in 2001. The 2001 underwriting results reflect the
benefit of premium rate increases and higher fee income,
partially offset by increased loss cost trends, including
increased medical costs, auto repair costs and reinsurance costs.

Revenues of $9.494 billion in 2002 increased
$1.722 billion from 2001. The increase is primarily
attributable to premium rate increases, higher fee income, the
inclusion of the full-year of Northland and Associates in 2002
and the benefit of the Citigroup indemnification agreement.
Total revenues for Northland and Associates were
$946.7 million in 2002, an increase of $715.4 million
over 2001 which only includes the fourth quarter of 2001. The
increase in revenue for 2002 was partially offset by lower net
investment income combined with lower realized investment

41



---



##### 



gains compared to 2001. Revenues of
$7.771 billion in 2001 increased $935.6 million from
2000. The increase in 2001 reflected higher earned premiums,
higher fee income and higher realized investment gains and one
quarter of Northland and Associates, partially offset by a
decrease in net investment income. The inclusion of Northland
and Associates in the fourth quarter of 2001 added $231.3
million to full year 2001 revenues.


Earned premiums were $6.801 billion in 2002
compared to $5.447 billion in 2001 and $4.747 billion
in 2000. The increase in earned premiums in 2002 was primarily
due to premium rate increases and the full-year inclusion of
Northland and Associates in 2002. Earned premiums related to
Northland and Associates were $846.1 million in 2002, an
increase of $642.9 million over 2001 which only includes
the fourth quarter of 2001. The 2001 increase in earned premiums
was primarily due to rate increases, the full-year impact of the
ongoing business associated with the Reliance Surety acquisition
and the renewal rights for the Reliance Middle Market and
Frontier businesses, and the inclusion of Northland and
Associates in the fourth quarter of 2001. The inclusion of
Northland and Associates in the fourth quarter of 2001 added
$203.2 million to full year 2001 earned premiums.

Net investment income was $1.495 billion for
2002, a decrease of $121.0 million from $1.616 billion
in 2001. Lower average investment yields reflected reduced
returns in the Companys public equity investments and the
lower interest rate environment, partially offset by an increase
in average invested assets due to the inclusion of Northland and
Associates 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 includes the fourth quarter of 2001. Net
investment income was $1.616 billion in 2001, a decrease of
$96.9 million from $1.713 billion in 2000. This
decrease largely reflects the increase in dividends and debt
repayments to Citigroup, lower fixed income interest rates and
lower returns from private equity investments. The inclusion of
Northland and Associates in the fourth quarter of 2001 added
$22.4 million to full year 2001 net investment income.

Fee income was $454.9 million in 2002, a
$107.5 million increase from 2001. Fee income was
$347.4 million in 2001, a $35.0 million increase from
2000. 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 and automobile
assigned risk plans and to self-insurance pools. The increases
in fee income were primarily due to the favorable rate
environment and the repopulation of the involuntary pools. Claim
volume under administration increased to $2.656 billion for
2002, compared to $2.252 billion in 2001 and
$2.024 billion in 2000.

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

Other revenues decreased to $32.1 million in
2002, from $41.4 million in 2001. Other revenues increased
$25.3 million to $41.4 million in 2001 from
$16.1 million in 2000.

Net written premiums by market were as follows:

| |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  | 
|

|                                              |                     |                 |         |         |         |      |         |         |         |   |         |         |         | 
|--------------------------------------------- | ------------------- | --------------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|(for the year ended December 31, in millions) |                     | 2002            |         | 2001    |         | 2000
|                                             
|                                             
|Core                                          |                     |                 |         |         |         |      |         |         |         |   |         |        
|                                              | National Accounts   |                 | $       | 734.6   |         |      | $       | 418.9   |         |   | $       | 352.3   |        
|                                              | Commercial Accounts |                 |         | 3,556.1 |         |      |         | 2,407.1 |         |   |         | 2,098.9 |        
|                                              | Select Accounts     |                 |         | 1,869.5 |         |      |         | 1,713.2 |         |   |         | 1,575.4 |        
|                                             
|                                              |                     | Total Core      |         |         | 6,160.2 |      |         |         | 4,539.2 |   |         |         | 4,026.6 | 
|Specialty                                     |                     |                 |         |         |         |      |         |         |         |   |         |        
|                                              | Bond                |                 |         | 629.9   |         |      |         | 590.2   |         |   |         | 486.5   |        
|                                              | Gulf                |                 |         | 579.4   |         |      |         | 608.2   |         |   |         | 517.4   |        
|                                             
|                                              |                     | Total Specialty |         |         | 1,209.3 |      |         |         | 1,198.4 |   |         |         | 1,003.9 | 
|                                             
|Total net written premiums                    |                     | $               | 7,369.5 |         |         | $    | 5,737.6 |         |         | $ | 5,030.5 |        
|                                             

Commercial Lines net written premiums were
$7.370 billion in 2002 compared to $5.738 billion in
2001 and $5.031 billion in 2000. The 2002 increase reflects
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, including
approximately $115.0 million relating to the termination of
certain reinsurance contracts in 2002. Net written premiums
related to Northland and Associates were $824.8 million in
2002, compared to $167.4 million in 2001 which only
includes the fourth quarter of 2001. The Commercial Lines
business of Northland and Associates is included with Commercial
Accounts. The 2001 increase reflected the impact of the
improving rate environment. The 2001 increase also includes the
full-year impact of the acquisition in 2000 of the renewal
rights for the Reliance Middle Market business, the acquisition
in 2000 of the renewal rights for the Frontier business in Gulf,
the impact of the ongoing business associated with the Reliance
Surety acquisition in Bond combined with net written premiums
related to the fourth quarter inclusion of Northland and
Associates in 2001. The inclusion of Northland and Associates in
the fourth quarter of 2001 added $167.4 million to full
year 2001 net written premiums. Included in Bond net written
premiums in 2000 is an increase of $130.7 million due to a
reinsurance transaction associated with the acquisition of the
Reliance Surety business.

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. National Accounts also includes participation in

42



---



##### 



state mandated residual market workers
compensation and automobile assigned risk plans. National
Accounts net written premiums were $734.6 million in 2002
compared to $418.9 million in 2001. This increase in net
written premiums was due to renewal price increases, higher new
business levels and the repopulation of residual market pools.
National Accounts net written premiums were $418.9 million in
2001 compared to $352.3 million in 2000. This increase was
primarily due to the purchase of less reinsurance, reflecting
the shift in business mix from guaranteed cost products to
loss-sensitive products, combined with the repopulation of the
involuntary pools.


Commercial Accounts serves primarily 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 increased 48% to $3.556 billion 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. Northland and Associates net written premiums
include an increase of approximately $115.0 million related
to the termination of certain reinsurance contracts. 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. 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. The one area not showing adequate
rate improvement, however, is the workers compensation
line and, accordingly, Commercial Accounts has not grown this
business. New business premiums in Commercial Accounts for 2002
were $733.0 million compared to $507.0 million in
2001. The business retention ratio for 2002 was 75%, up from 71%
for 2001. For Commercial Lines, 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 Northland and
Associates for comparison purposes. Commercial Accounts net
written premiums of $2.407 billion in 2001 were
$308.2 million above 2000 premium levels. This increase
reflected renewal price changes of 19%, favorable new business
in national property and the inclusion of Northland and
Associates in the fourth quarter of 2001.

Select Accounts serves small businesses through a
network of independent agents. Select Accounts net written
premiums were $1.870 billion in 2002 compared to
$1.713 billion in 2001 and $1.575 billion in 2000. The
increase in Select Accounts net written premiums primarily
reflected renewal price changes averaging 17% for 2002. New
business premiums in Select Accounts for 2002 were
$306.5 million compared to $275.8 million in 2001. The
business retention ratio for 2002, which was 80%, remained
strong and consistent with 2001. 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 multiperil and property lines of
business. The 2001 increase in Select Accounts net written
premiums primarily reflected price increases. This increase was
partially offset by the Companys continued disciplined
approach to underwriting and risk management. Renewal price
changes averaged 14% for 2001 and retention levels were
favorable and averaged 80%.

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 of $629.9 million in 2002 was $39.7 million
higher than 2001. The 2002 amount is 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. In addition, the 2001 amount is increased
by $34.1 million due to the termination of the Master Bond
Liability reinsurance treaty effective January 1, 2001.
Excluding these two reinsurance adjustments, Bond net written
premiums increased $91.3 million during 2002 compared to
2001. This increase reflects a favorable premium rate
environment and strong production growth in executive liability
product lines, which target middle and small market private
accounts. In addition, the surety product lines benefited from
higher premium rates in 2002. Bond net written premiums of
$590.2 million in 2001 were $234.4 million above 2000,
after an adjustment of $130.7 million in 2000 due to a
reinsurance transaction associated with the acquisition of the
Reliance Surety business. The $234.4 million increase was
primarily due to the full-year impact of the ongoing business
associated with the Reliance Surety acquisition and production
growth in Bonds Executive Liability product line group,
specifically its fidelity, directors and officers
liability and packaged product lines. The packaged product lines
combine fidelity insurance, 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s Executive Liability
product lines target middle and small market private accounts as
well as not-for-profit accounts. The growth in these product
lines is reflective of Bonds strategy to further enhance
its product and customer diversification through the faster
growing and larger executive liability market.

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 executive and

43



---



##### 



professional liability products. Gulf net written
premiums were $579.4 million in 2002, compared to
$608.2 million in 2001. Gulfs decision to exit
non-core businesses, including assumed reinsurance,
transportation, residual value and property, offset increases in
Gulfs core specialty lines, resulting in an overall
decrease in Gulf net written premiums. Gulf net written premiums
were $608.2 million in 2001, compared to
$517.4 million in 2000. This increase primarily reflected
the full-year impact of the renewal rights for the Frontier
business and participation in the London market.


Commercial Lines claims and expenses of
$10.039 billion in 2002 increased $3.531 billion from
2001 and increased $1.338 billion in 2001 compared to 2000.
The 2002 increase was primarily related to asbestos 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 the $644.0 million of losses
attributed to the effect of the terrorist attack in 2001.
Included in claims and expenses in 2002 is unfavorable prior
year reserve development of $3.162 billion compared to 2001
unfavorable prior year reserve development of
$16.6 million. The most significant component in 2002 prior
year reserve development was asbestos incurred losses which
increased $2.756 billion over 2001. For additional
information see  Asbestos Claims and
Litigation. Separately, the Company strengthened its
environmental reserves in the fourth quarter by
$100.0 million, bringing the total to $385.5 million,
and reduced its reserves for cumulative injuries other than
asbestos by $94.8 million to $553.6 million. These
actions were taken as a result of recent payment and settlement
experience. In addition, the Company strengthened prior year
reserves for certain run-off lines of business, including
assumed reinsurance, and experienced favorable development in
certain ongoing businesses. Claims and expenses for Northland
and Associates were $967.7 million in 2002, an increase of
$761.1 million over 2001 which only includes the fourth
quarter of 2001. The increase was also partially offset by the
elimination of goodwill amortization and by reduced catastrophe
losses. The 2001 increase was primarily due to higher
catastrophe losses primarily associated with the terrorist
attack on September 11th, increased loss cost trends,
including increased medical costs, auto repair costs, higher
losses and operating expenses associated with the growth in
premium and claims volume including the full-year impact of the
Reliance Surety acquisition and the acquisition of the renewal
rights for the Reliance Middle Market and Frontier businesses,
and the inclusion of Northland and Associates in the fourth
quarter of 2001, partially offset by higher favorable prior year
reserve development. The inclusion of Northland and Associates
in the fourth quarter of 2001 added $206.6 million to full
year 2001 claims and expenses.

There were no catastrophe losses in 2002 or 2000.
Catastrophe losses, net of taxes and reinsurance, were
$470.5 million in 2001. Catastrophe losses in 2001 were
primarily due to the terrorist attack on September 11th,
the Seattle earthquake and Tropical Storm Allison.

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

|                                                                                                                |              |      |       |      |  |      |       |      |   |  |       |       |  
|--------------------------------------------------------------------------------------------------------------- | ------------ | ---- | ----- | ---- |  | ---- | ----- | ---- | - |  | ----- | ----- | -
|                                                                                                               
|                                                                                                               
|(for the year ended December 31,)                                                                               |              | 2002 |       | 2001 |  | 2000
|                                                                                                               
|                                                                                                               
|GAAP combined ratio, excluding catastrophes,
    prior year reserve development, and goodwill
    amortization: |              |      |       |      |  |      |       |      |   |  |       |      
|Loss and LAE ratio                                                                                              |              |      | 66.6  | %    |  |      | 69.3  | %    |   |  | 73.9  | %    
|Underwriting expense ratio                                                                                      |              |      | 27.6  |      |  |      | 28.8  |      |   |  | 26.1  |      
|                                                                                                               
|                                                                                                                | Total        |      |       | 94.2 |  |      |       | 98.1 |   |  |       | 100.0 |  
|Catastrophes:                                                                                                   |              |      |       |      |  |      |       |      |   |  |       |      
|                                                                                                                | Natural      |      |       |     |  |      |       | 0.6  |   |  |       |      |  
|                                                                                                                | September 11 |      |       |     |  |      |       | 12.7 |   |  |       |      |  
|Prior year reserve development:                                                                                 |              |      |       |      |  |      |       |      |   |  |       |      
|                                                                                                                | Asbestos(1)  |      |       | 31.5 |  |      |       | 3.5  |   |  |       | 1.1   |  
|                                                                                                                | All other    |      |       | 3.2  |  |      |       | (3.2 | ) |  |       | (0.3  | )
|Goodwill amortization                                                                                           |              |      |      |      |  |      | 0.9   |      |   |  | 0.9   |      
|                                                                                                               
|GAAP combined ratio                                                                                             |              |      | 128.9 | %    |  |      | 112.6 | %    |   |  | 101.7 | %    
|                                                                                                               



|    |                                                                             
|--- | ----------------------------------------------------------------------------
|(1) | Excludes losses recovered under the Citigroup
    indemnification agreement.

Commencing in 2002, the GAAP underwriting expense
ratio has been computed using net earned premiums. Previously,
this ratio for GAAP purposes was computed using net written
premiums. Prior periods have been restated to conform to this
new presentation.

The deterioration in the 2002 GAAP combined ratio
includes the impact of higher prior year reserve development,
primarily due to asbestos, partially offset by no catastrophe
losses in 2002 compared to the impact of the terrorist attack on
September 11th on 2001, and the elimination of goodwill
amortization. The improvement in the GAAP combined ratio,
excluding catastrophes, prior year reserve development and
goodwill amortization, from 2001 to 2002, reflects an
improvement in the loss and LAE ratio and an improvement in the
underwriting expense ratio. The improvement in the loss and LAE
ratio is primarily due to the benefit of the favorable rate
environment and improved profitability from the Companys
continued effort to adjust business mix to areas generating rate
adequacy. The improvement in the underwriting expense ratio is
primarily attributed to the benefit of premium rate increases.

The deterioration in the 2001 GAAP combined ratio
resulted primarily from the impact of the terrorist attack on
September 11th. The improvement in the GAAP combined ratio,
excluding catastrophes, prior year reserve development and
goodwill amortization, from 2000 to 2001, reflects an
improvement in the loss and LAE ratio, partially

44



---



##### 



offset by a deterioration in the underwriting
expense ratio. The improvement in the loss and LAE ratio is
primarily due to premium growth related to rate increases, the
full-year impact of the ongoing business associated with the
Reliance Surety acquisition, the purchase of the renewal rights
for the Reliance Middle Market and Frontier businesses partially
offset by increased loss cost trends. The deterioration in the
underwriting expense ratio is primarily due to the impact of the
Bond business acquisition of the Reliance Surety business, which
generally has a higher underwriting expense ratio.


Personal Lines

| |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  | 
|

|                                                                                                |  |      |         |      |  |      |         |  |  |   |         | 
|----------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|(for the year ended December 31, in millions)                                                   |  | 2002 |         | 2001 |  | 2000
|                                                                                               
|                                                                                               
|Revenues                                                                                        |  | $    | 4,775.1 |      |  | $    | 4,453.7 |  |  | $ | 4,231.7 | 
|                                                                                               
|Net income before minority interest and
    cumulative effect of change in accounting principle |  | $    | 316.8   |      |  | $    | 241.9   |  |  | $ | 360.2   | 
|Minority interest, net of tax                                                                   |  |      |        |      |  |      |        |  |  |   | 16.6    | 
|Cumulative effect of change in accounting
    principle, net of tax                             |  |      |        |      |  |      | 0.5     |  |  |   |        | 
|                                                                                               
|Net income                                                                                      |  | $    | 316.8   |      |  | $    | 242.4   |  |  | $ | 343.6   | 
|                                                                                               

Net income in 2002 was $316.8 million
compared to $242.4 million in 2001 and $343.6 million
in 2000. Included in 2001 was a net loss of $41.6 million
related to the terrorist attack on September 11, 2001.
Included in 2000 was minority interest of $16.6 million
related to the January through April 2000 period when
approximately 14.8% of TIGHIs outstanding common stock was
not owned by TPC. During April 2000, TPC completed a cash tender
offer and merger, as a result of which TIGHI became TPCs
wholly-owned subsidiary. Personal Lines net income also includes
net realized investment gains (losses) of
$(28.5) million, $4.3 million and $(0.3) million
in 2002, 2001 and 2000, respectively.

The major components of operating income and a
reconciliation of operating income to net income is as follows:

| |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  | 
|

|                                                                                                                   |                          |      |       |       |   |      |       |        |   |   |       |       |  
|------------------------------------------------------------------------------------------------------------------ | ------------------------ | ---- | ----- | ----- | - | ---- | ----- | ------ | - | - | ----- | ----- | -
|(for the year ended December 31, in millions)                                                                      |                          | 2002 |       | 2001  |   | 2000
|                                                                                                                  
|                                                                                                                  
|Underwriting gain (loss), excluding
    catastrophes, prior year reserve development and goodwill
    amortization |                          | $    | 51.6  |       |   | $    | (16.6 | )      |   | $ | (3.2  | )    
|Catastrophes:                                                                                                      |                          |      |       |       |   |      |       |        |   |   |       |      
|                                                                                                                   | Natural                  |      |       | (54.7 | ) |      |       | (44.5  | ) |   |       | (53.6 | )
|                                                                                                                   | September 11             |      |       |      |   |      |       | (41.6  | ) |   |       |      |  
|Prior year reserve development                                                                                     |                          |      | 19.4  |       |   |      | 20.2  |        |   |   | 72.2  |      
|Goodwill amortization                                                                                              |                          |      |      |       |   |      | (18.5 | )      |   |   | (16.1 | )    
|                                                                                                                  
|                                                                                                                   | Underwriting gain (loss) |      |       | 16.3  |   |      |       | (101.0 | ) |   |       | (0.7  | )
|Net investment income                                                                                              |                          |      | 278.8 |       |   |      | 294.2 |        |   |   | 315.1 |      
|Other                                                                                                              |                          |      | 51.8  |       |   |      | 47.8  |        |   |   | 46.1  |      
|                                                                                                                  
|Operating income                                                                                                   |                          |      | 346.9 |       |   |      | 241.0 |        |   |   | 360.5 |      
|Realized investment gains (losses)                                                                                 |                          |      | (28.5 | )     |   |      | 4.3   |        |   |   | (0.3  | )    
|Restructuring charge                                                                                               |                          |      | (1.6  | )     |   |      | (3.4  | )      |   |   |      |      
|Cumulative effect of change in accounting
    principle                                                            |                          |      |      |       |   |      | 0.5   |        |   |   |      |      
|Minority interest                                                                                                  |                          |      |      |       |   |      |      |        |   |   | 16.6  |      
|                                                                                                                  
|Net income                                                                                                         |                          | $    | 316.8 |       |   | $    | 242.4 |        |   | $ | 343.6 |      
|                                                                                                                  

Operating income of $346.9 million for 2002
was $105.9 million higher than $241.0 million for
2001. Operating income in 2002 increased primarily due to
premium rate increases in excess of loss cost trends and the
$41.6 million impact of the terrorist attack on
September 11th on 2001 operating income. This was partially
offset by natural catastrophe losses of $54.7 million
compared to $44.5 million of natural catastrophe losses in
2001. Favorable reserve development was recognized, primarily in
automobile, due to the moderation in loss cost trends. The
elimination of goodwill amortization also contributed to the
increase in 2002 operating income. Despite the benefit of higher
average invested assets resulting from strong cash flows from
underwriting, 2002 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. Underwriting gain (loss),
excluding catastrophes, prior year reserve development and
goodwill amortization increased $68.2 million to
$51.6 million in 2002. The 2002 underwriting results
reflect an improved premium rate environment in both auto and
property and a moderation in the increase in loss cost trends.

Operating income of $241.0 million for 2001
was down $119.5 million compared to operating income of
$360.5 million in 2000. The decrease in operating income in
2001 reflects a net loss of $41.6 million related to the
impact of the terrorist attack on September 11th. Operating
income in 2001 was favorably impacted by natural catastrophe
losses of $44.5 million compared to $53.6 million of
natural catastrophe losses in 2000. Operating income in 2001 was
also impacted by lower favorable

45



---



##### 



prior year reserve development of $20.2 million
compared to $72.2 million in 2000. Also contributing to the
2001 decrease in operating income was a $20.9 million
decrease in net investment income from 2000, which largely
reflects the increase in dividends and debt repayments to
Citigroup and lower fixed income interest rates. Underwriting
loss, excluding catastrophes, prior year reserve development and
goodwill amortization decreased $13.4 million to
$16.6 million in 2001. The 2001 underwriting results
reflect the effects of increased loss cost trends, including
increased medical costs and auto repair costs, partially offset
by rate increases.


Revenues of $4.775 billion in 2002 increased
$321.4 million from 2001. The increase in revenues
reflected growth in earned premiums due to premium rate
increases and the full-year inclusion of Northland in 2002,
partially offset by realized investment losses in 2002 compared
to realized investment gains in 2001 and a decrease in net
investment income. Total revenues for Northland were
$123.0 million in 2002, an increase of $99.9 million
over 2001 which only includes the fourth quarter of 2001.
Revenues in 2001 were $4.454 billion, an increase of
$222.0 million compared to $4.232 billion in 2000. The
increase was primarily attributable to a $248.5 million
growth in earned premiums primarily due to rate increases and
$6.3 million of realized investment gains in 2001, compared
to $0.6 million realized investment losses in 2000. This
was partially offset by a $35.9 million decrease in net
investment income from 2000, which largely reflects the increase
in dividends and debt repayments to Citigroup and lower fixed
income interest rates. The inclusion of Northland in the fourth
quarter of 2001 added $23.1 million to full-year 2001
revenues.

Earned premiums increased $390.2 million to
$4.354 billion in 2002 from $3.964 billion in 2001.
The increase in earned premiums in 2002 was primarily due to
rate increases in all product lines and the full-year inclusion
of Northland in 2002. Earned premiums for Northland were
$112.1 million in 2002, an increase of $91.2 million
over 2001 which only includes the fourth quarter of 2001. Earned
premiums increased $248.5 million to $3.964 billion in
2001 from $3.715 billion in 2000 primarily due to rate
increases. The inclusion of Northland in the fourth quarter of
2001 added $20.9 million to full-year 2001 earned premiums.

Net investment income was $384.7 million in
2002, a decrease of $25.5 million from 2001. The decline
resulted from reduced returns in the Companys public
equity investments and the lower interest rate environment,
mostly offset by the benefit of higher average invested assets
resulting from strong cash flows from operations. Net investment
income was $410.2 million in 2001, a decrease of
$35.9 million from 2000. This decrease largely reflects the
increase in dividends and debt repayments to Citigroup and lower
fixed income interest rates.

Other revenues were $80.1 million in 2002, a
$6.8 million increase from 2001. Premium installment
charges are the primary source of Personal Lines other income.
The increase in other revenues was primarily due to the
full-year inclusion of Northland in 2002. Other revenues
increased $2.5 million to $73.3 million in 2001.

Personal Lines had approximately
5.5 million, 5.4 million and 5.4 million policies
in force at December 31, 2002, 2001 and 2000, respectively.

Net written premiums by product line were as
follows:

| |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  | 
|

|                                              |  |      |         |      |  |      |         |  |  |   |         | 
|--------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|(for the year ended December 31, in millions) |  | 2002 |         | 2001 |  | 2000
|                                             
|                                             
|Personal automobile                           |  | $    | 2,842.9 |      |  | $    | 2,590.7 |  |  | $ | 2,366.3 | 
|Homeowners and other                          |  |      | 1,732.1 |      |  |      | 1,517.2 |  |  |   | 1,446.5 | 
|                                             
|Total net written premiums                    |  | $    | 4,575.0 |      |  | $    | 4,107.9 |  |  | $ | 3,812.8 | 
|                                             

Personal Lines net written premiums in 2002 were
$4.575 billion, compared to $4.108 billion in 2001.
The increase in net written premiums of $467.1 million in
2002 was principally a result of renewal price increases in both
the Automobile and Homeowners and Other lines of business and
the full-year inclusion of Northland in 2002. Net written
premiums for Northland were $111.0 million in 2002, an
increase of $85.7 million over 2001 which only includes the
fourth quarter of 2001. Personal Lines net written premiums in
2001 were $4.108 billion, a $295.1 million increase
compared to $3.813 billion in 2000. The increase in 2001
reflects growth in target markets served by independent agents
and growth in affinity group marketing and joint marketing
arrangements, partially offset by continued emphasis on
disciplined underwriting and risk management. Rate increases
implemented in both the automobile and homeowners product lines
were the primary contributors to the growth in net written
premiums in 2001. The inclusion of Northland in the fourth
quarter of 2001 added $25.3 million to full-year 2001 net
written premiums.

Automobile net written premiums increased 10% to
$2.843 billion in 2002. 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. 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. Policy retention levels for
standard voluntary business remained favorable and averaged 80%.
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 increased 9% to
$2.591 billion in 2001, 8% excluding the impact of

46



---



##### 



Northland. Renewal price changes for standard
voluntary business averaged 7% for 2001. Policy retention levels
for 2001 standard voluntary business were comparable to 2000 and
averaged 79%.


Homeowners and Other net written premiums
increased 14% to $1.732 billion 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. Retention levels
also remained favorable and averaged 80%. Homeowners and Other
net written premiums increased 5% to $1.517 billion in
2001. Renewal price changes averaged 10% for 2001 and retention
levels were favorable and averaged 80%.

Production through the Companys independent
agents in Personal Lines, which represents over 81% of Personal
Lines total net written premiums, was up 13% to $3.736 billion
for 2002, including the impact of Northland. Net written
premiums through channels other than independent agents was up
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. Production through the
Companys independent agents in Personal Lines was up 9% to
$3.308 billion in 2001. Net written premiums through
channels other than independent agents was up 2% to
$800.0 million in 2001.

Personal Lines claims and expenses were
$4.331 billion in 2002 compared to $4.115 billion in
2001 and $3.715 billion in 2000. The 2002 increase was
primarily attributed to the inclusion in 2002 of the full-year
results of Northland and increased loss cost trends partially
offset by the effects of the terrorist attack on
September 11th in 2001. Claims and expenses for Northland
were $121.8 million in 2002, an increase of
$97.1 million over 2001 which only includes the fourth
quarter of 2001. During 2002, Personal Lines experienced a
moderation in the rise in auto loss costs. The 2002 amount
includes $29.9 million of favorable prior year reserve
development versus $31.0 million in 2001. Also impacting
year over year results were higher natural catastrophe losses
and the benefit of the elimination of goodwill amortization. The
increase in claims and expenses in 2001 reflects
$60.0 million of catastrophe losses associated with the
terrorist attack on September 11th. The increase also
reflects the impact of increased loss cost trends and lower
favorable prior year reserve development. The inclusion of
Northland in the fourth quarter of 2001 added $24.7 million
to full-year 2001 claims and expenses.

Catastrophe losses, net of taxes and reinsurance,
were $54.7 million, $86.1 million and
$53.6 million in 2002, 2001 and 2000, respectively.
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 icestorms
in the Southeast in the fourth quarter. Catastrophe losses in
2001 were primarily due to the terrorist attack on
September 11th, Tropical Storm Allison and wind and
hailstorms in the Midwest and Texas in the second quarter.
Catastrophe losses in 2000 were primarily due to Texas, Midwest
and Northeast wind and hailstorms in the second quarter and
hailstorms in Louisiana and Texas in the first quarter.

GAAP combined ratios for Personal Lines were as
follows:

| |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  | 
|

|                                                                                                                |              |      |      |      |  |      |       |       |  |  |       |       | 
|--------------------------------------------------------------------------------------------------------------- | ------------ | ---- | ---- | ---- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|(for the year ended December 31,)                                                                               |              | 2002 |      | 2001 |  | 2000
|                                                                                                               
|                                                                                                               
|GAAP combined ratio, excluding catastrophes,
    prior year reserve development, and goodwill
    amortization: |              |      |      |      |  |      |       |       |  |  |       |      
|Loss and LAE ratio                                                                                              |              |      | 72.4 | %    |  |      | 74.5  | %     |  |  | 74.4  | %    
|Underwriting expense ratio                                                                                      |              |      | 25.8 |      |  |      | 26.3  |       |  |  | 26.0  |      
|                                                                                                               
|                                                                                                                | Total        |      |      | 98.2 |  |      |       | 100.8 |  |  |       | 100.4 | 
|Catastrophes:                                                                                                   |              |      |      |      |  |      |       |       |  |  |       |      
|                                                                                                                | Natural      |      |      | 1.9  |  |      |       | 1.7   |  |  |       | 2.2   | 
|                                                                                                                | September 11 |      |      |     |  |      |       | 1.6   |  |  |       |      | 
|Prior year reserve development                                                                                  |              |      | (0.7 | )    |  |      | (0.8  | )     |  |  | (3.0  | )    
|Goodwill amortization                                                                                           |              |      |     |      |  |      | 0.5   |       |  |  | 0.4   |      
|                                                                                                               
|GAAP combined ratio                                                                                             |              |      | 99.4 | %    |  |      | 103.8 | %     |  |  | 100.0 | %    
|                                                                                                               

Commencing in 2002, the GAAP underwriting expense
ratio has been computed using net earned premiums. Previously,
this ratio for GAAP purposes was computed using net written
premiums. Prior periods have been restated to conform to this
new presentation.

The improvement in the 2002 GAAP combined ratio
includes the impact of slightly higher natural catastrophes in
2002, the impact of the terrorist attack on September 11th
on 2001, slightly lower favorable prior year reserve development
and the elimination of goodwill amortization. The improvement in
the GAAP combined ratio excluding catastrophes, prior year
reserve development and goodwill amortization, from 2001 to
2002, reflects an improvement in both the loss and LAE ratio and
the underwriting expense ratio. The improvement in the loss and
LAE ratio is primarily attributed to rate increases and the
moderation in loss cost trends. The improvement in the
underwriting expense ratio is primarily attributed to the
benefit of premium rate increases. An increase in contingent
commissions, resulting from the improved underwriting results,
offset an overall reduction in other expenses.

The deterioration in the 2001 GAAP combined ratio
includes the impact of September 11th, and lower favorable
prior year reserve development partially offset by lower natural
catastrophes in 2001. The deterioration in the GAAP combined
ratio, excluding catastrophes, prior year reserve development
and goodwill amortization, from 2000 to 2001, reflects a
deterioration in both the loss and

47



---



##### 



LAE ratio and in the underwriting expense ratio.
The deterioration in the loss and LAE ratio reflects increased
loss cost trends partially offset by the growth in premiums due
to rate increases. The deterioration in the underwriting expense
ratio is due to higher commission expense associated with the
mix of business.


Interest Expense and Other

| |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  | 
|

|                                  |  |      |       |      |  |      |        |   |  |   |        |  
|--------------------------------- |  | ---- | ----- | ---- |  | ---- | ------ | - |  | - | ------ | -
|(for the year ended               |  |      |       |      |  |     
|December 31, in millions)         |  | 2002 |       | 2001 |  | 2000
|                                 
|                                 
|Revenues                          |  | $    | 1.0   |      |  | $    | 5.6    |   |  | $ | 3.7    |  
|                                 
|                                 
|Net loss before minority interest |  | $    | (97.6 | )    |  | $    | (139.5 | ) |  | $ | (208.0 | )
|Minority interest, net of tax     |  |      |      |      |  |      |       |   |  |   | (4.7   | )
|                                 
|Net loss                          |  | $    | (97.6 | )    |  | $    | (139.5 | ) |  | $ | (203.3 | )
|                                 
|                                 

The primary component of net loss before minority
interest for 2002, 2001 and 2000 was after-tax interest expense
of $99.6 million, $133.2 million and
$192.1 million, respectively. Net loss in 2000 reflects
minority interest of $4.7 million related to the January
through April 2000 period when approximately 14.8% of
TIGHIs outstanding common stock was not owned by TPC.
During April 2000, TPC completed a cash tender offer and merger,
as a result of which TIGHI became TPCs wholly owned
subsidiary. The reduction in interest expense in 2002 is due to
lower average interest-bearing debt levels primarily related to
the repayment of debt obligations to Citigroup in the 2002 first
quarter. The decrease in interest expense in 2001 is due to
lower outstanding debt and lower interest rates. Included in
2001 net loss 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 judicial
interpretations and other trends that have attempted to maximize
insurance availability for asbestos claims, from both a coverage
and liability standpoint, far beyond the intent of the
contracting parties. These policies generally were issued prior
to 1980. 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 an increase in
the number of 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., and who 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. See  Legal
Proceedings. Particularly during the last few months of
2001 and continuing through 2002, the trends described above
both accelerated and became more visible. Accordingly, there is
a high degree of uncertainty with respect to future exposure
from asbestos claims.

Increasingly, policyholders have been asserting
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. The Company expects this trend to continue. 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.

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 and 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. See  Legal
Proceedings.

48



---



##### 



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. Once the gross ultimate
exposure for indemnity and related claim adjustment expense is
determined for each policyholder by each policy year, the
Company calculates 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 meaningful data from which an 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. Losses paid have
increased in 2002 compared to prior years. There has been an
acceleration in recent quarters in the amount of payments,
including those from prior settlements of coverage disputes
entered into between the Company and certain of its
policyholders. For 2002, approximately 54% of total paid losses
relate to policyholders with whom the Company previously entered
into settlement agreements that limit the Companys
liability. Net losses paid were $361.1 million for 2002
compared to $174.8 million for 2001 reflective of the items
described above.

At December 31, 2002, asbestos reserves were
$3.404 billion, an increase of $2.584 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. This charge was partially offset by an after tax benefit
of $520.0 million, included in revenues, related to
recoveries from full utilization of the Citigroup
indemnification agreement. The increase in reserves is based on
the Companys analysis of asbestos claim 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 an examination of
recent claim activity from policyholders reporting claims for
the first time, and a review of past settlements.

The Companys asbestos study segmented
asbestos exposures into the following categories: policyholders
with settlement agreements, other policyholders with active
claims, assumed reinsurance and reserves for unallocated
incurred but not reported (IBNR) claims. The following
table displays asbestos reserves by policyholder category:

|                                         |                     |               |       |         |  |             |       |       |  |   |         |       | 
|---------------------------------------- | ------------------- | ------------- | ----- | ------- |  | ----------- | ----- | ----- |  | - | ------- | ----- | 
|                                        
|                                        
|(at and for the year ended              
|December 31, 2002                        |                     | Number of     |       | Total   |  | Asbestos   
|$ in millions)                           |                     | Policyholders |       | Paid(1) |  | Reserves(2)
|                                        
|                                        
|Policyholders with settlement agreements |                     |               | 26    |         |  | $           | 196.1 |       |  | $ | 942.1   |      
|Other policyholders with active claims:  |                     |               |       |         |  |             |       |       |  |   |         |      
|                                         | Home office review  |               |       | 264     |  |             |       | 143.6 |  |   |         | 809.4 | 
|                                         | Field office review |               |       | 807     |  |             |       | 4.9   |  |   |         | 110.0 | 
|Assumed reinsurance                      |                     |               |       |         |  |             | 16.5  |       |  |   | 242.8   |      
|Unallocated IBNR                         |                     |               |       |         |  |             |       |       |  |   | 1,300.0 |      
|                                        
|Total                                    |                     |               | 1,097 |         |  | $           | 361.1 |       |  | $ | 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 agreements.
Structured agreements are arrangements under which policyholders
and/or plaintiffs agree to fixed financial amounts to be paid at
scheduled times. In August 2002, the Company entered into a
settlement agreement with Shook & Fletcher Insulation
Co. (Shook) settling coverage litigation under insurance
policies which the Company issued to Shook. After payments made
in the fourth quarter of 2002 under this settlement, the
remaining obligations are valued at approximately
$99.2 million (after reinsurance and discounting). 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 based upon substantial progress in
negotiations during the fourth quarter of 2002. The
Companys single payment contribution to the proposed
settlement, expected in June 2004, is approximately
$388.8 million after

49



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##### 



reinsurance. Coverage in place arrangements
represent agreements with major policyholders on specified
amounts of coverage to be provided. Payments may include annual
maximums and are only made when valid claims are presented.
Wellington accounts refer to the 35 remaining defendants that
were parties to a 1985 settlement agreement settling their
asbestos claims. This agreement is similar to a coverage in
place arrangement in which the parties have agreed on specific
amounts of coverage and the terms on which the coverage can be
accessed.


Other policyholders with active claims are
annually 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.

Assumed reinsurance exposure primarily consists
of reinsurance of excess coverage, including various pool
participations. In addition to amounts in reserve for specific
policyholders or groups of policyholders, as described above,
the Company has established an unallocated IBNR reserve to
respond to adverse development for existing policyholders, new
claims from policyholders reporting claims for the first time
and for policyholders for which there is, or may be litigation.

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

|                                                     |        |      |   |         |   |      |   |         |   |  |   |         |  
|---------------------------------------------------- | ------ | ---- | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                                    
|                                                    
|(at and for the year ended December 31, in millions) |        | 2002 |   | 2001    |   | 2000
|                                                    
|                                                    
|Beginning reserves:                                  |        |      |   |         |   |      |   |         |   |  |   |        
|                                                     | Direct |      | $ | 1,046.0 |   |      | $ | 1,005.4 |   |  | $ | 1,049.9 |  
|                                                     | Ceded  |      |   | (225.6  | ) |      |   | (199.0  | ) |  |   | (223.0  | )
|                                                    
|                                                     | Net    |      |   | 820.4   |   |      |   | 806.4   |   |  |   | 826.9   |  
|Incurred losses and loss expenses:                   |        |      |   |         |   |      |   |         |   |  |   |        
|                                                     | Direct |      |   | 3,660.2 |   |      |   | 282.7   |   |  |   | 187.4   |  
|                                                     | Ceded  |      |   | (715.2  | ) |      |   | (93.9   | ) |  |   | (137.4  | )
|Losses paid:                                         |        |      |   |         |   |      |   |         |   |  |   |        
|                                                     | Direct |      |   | 419.1   |   |      |   | 242.1   |   |  |   | 231.9   |  
|                                                     | Ceded  |      |   | (58.0   | ) |      |   | (67.3   | ) |  |   | (161.4  | )
|                                                    
|Ending 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   |  
|                                                    

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

ENVIRONMENTAL CLAIMS AND LITIGATION

The Company continues to receive claims from
policyholders which 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.

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, 2002, approximately
81% of the net environmental reserve (approximately
$311.8 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 19% of the
net environmental reserve (approximately $73.7 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

50



---



##### 



policy issued to the policyholder for past,
present and future environmental liabilities as well as
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. 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, for each
policyholder on a quarterly basis. 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 substantial reduction in the number of
policyholders with pending coverage litigation disputes, a
continued reduction in the number of policyholders tendering for
the first time an environmental remediation-type claim to the
Company, as well as a continued reduction in the number of
policyholders with active environmental claims.

As of December 31, 2002, the number of
policyholders with pending coverage litigation disputes
pertaining to environmental claims was 205, approximately 5%
less than the number pending as of December 31, 2001, and
approximately 16% less than the number pending as of
December 31, 2000. Also, in 2002, there were 110
policyholders tendering for the first time an environmental
remediation-type claim to the Company. This compares to
134 policyholders doing so in 2001 and
158 policyholders in 2000. The Companys review of
policyholders tendering claims for the first time has indicated
that they are fewer in number and lower in severity. More
specifically, policyholders are smaller in size, have fewer
sites per policyholder, they are lower tier defendants, and
regulatory agencies are utilizing risk based analysis and more
efficient clean-up technologies.

The Company has resolved, for approximately
$1.952 billion (before reinsurance), the environmental
liabilities presented by 5,807, or 92%, of the total 6,342
policyholders who have tendered environmental claims to the
Company through December 31, 2002. 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, recent increases in settlement amounts have led the
Company to increase its environmental reserves by
$100.0 million in the fourth quarter of 2002.

51



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##### 



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

|                                                     |        |      |   |       |   |      |   |        |   |  |   |        |  
|---------------------------------------------------- | ------ | ---- | - | ----- | - | ---- | - | ------ | - |  | - | ------ | -
|                                                    
|                                                    
|(at and for the year ended December 31, in millions) |        | 2002 |   | 2001  |   | 2000
|                                                    
|                                                    
|Beginning reserves:                                  |        |      |   |       |   |      |   |        |   |  |   |       
|                                                     | Direct |      | $ | 478.8 |   |      | $ | 668.8  |   |  | $ | 801.0  |  
|                                                     | Ceded  |      |   | (82.8 | ) |      |   | (110.9 | ) |  |   | (125.4 | )
|                                                    
|                                                     | Net    |      |   | 396.0 |   |      |   | 557.9  |   |  |   | 675.6  |  
|Incurred losses and loss expenses:                   |        |      |   |       |   |      |   |        |   |  |   |       
|                                                     | Direct |      |   | 153.9 |   |      |   | 57.8   |   |  |   | 74.9   |  
|                                                     | Ceded  |      |   | (3.8  | ) |      |   | (12.1  | ) |  |   | (10.5  | )
|Losses paid:                                         |        |      |   |       |   |      |   |        |   |  |   |       
|                                                     | Direct |      |   | 184.9 |   |      |   | 247.8  |   |  |   | 207.1  |  
|                                                     | Ceded  |      |   | (24.3 | ) |      |   | (40.2  | ) |  |   | (25.0  | )
|                                                    
|Ending reserves:                                     |        |      |   |       |   |      |   |        |   |  |   |       
|                                                     | Direct |      |   | 447.8 |   |      |   | 478.8  |   |  |   | 668.8  |  
|                                                     | Ceded  |      |   | (62.3 | ) |      |   | (82.8  | ) |  |   | (110.9 | )
|                                                    
|                                                     | Net    |      | $ | 385.5 |   |      | $ | 396.0  |   |  | $ | 557.9  |  
|                                                    

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, 2002
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.

CUMULATIVE INJURY OTHER THAN ASBESTOS (CIOTA) CLAIMS

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

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

To the extent disputes exist between the Company
and a policyholder regarding the coverage available for CIOTA
claims, the Company resolves the disputes, where feasible,
through settlement with the policyholder or through coverage
litigation. Historically, the Companys experience has
indicated that policyholders with potentially significant
environmental and/or asbestos exposures, may often have other
CIOTA exposures or CIOTA claims pending with the Company.
Generally, the terms of a settlement agreement set forth the
nature of the Companys participation in resolving CIOTA
claims and the scope of coverage to be

52



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##### 



provided by the Company, and contain the
appropriate indemnities and hold harmless provisions to protect
the Company. These settlements generally eliminate uncertainties
for the Company regarding the risks extinguished, including the
risk that losses would be greater than anticipated due to
evolving theories of tort liability or unfavorable coverage
determinations. The Companys approach also has the effect
of determining losses at a date earlier than would have occurred
in the absence of these settlement agreements. On the other
hand, in cases where future developments are favorable to
insurers, this approach could have the effect of resolving
claims for amounts in excess of those that the Company
ultimately would have paid had the claims not been settled in
this manner. The Company decreased CIOTA reserves by
$94.8 million in the fourth quarter of 2002 reflective of
lower levels of paid activity during recent periods.


At December 31, 2002, approximately 77%
(approximately $425.0 million) of the net CIOTA reserve
represents incurred but not reported losses for which the
Company has not received any specific claims. The balance,
approximately 23% of the net aggregate reserve (approximately
$128.6 million), is for pending CIOTA claims.

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

|                                                     |        |      |   |        |   |      |   |         |   |  |   |         |  
|---------------------------------------------------- | ------ | ---- | - | ------ | - | ---- | - | ------- | - |  | - | ------- | -
|                                                    
|                                                    
|(at and for the year ended December 31, in millions) |        | 2002 |   | 2001   |   | 2000
|                                                    
|                                                    
|Beginning reserves:                                  |        |      |   |        |   |      |   |         |   |  |   |        
|                                                     | Direct |      | $ | 893.4  |   |      | $ | 1,078.6 |   |  | $ | 1,184.3 |  
|                                                     | Ceded  |      |   | (183.4 | ) |      |   | (279.5  | ) |  |   | (312.9  | )
|                                                    
|                                                     | Net    |      |   | 710.0  |   |      |   | 799.1   |   |  |   | 871.4   |  
|Incurred losses and loss expenses:                   |        |      |   |        |   |      |   |         |   |  |   |        
|                                                     | Direct |      |   | (89.0  | ) |      |   | (114.4  | ) |  |   | 26.5    |  
|                                                     | Ceded  |      |   | (11.1  | ) |      |   | 69.5    |   |  |   | (10.6   | )
|Losses paid:                                         |        |      |   |        |   |      |   |         |   |  |   |        
|                                                     | Direct |      |   | 60.9   |   |      |   | 70.8    |   |  |   | 132.2   |  
|                                                     | Ceded  |      |   | (4.6   | ) |      |   | (26.6   | ) |  |   | (44.0   | )
|                                                    
|Ending reserves:                                     |        |      |   |        |   |      |   |         |   |  |   |        
|                                                     | Direct |      |   | 743.5  |   |      |   | 893.4   |   |  |   | 1,078.6 |  
|                                                     | Ceded  |      |   | (189.9 | ) |      |   | (183.4  | ) |  |   | (279.5  | )
|                                                    
|                                                     | Net    |      | $ | 553.6  |   |      | $ | 710.0   |   |  | $ | 799.1   |  
|                                                    

INVESTMENT PORTFOLIO

The Companys invested assets at
December 31, 2002 totaled $38.425 billion, including
$3.599 billion 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. Adjusting for the effect of securities in process
of settlement, invested assets at December 31, 2002 totaled
$34.826 billion, of which 90% 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 7% in other investments. Excluding the impact
of securities lending, unrealized investment gains and losses,
receivables for investment sales and payables on investment
purchases, the pre-tax average yield was 6.0%, 6.9% and 7.6% for
the years ended December 31, 2002, 2001 and 2000,
respectively, and the after-tax average yield was 4.4%, 5.0% and
5.5% for the years ended December 31, 2002, 2001 and 2000,
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, 2002 totaled $30.003
billion, comprising $29.462 billion of publicly traded
fixed maturities and $541.6 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, 2002 were
Aa2 and Baa1, respectively. Included in the fixed maturity
portfolio at that date was approximately $1.945 billion of
below investment grade securities. The average duration of the
fixed maturity portfolio, including short-term investments, was
5.0 years as of December 31, 2002, or 5.8 years
excluding short-term investments.

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, 2002, in millions) |                                     | Value    |   | Carrying Value  
|                                   
|                                   
|Quality Rating:                     |                                     |          |   |                  |  |  |  |      
|                                    | Aaa                                 |          | $ | 17,610.2         |  |  |  | 58.7  | %
|                                    | Aa                                  |          |   | 5,271.0          |  |  |  | 17.6  |  
|                                    | A                                   |          |   | 2,299.3          |  |  |  | 7.6   |  
|                                    | Baa                                 |          |   | 2,877.8          |  |  |  | 9.6   |  
|                                   
|                                    | Total investment grade              |          |   | 28,058.3         |  |  |  | 93.5  |  
|                                    | Non-investment grade                |          |   | 1,944.9          |  |  |  | 6.5   |  
|                                   
|                                    | Total fixed maturity
    investment |          | $ | 30,003.2         |  |  |  | 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.

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At December 31, 2002, the Company held CMOs
with a fair value of $4.120 billion. Approximately 58% 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 $4.815 billion of GNMA, FNMA,
FHLMC or FHA mortgage-backed pass-through securities at
December 31, 2002. Virtually all of these securities are
rated Aaa.

The Companys equity investments are
primarily through private equity and arbitrage partnerships,
which are subject to more volatility than the Companys
fixed income investments, but historically have provided a
higher return. At December 31, 2002, the carrying value of
the Companys investments in private equity and arbitrage
partnerships was $1.611 billion.

OUTLOOK

The 2002 year saw 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 and has significantly reduced the acquisition activity
of the industry.

A variety of other factors continue to affect the
property and casualty insurance market and the Companys
core business outlook, including improvement in pricing in the
commercial lines marketplace, 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 the Companys position as a consistently profitable
market leader and a cost-effective provider of property and
casualty insurance in the United States.

Changes in the general interest rate environment
affect the returns available on new investments. While a rising
interest rate environment enhances the returns available, it
reduces the market value of existing fixed maturity investments
and the availability of gains on disposition. A decline in
interest rates reduces the return available on new investments,
but creates the opportunity for realized investment gains on
disposition of fixed maturity investments. In 2002, interest
rates declined to their lowest levels since the 1950s, and
equity returns were negative for the second consecutive year.
These trends may continue into 2003, reducing the return
available on the investment of funds.

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. The
Company believes that 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 is 7% for 2003, 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 $570.0 million for 2003
subject to final rules to be established by the
U.S. Treasury. Due to the high level of the deductible, the
Company believes that the bill will have little impact on the
price or availability of terrorism coverage in the marketplace.

54



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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.

Commercial Lines

In 2002, the trend of higher rates continued in
Commercial Lines. Prices generally rose throughout the year,
although some of the increases varied significantly by region
and business segment. 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 significant rate increases and more restrictive
terms and conditions, for certain coverages.

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 guaranteed cost or
retrospectively rated insurance policy, pricing improved during
2002 and 2001. The Company has benefited from higher rates and
believes that pricing will continue to stay firm into 2003.
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 2002 will continue into 2003. 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
continue to grow significantly as the primary market is firming.
Premium that the Company services for these pools grew 91% in
2002 compared to 2001 and is expected to continue to grow.

Commercial Accounts achieved double-digit price
increases on renewal business during 2002 and 2001, improving
the overall profit margin in this business, more than offsetting
the impacts of rising loss cost and medical inflation,
reinsurance costs and lower investment yields. New business
levels also increased during 2002 across most products but
especially for property coverages where Commercial Accounts
benefited from the Companys property underwriting
specialization, financial strength and limits capacity. The
Company will continue to seek significant rate increases in
2003, as pricing in some areas and business segments, such as
workers compensation, still has not improved to the point
of producing acceptable returns. However, the rate of increase
may decline modestly as compared to the past two years.

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 discussed above. Net written premium for these
combined operations was $86.8 million in 2002.

In Select Accounts, the trend toward increased
pricing on renewal business that started in late 1999 gained
momentum in 2000 and 2001 and continued to improve during 2002.
Prices generally rose during this time frame while customer
retention remained consistent with prior periods. 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
2003, however the rate of increase may decline modestly as
compared to the past year. Loss cost trends in Select Accounts
improved across major lines in 2002 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.

Bond achieved significant growth in 2002 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. The decrease in capacity in the surety
marketplace is expected to continue to create opportunities for
further price increases for all surety products in 2003,
although the increased cost of reinsurance will offset some of
the positive impact. 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. In addition, a decrease
in reinsurance capacity will allow further price increases for
all executive liability products in 2003. Bonds focus
remains on selective underwriting,

55



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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. Although
specific increases varied by region, industry and product,
improvement was most evident in the directors and
officers, professional liability and umbrella lines of
business, with lesser increases achieved in the excess and
surplus lines of business. The favorable impact from rate
improvement continues to be partially offset by rising loss cost
trends. At the end of February 2003, Gulf resolved a claims
coverage dispute with a policyholder relating to a run-off
product line. The settlement will result in a charge by the
Company of approximately $68.0 million after reinsurance,
tax and minority interest.

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 asbestos study 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, control operating expenses, keep prices
competitive and aligned with loss trend, and manage its exposure
to catastrophe losses.

During 2002, the personal auto market place
experienced widespread rate increases, as companies attempted to
restore profitability after years of unacceptable underwriting
and investment yields. As a result, premium growth is expected
to outpace growth in losses and expenses in 2003. Personal Lines
will continue to maintain its underwriting discipline and will
continue to increase auto rates as needed to achieve acceptable
returns and to offset inflationary pressures.

Market conditions for property insurance changed
in 2002, as the industry experienced significant rate increases,
scaled back coverages, and reduced new business initiatives to
improve profitability. Personal Lines had implemented these
actions in the past several years, and has achieved
significantly improved profit results relative to the industry.
Personal Lines will maintain its underwriting discipline and
will continue to increase property rates as needed to achieve
acceptable returns and to offset inflationary pressures.

TRANSACTIONS WITH FORMER AFFILIATES

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
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 $47.2 million for the period from
April 1, 2002 through December 31, 2002. Either party
may terminate the agreement effective on the end of a month upon
90 days prior notice. 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.

See note 16 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

The Companys principal asset is the capital
stock of TIGHI and its insurance subsidiaries.

The liquidity requirements of the Companys
business have been met primarily by funds generated from
operations, asset maturities and income received on investments.
Cash provided from these sources is used primarily for claims

56



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and claim adjustment expense payments and
operating expenses. Catastrophe claims, the timing and amount of
which are inherently unpredictable, may create increased
liquidity requirements. 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. Additional sources of cash
flow include the sale of invested assets and financing
activities. It is the opinion of the Companys management
that the Companys future liquidity needs will be met from
all of the above sources.


Net cash flows are generally invested in
marketable securities. The Company closely monitors the duration
of these investments, and investment purchases and sales are
executed with the objective of having adequate funds available
to satisfy its maturing liabilities. As the Companys
investment strategy focuses on asset and liability durations,
and not specific cash flows, asset sales may be required to
satisfy obligations and/or rebalance asset portfolios. The
Companys invested assets at December 31, 2002 totaled
$38.425 billion, including $3.599 billion 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. Adjusting
for the effect of securities in process of settlement, invested
assets at December 31, 2002 totaled $34.826 billion,
of which 90% 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 7% in other
investments.

Notes payable to former affiliates at
December 31, 2002 was as follows:

|                                         |  |  |        | 
|---------------------------------------- |  |  | ------ | 
|                                        
|                                        
|(in millions)                           
|                                        
|                                        
|3.60% Note due 2003 under line of credit |  |  | $500.0 | 
|Floating rate loan under line of credit  |  |  | 200.0  | 
|                                        
|Total                                    |  |  | $700.0 | 
|                                        

Long-term debt and convertible notes outstanding
at December 31, 2002 was as follows:

|                                                           |  |   |         | 
|---------------------------------------------------------- |  | - | ------- | 
|                                                          
|                                                          
|(in millions)                                             
|                                                          
|                                                          
|Promissory Note due 2004                                   |  | $ | 550.0   | 
|6.75% Notes due 2006                                       |  |   | 150.0   | 
|7.81% Note various due dates through 2011                  |  |   | 27.0    | 
|7.75% Notes due 2026                                       |  |   | 200.0   | 
|Convertible junior subordinated notes payable due
    2032 |  |   | 892.5   | 
|Convertible notes payable due 2032                         |  |   | 49.7    | 
|                                                          
|                                                           |  |   | 1,869.2 | 
|Debt issuance costs                                        |  |   | 25.5    | 
|                                                          
|Total                                                      |  | $ | 1,843.7 | 
|                                                          

The Companys cash flow needs include
shareholder dividends and debt service. TPC and TIGHI are
holding companies and have no direct operations. Accordingly,
TPC and TIGHI meet cash flow needs primarily through dividends
from operating subsidiaries. In addition, TIGHI has available to
it a $250.0 million revolving line of credit from
Citigroup. TIGHI pays a commitment fee to Citigroup for that
line of credit, which expires in 2006. Borrowings under this
line of credit carry a variable interest rate based upon LIBOR
plus 50 basis points. At December 31, 2002, borrowings
under this revolving line of credit were $200.0 million.
The Company expects to repay all of this debt by the end of the
first quarter of 2003. TIGHI also has an additional
$500.0 million revolving line of credit agreement from
Citigroup, which expires in December 2006. At December 31,
2002, current borrowings under this line of credit, which mature
on November 7, 2003 and carry a fixed interest rate of
3.60%, were $500.0 million.

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, TPC entered into a note agreement with Citigroup.
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 repaid 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. 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 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.

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.

57



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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 promissory note. The Floating Rate Notes also carry a
variable interest rate of LIBOR plus 25 basis points per annum
and are callable by the Company after August 5, 2003. The
Company expects to repay substantially all of this new debt by
the end of 2003.

Contractual obligations at December 31, 2002
were as follows:

|                                                                                                                                           |  |           |         |        |  |       |       |         |  |       |       |  |  |   |      |  |  |   |         | 
|------------------------------------------------------------------------------------------------------------------------------------------ |  | --------- | ------- | ------ |  | ----- | ----- | ------- |  | ----- | ----- |  |  | - | ---- |  |  | - | ------- | 
|                                                                                                                                          
|                                                                                                                                          
|Payments Due by Period                                                                                                                     |  | Less than |         | 1-3    |  | 4-5   |       | After 5
|(in millions)                                                                                                                              |  | Total     |         | 1 Year |  | Years |       | Years   |  | Years
|                                                                                                                                          
|                                                                                                                                          
|Notes payable to former affiliates                                                                                                         |  | $         | 700.0   |        |  | $     | 700.0 |         |  | $     |      |  |  | $ |     |  |  | $ |        | 
|Long-term debt                                                                                                                             |  |           | 927.0   |        |  |       | 3.0   |         |  |       | 712.0 |  |  |   | 6.0  |  |  |   | 206.0   | 
|Convertible junior subordinated notes payable                                                                                              |  |           | 892.5   |        |  |       |      |         |  |       |      |  |  |   |     |  |  |   | 892.5   | 
|Convertible notes payable                                                                                                                  |  |           | 49.7    |        |  |       |      |         |  |       |      |  |  |   |     |  |  |   | 49.7    | 
|TIGHI-obligated mandatorily redeemable securities
    of subsidiary trusts holding solely junior subordinated debt
    securities of TIGHI |  |           | 900.0   |        |  |       |      |         |  |       |      |  |  |   |     |  |  |   | 900.0   | 
|Operating leases                                                                                                                           |  |           | 301.4   |        |  |       | 84.5  |         |  |       | 150.5 |  |  |   | 39.6 |  |  |   | 26.8    | 
|                                                                                                                                          
|                                                                                                                                           |  | $         | 3,770.6 |        |  | $     | 787.5 |         |  | $     | 862.5 |  |  | $ | 45.6 |  |  | $ | 2,075.0 | 
|                                                                                                                                          

In the normal course of business, the Company has
unfunded commitments to partnerships in which it invests. These
commitments were $864.3 million and $1.025 billion at
December 31, 2002 and 2001, respectively.

On January 23, 2003, the Companys
board of directors declared a quarterly dividend of
$0.06 per share on class A and class B common stock,
payable on February 28, 2003, to shareholders of record on
February 5, 2003. 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.

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
$727.7 million is available by the end of 2003 for such
dividends without prior approval of the Connecticut Insurance
Department. However, the payment of a portion of this amount is
likely to be subject to approval by the Connecticut Insurance
Department in accordance with the formula described above,
depending upon the amount and timing of the payments.

On September 25, 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 through September 2004 in the open
market, and it is expected that funding for the program will
principally come from operating cash flow. When shares are
repurchased, such shares will be reported as authorized and
unissued treasury stock in the consolidated balance sheet. There
were no shares repurchased under this plan in 2002.

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. In addition, the ability
of TIGHI to pay dividends to TPC is subject to the terms of the
TIGHI trust mandatorily redeemable securities which prohibit
TIGHI from paying dividends in the event it has failed to pay or
has deferred dividends or is in default under the trust
mandatorily redeemable securities.

Under the terms of the Tax Allocation Agreement
between TPC and Citigroup, TPC is financially responsible for
adverse tax consequences on the tax-free status of the Citigroup
Distribution as a result of actions taken by TPC. One of the
potential post Citigroup Distribution actions by TPC, which
could adversely impact the tax status of the Citigroup
Distribution, is the issuance of additional common

58



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stock within two years of the Citigroup
Distribution. On April 23, 2002, the Internal Revenue
Service issued temporary regulations governing certain aspects
of spin-off distributions occurring after April 26, 2002.
In these temporary regulations, safe harbor rules are provided
under which certain post spin-off transactions involving common
stock do not adversely impact the tax status of the spin-off. In
certain circumstances, these rules provide TPC with additional
flexibility to issue additional common stock in corporate
transactions as compared to the rules that were in place at the
time of the TPC IPO.


In May 2002, the Company guaranteed certain debt
obligations of TIGHI. If the Company or TIGHI defaults on
certain of their obligations related to the TIGHI Securities,
the Company may not declare or pay dividends on its capital
stock or take certain other actions related to its capital stock.

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, 2002, all of the Companys insurance
subsidiaries had adjusted capital in excess of amounts requiring
any company or regulatory action.

In the opinion of Companys management,
realization of the recognized deferred tax asset of
$1.447 billion is more likely than not based on
expectations as to the Companys future taxable income.
Excluding the effect of the asbestos reserve increase in 2002
(see note 6 of notes to the Companys consolidated
financial statements for a further discussion), the Company has
reported pretax financial statement income of
$1.848 billion on average over the last three years and has
generated federal taxable income exceeding $1.071 billion
on average in each year during this same period. The Company has
a net operating loss carryforward of $1.390 billion at
December 31, 2002. Projections of taxable income for 2003
are in excess of the loss carryforward. See note 9 of notes
to the Companys consolidated financial statements for a
further discussion.

CRITICAL ACCOUNTING POLICIES

The Company considers its most significant
accounting policies to be those applied to unpaid claim and
claim adjustment liabilities and related reinsurance
recoverables.

Total claims and claim adjustment expense
reserves were $33.736 billion at December 31, 2002.
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.

During 2001, the Company recorded a charge of
$489.5 million representing the estimated loss for both
reported and unreported claims incurred and related claim
adjustment expenses, net of reinsurance recoverables and taxes,
related to the terrorist attack on September 11th. The
associated reserves and related reinsurance recoverables
represent the estimated ultimate net costs of all incurred
claims and claim adjustment expenses related to the attack.
Since the reserves and related reinsurance recoverables are
based on estimates, the ultimate net liability may be more or
less than such amounts.

Some of the Companys loss reserves are for
asbestos and environmental claims and related litigation. While
the study of asbestos claims and associated liabilities and the
analysis of environmental claims considered 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 in future periods it is possible that
the outcome of the continued uncertainties regarding
asbestos-related claims could result in liability 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
$10.978 billion at December 31, 2002. Amounts
recoverable from reinsurers are estimated in a manner consistent
with the claim liability

59



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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.
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, 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.
Changes in these estimates could result in additional income
statement charges.


OTHER MATTERS

Reserves for losses and loss adjustment expenses
on a statutory basis were $23.280 billion,
$20.215 billion and $19.428 billion at
December 31, 2002, 2001 and 2000, respectively. The
increase from December 31, 2001 to December 31, 2002
is primarily due to the increase in asbestos reserves of
$2.584 billion during the year. The increase from
December 31, 2000 to December 31, 2001 includes the
impact of the terrorist attack on September 11th and the
inclusion of Northland and Associates as of October 2001. These
increases were partially offset by net payments of
$578.0 million and $426.6 million for asbestos,
environmental and other cumulative injury claims during the
years ended December 31, 2002 and 2001, respectively.

During April 2000, the Company completed a cash
tender offer and merger, as a result of which TIGHI became
TPCs wholly-owned subsidiary. In the tender offer and
merger, TPC acquired all of TIGHIs outstanding shares that
were not already owned by TPC, representing approximately 14.8%
of TIGHIs outstanding common stock, for
$2.413 billion in cash financed by a loan from Citigroup.

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 $17.0 million,
$19.4 million and $16.3 million for the years ended
December 31, 2002, 2001 and 2000, respectively. See note 11
of notes to the Companys consolidated financial statements
for a discussion of restricted common stock awards.

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. 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 is expected to
be paid to Citigroup during the first quarter of 2003.

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 is expected in the first quarter of 2003.

Accordingly, beginning August 20, 2002, TPC
sponsors qualified and nonqualified non-contributory defined
benefit

60



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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. The Companys net expense related to these
plans was $9.2 million for the period from August 20,
2002 through December 31, 2002. Prior to the Citigroup
Distribution, substantially similar benefits were provided to
TPC employees through plans 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, $11.7 million for 2001, and
$14.5 million for 2000.


The principal assumptions used in determining
pension and postretirement benefit obligation are as follows:

|                                                |                             |  |       |       | 
|----------------------------------------------- | --------------------------- |  | ----- | ----- | 
|                                               
|                                               
|(at December 31, 2002)                         
|                                               
|                                               
|Discount rate                                   |                             |  | 6.75% |      
|Expected long-term rate of return on assets     |                             |  | 8.0%  |      
|Future compensation increase rate               |                             |  | 4.5%  |      
|Health care cost increase rate (ultimate rate): |                             |  |       |      
|                                                | Following year              |  |       | 10.0% | 
|                                                | Decreasing to the year 2008 |  |       | 5.0%  | 
|                                               

The principal assumptions are considered
appropriate given the underlying investment portfolio asset mix,
nature of liabilities which are primarily for active employees,
expected compensation and health care cost trends. The expected
long-term rate of return on assets of 8% is based on the current
and expected asset mix which is approximately 60% in equity
investments and 40% in fixed income investments. The discount
rate of 6.75% was based on an analysis of current and historical
interest rates and the duration of plan obligations.

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 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.

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; 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; 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 to, 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.

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|         |                                                           
|-------- | ----------------------------------------------------------
|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, 2002. 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, 2002 and 2001 was
$38.425 billion and $32.619 billion, respectively, of
which 78% and 79% was invested in fixed maturity securities,
respectively. The primary market risk to the investment
portfolio is interest rate risk associated with investments in
fixed maturity securities. The Companys exposure to equity
price risk and foreign exchange risk is not significant. The
Company has no direct commodity risk.

For fixed maturity securities, short-term
liquidity needs and the potential liquidity needs of the
business are key factors in managing the portfolio. The
portfolio duration relative to the liabilities duration is
primarily managed through cash market transactions.

For 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, 2001. 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 and mandatorily redeemable securities of
subsidiary trusts (trust securities) 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 and trust securities see notes 8 and 10
to the consolidated financial statements as well as the
Liquidity and Capital Resources section of Managements
Discussion and Analysis.

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, 2002 and 2001.

For debt and fixed rate trust securities, the
change in fair value is determined by calculating hypothetical
December 31, 2002 and 2001 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 $1.5 billion based on a 100
basis point increase in interest rates as of December 31,
2002 and 2001. 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 6% of total liabilities as of
December 31, 2002 and approximately 52% of total

62



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assets and approximately 9% of total liabilities
as of December 31, 2001. 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, 2002 and 2001,
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, 2002 and 2001 is not material.

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|        |                                            
|------- | -------------------------------------------
|Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




Index to Consolidated Financial Statements

|                                                                                                                       |  |      |    | 
|---------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                       |  | Page
|                                                                                                                       |  |     
|Independent Auditors Report                                                                                           |  |      | 65 | 
|Consolidated Statement of Income (Loss) for the
    years ended December 31, 2002, 2001 and 2000                       |  |      | 66 | 
|Consolidated Balance Sheet at December 31,
    2002 and 2001                                                           |  |      | 67 | 
|Consolidated Statement of Changes in
    Shareholders Equity for the years ended December 31,
    2002, 2001 and 2000 |  |      | 68 | 
|Consolidated Statement of Cash Flows for the
    years ended December 31, 2002, 2001 and 2000                          |  |      | 69 | 
|Notes to Consolidated Financial Statements                                                                             |  |      | 70 | 

64



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Independent Auditors Report

The Board of Directors and Shareholders

Travelers Property Casualty Corp.:


We have audited the accompanying consolidated
balance sheets of Travelers Property Casualty Corp. and
subsidiaries as of December 31, 2002 and 2001, 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, 2002. 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, 2002 and 2001,
and the results of their operations and their cash flows for
each of the years in the three-year period ended
December 31, 2002, 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 23, 2003


65



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TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (LOSS)

(in millions, except per share data)


| |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  | 
|

|                                                                                                                               |                                                               |      |          |          |   |      |         |          |   |   |         |          | 
|------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------- | ---- | -------- | -------- | - | ---- | ------- | -------- | - | - | ------- | -------- | 
|For the year ended December 31,                                                                                                |                                                               | 2002 |          | 2001     |   | 2000
|                                                                                                                              
|                                                                                                                              
|Revenues                                                                                                                       |                                                               |      |          |          |   |      |         |          |   |   |         |         
|Premiums                                                                                                                       |                                                               | $    | 11,155.3 |          |   | $    | 9,410.9 |          |   | $ | 8,462.2 |         
|Net investment income                                                                                                          |                                                               |      | 1,880.5  |          |   |      | 2,034.0 |          |   |   | 2,161.6 |         
|Fee income                                                                                                                     |                                                               |      | 454.9    |          |   |      | 347.4   |          |   |   | 312.4   |         
|Realized investment gains                                                                                                      |                                                               |      | 146.7    |          |   |      | 322.5   |          |   |   | 47.0    |         
|Recoveries from former affiliate                                                                                               |                                                               |      | 520.0    |          |   |      |        |          |   |   |        |         
|Other revenues                                                                                                                 |                                                               |      | 112.3    |          |   |      | 115.7   |          |   |   | 87.8    |         
|                                                                                                                              
|                                                                                                                               | Total revenues                                                |      |          | 14,269.7 |   |      |         | 12,230.5 |   |   |         | 11,071.0 | 
|                                                                                                                              
|Claims and expenses                                                                                                            |                                                               |      |          |          |   |      |         |          |   |   |         |         
|Claims and claim adjustment expenses                                                                                           |                                                               |      | 11,138.5 |          |   |      | 7,764.7 |          |   |   | 6,472.9 |         
|Amortization of deferred acquisition costs                                                                                     |                                                               |      | 1,810.2  |          |   |      | 1,538.7 |          |   |   | 1,298.4 |         
|Interest expense                                                                                                               |                                                               |      | 156.8    |          |   |      | 204.9   |          |   |   | 295.5   |         
|General and administrative expenses                                                                                            |                                                               |      | 1,424.0  |          |   |      | 1,333.2 |          |   |   | 1,140.6 |         
|                                                                                                                              
|                                                                                                                               | Total claims and expenses                                     |      |          | 14,529.5 |   |      |         | 10,841.5 |   |   |         | 9,207.4  | 
|                                                                                                                              
|Income (loss) before federal income
    taxes, minority interest and cumulative effect of changes in
    accounting principles |                                                               |      | (259.8   | )        |   |      | 1,389.0 |          |   |   | 1,863.6 |         
|Federal income taxes (benefit)                                                                                                 |                                                               |      | (476.5   | )        |   |      | 326.8   |          |   |   | 491.3   |         
|Minority interest, net of tax                                                                                                  |                                                               |      | 1.1      |          |   |      |        |          |   |   | 60.1    |         
|                                                                                                                              
|Income before cumulative effect of changes in
    accounting principles                                                        |                                                               |      | 215.6    |          |   |      | 1,062.2 |          |   |   | 1,312.2 |         
|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)                                                                                                              |                                                               | $    | (27.0    | )        |   | $    | 1,065.4 |          |   | $ | 1,312.2 |         
|                                                                                                                              
|Basic and diluted earnings per share                                                                                           |                                                               |      |          |          |   |      |         |          |   |   |         |         
|Income before cumulative effect of changes in
    accounting principles                                                        |                                                               | $    | 0.23     |          |   | $    | 1.38    |          |   | $ | 1.71    |         
|Cumulative effect of changes in accounting
    principles                                                                      |                                                               |      | (0.26    | )        |   |      | 0.01    |          |   |   |        |         
|                                                                                                                              
|Net income (loss)                                                                                                              |                                                               | $    | (0.03    | )        |   | $    | 1.39    |          |   | $ | 1.71    |         
|                                                                                                                              
|Weighted average number of common shares
    outstanding                                                                       |                                                               |      | 949.5    |          |   |      | 769.0   |          |   |   | 769.0   |         
|Weighted average number of common shares
    outstanding and common stock equivalents                                          |                                                               |      | 951.2    |          |   |      | 769.0   |          |   |   | 769.0   |         
|                                                                                                                              

See notes to consolidated financial statements.

66



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##### 



TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in millions, except shares and per share data)


| |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  | 
|

|                                                                                                                                                                                                                            |                                                                                                                                                                        |      |          |          |  |   |          |          | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | -------- | -------- |  | - | -------- | -------- | 
|At December 31,                                                                                                                                                                                                             |                                                                                                                                                                        | 2002 |          | 2001    
|                                                                                                                                                                                                                           
|                                                                                                                                                                                                                           
|Assets                                                                                                                                                                                                                      |                                                                                                                                                                        |      |          |          |  |   |          |         
|Fixed maturities, available for sale at fair
    value (including $580.5 and $975.7 at December 31, 2002 and
    2001, respectively, subject to securities lending agreements)
    (amortized cost $28,877.8 and $25,460.5) |                                                                                                                                                                        | $    | 30,003.2 |          |  | $ | 25,850.7 |         
|Equity securities, at fair value (cost $861.9 and
    $980.4)                                                                                                                                                               |                                                                                                                                                                        |      | 851.5    |          |  |   | 984.0    |         
|Mortgage loans                                                                                                                                                                                                              |                                                                                                                                                                        |      | 257.9    |          |  |   | 274.4    |         
|Real estate held for sale                                                                                                                                                                                                   |                                                                                                                                                                        |      | 12.5     |          |  |   | 38.3     |         
|Short-term securities                                                                                                                                                                                                       |                                                                                                                                                                        |      | 4,853.6  |          |  |   | 2,798.3  |         
|Trading securities                                                                                                                                                                                                          |                                                                                                                                                                        |      | 40.7     |          |  |   | 628.1    |         
|Other investments                                                                                                                                                                                                           |                                                                                                                                                                        |      | 2,405.8  |          |  |   | 2,044.8  |         
|                                                                                                                                                                                                                           
|                                                                                                                                                                                                                            | Total investments                                                                                                                                                      |      |          | 38,425.2 |  |   |          | 32,618.6 | 
|                                                                                                                                                                                                                           
|Cash                                                                                                                                                                                                                        |                                                                                                                                                                        |      | 92.2     |          |  |   | 236.9    |         
|Investment income accrued                                                                                                                                                                                                   |                                                                                                                                                                        |      | 339.3    |          |  |   | 359.5    |         
|Premium balances receivable                                                                                                                                                                                                 |                                                                                                                                                                        |      | 3,861.4  |          |  |   | 3,657.0  |         
|Reinsurance recoverables                                                                                                                                                                                                    |                                                                                                                                                                        |      | 10,977.5 |          |  |   | 11,047.3 |         
|Deferred acquisition costs                                                                                                                                                                                                  |                                                                                                                                                                        |      | 873.0    |          |  |   | 768.1    |         
|Deferred federal income taxes                                                                                                                                                                                               |                                                                                                                                                                        |      | 1,447.1  |          |  |   | 1,182.4  |         
|Contractholder receivables                                                                                                                                                                                                  |                                                                                                                                                                        |      | 2,544.1  |          |  |   | 2,197.8  |         
|Goodwill                                                                                                                                                                                                                    |                                                                                                                                                                        |      | 2,411.5  |          |  |   | 2,576.5  |         
|Receivables for investment sales                                                                                                                                                                                            |                                                                                                                                                                        |      | 138.7    |          |  |   | 129.7    |         
|Other assets                                                                                                                                                                                                                |                                                                                                                                                                        |      | 3,027.5  |          |  |   | 3,004.0  |         
|                                                                                                                                                                                                                           
|                                                                                                                                                                                                                            | Total assets                                                                                                                                                           |      | $        | 64,137.5 |  |   | $        | 57,777.8 | 
|                                                                                                                                                                                                                           
|Liabilities                                                                                                                                                                                                                 |                                                                                                                                                                        |      |          |          |  |   |          |         
|Claims and claim adjustment expense reserves                                                                                                                                                                                |                                                                                                                                                                        | $    | 33,736.0 |          |  | $ | 30,736.6 |         
|Unearned premium reserves                                                                                                                                                                                                   |                                                                                                                                                                        |      | 6,459.9  |          |  |   | 5,666.9  |         
|Contractholder payables                                                                                                                                                                                                     |                                                                                                                                                                        |      | 2,544.1  |          |  |   | 2,197.8  |         
|Notes payable to former affiliates                                                                                                                                                                                          |                                                                                                                                                                        |      | 700.0    |          |  |   | 1,697.7  |         
|Long-term debt                                                                                                                                                                                                              |                                                                                                                                                                        |      | 926.2    |          |  |   | 379.8    |         
|Convertible junior subordinated notes payable                                                                                                                                                                               |                                                                                                                                                                        |      | 867.8    |          |  |   |         |         
|Convertible notes payable                                                                                                                                                                                                   |                                                                                                                                                                        |      | 49.7     |          |  |   |         |         
|Payables for investment purchases                                                                                                                                                                                           |                                                                                                                                                                        |      | 3,737.9  |          |  |   | 485.2    |         
|Securities lending payable                                                                                                                                                                                                  |                                                                                                                                                                        |      | 597.9    |          |  |   | 1,001.7  |         
|Other liabilities                                                                                                                                                                                                           |                                                                                                                                                                        |      | 3,480.7  |          |  |   | 4,025.8  |         
|                                                                                                                                                                                                                           
|                                                                                                                                                                                                                            | Total liabilities                                                                                                                                                      |      |          | 53,100.2 |  |   |          | 46,191.5 | 
|                                                                                                                                                                                                                           
|TIGHI-obligated mandatorily redeemable securities
    of subsidiary trusts holding solely junior subordinated debt
    securities of TIGHI                                                                                  |                                                                                                                                                                        |      | 900.0    |          |  |   | 900.0    |         
|                                                                                                                                                                                                                           
|Shareholders equity                                                                                                                                                                                                        |                                                                                                                                                                        |      |          |          |  |   |          |         
|Common stock:                                                                                                                                                                                                               |                                                                                                                                                                        |      |          |          |  |   |          |         
|                                                                                                                                                                                                                            | Class A, $.01 par value, 1.5 billion
    shares authorized, 504.2 million and 269.0 million
    issued and outstanding at December 31, 2002 and 2001,
    respectively |      |          | 5.0      |  |   |          | 2.7      | 
|                                                                                                                                                                                                                            | Class B, $.01 par value, 1.5 billion
    shares authorized, 500.0 million issued and outstanding                                                                       |      |          | 5.0      |  |   |          | 5.0      | 
|Additional paid-in capital                                                                                                                                                                                                  |                                                                                                                                                                        |      | 8,618.4  |          |  |   | 4,433.0  |         
|Retained earnings                                                                                                                                                                                                           |                                                                                                                                                                        |      | 880.5    |          |  |   | 6,004.2  |         
|Accumulated other changes in equity from nonowner
    sources                                                                                                                                                               |                                                                                                                                                                        |      | 656.6    |          |  |   | 241.4    |         
|Treasury stock, at cost (shares 338,068 and 0)                                                                                                                                                                              |                                                                                                                                                                        |      | (4.9     | )        |  |   |         |         
|Unearned compensation                                                                                                                                                                                                       |                                                                                                                                                                        |      | (23.3    | )        |  |   |         |         
|                                                                                                                                                                                                                           
|                                                                                                                                                                                                                            | Total shareholders equity                                                                                                                                             |      |          | 10,137.3 |  |   |          | 10,686.3 | 
|                                                                                                                                                                                                                           
|                                                                                                                                                                                                                            | Total liabilities and shareholders
    equity                                                                                                                         |      | $        | 64,137.5 |  |   | $        | 57,777.8 | 
|                                                                                                                                                                                                                           

See notes to consolidated financial statements.

67



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##### 



TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS
EQUITY

(in millions)


| |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  | 
|

|                                                                                                          |                                               |      |          |          |   |      |         |          |  |   |         |         | 
|--------------------------------------------------------------------------------------------------------- | --------------------------------------------- | ---- | -------- | -------- | - | ---- | ------- | -------- |  | - | ------- | ------- | 
|For the year ended December 31,                                                                           |                                               | 2002 |          | 2001     |   | 2000
|                                                                                                         
|                                                                                                         
|Common stock and additional paid-in
    capital                                                           |                                               |      |          |          |   |      |         |          |  |   |         |        
|Balance, beginning of year                                                                                |                                               | $    | 4,440.7  |          |   | $    | 3,823.4 |          |  | $ | 3,792.1 |        
|Net proceeds from initial public offering                                                                 |                                               |      | 4,089.5  |          |   |      |        |          |  |   |        |        
|Employee stock-based compensation plans                                                                   |                                               |      | 64.7     |          |   |      |        |          |  |   |        |        
|Acquisition of affiliates                                                                                 |                                               |      |         |          |   |      | 578.0   |          |  |   |        |        
|Other                                                                                                     |                                               |      | 33.5     |          |   |      | 39.3    |          |  |   | 31.3    |        
|                                                                                                         
|                                                                                                          | Balance, end of year                          |      |          | 8,628.4  |   |      |         | 4,440.7  |  |   |         | 3,823.4 | 
|                                                                                                         
|Retained earnings                                                                                         |                                               |      |          |          |   |      |         |          |  |   |         |        
|Balance, beginning of year                                                                                |                                               |      | 6,004.2  |          |   |      | 4,989.9 |          |  |   | 2,818.5 |        
|Net income (loss)                                                                                         |                                               |      | (27.0    | )        |   |      | 1,065.4 |          |  |   | 1,312.2 |        
|Receipts from former subsidiaries                                                                         |                                               |      | 157.5    |          |   |      | 474.9   |          |  |   | 859.2   |        
|Dividends                                                                                                 |                                               |      | (5,254.2 | )        |   |      | (526.0  | )        |  |   |        |        
|                                                                                                         
|                                                                                                          | Balance, end of year                          |      |          | 880.5    |   |      |         | 6,004.2  |  |   |         | 4,989.9 | 
|                                                                                                         
|Accumulated other changes in equity from
    nonowner sources, net of tax                                 |                                               |      |          |          |   |      |         |          |  |   |         |        
|Balance, beginning of year                                                                                |                                               |      | 241.4    |          |   |      | 400.7   |          |  |   | (171.0  | )      
|Net unrealized gains on investment securities
    obtained as part of affiliate acquisition               |                                               |      |         |          |   |      | 21.1    |          |  |   |        |        
|Net unrealized gain (loss) on investment
    securities, net of reclassification adjustment (see note 10) |                                               |      | 475.4    |          |   |      | (172.0  | )        |  |   | 577.8   |        
|Minimum pension liability adjustment (see note 12)                                                        |                                               |      | (68.3    | )        |   |      |        |          |  |   |        |        
|Other(1)                                                                                                  |                                               |      | 8.1      |          |   |      | (8.4    | )        |  |   | (6.1    | )      
|                                                                                                         
|                                                                                                          | Balance, end of year                          |      |          | 656.6    |   |      |         | 241.4    |  |   |         | 400.7   | 
|                                                                                                         
|Treasury stock (at cost)                                                                                  |                                               |      |          |          |   |      |         |          |  |   |         |        
|Balance, beginning of year                                                                                |                                               |      |         |          |   |      |        |          |  |   |        |        
|Net employee stock based compensation plans                                                               |                                               |      | (4.9     | )        |   |      |        |          |  |   |        |        
|                                                                                                         
|                                                                                                          | Balance, end of year                          |      |          | (4.9     | ) |      |         |         |  |   |         |        | 
|                                                                                                         
|Unearned compensation                                                                                     |                                               |      |          |          |   |      |         |          |  |   |         |        
|Balance, beginning of year                                                                                |                                               |      |         |          |   |      |        |          |  |   |        |        
|Net issuance of restricted stock under employee
    stock based compensation plans                        |                                               |      | (29.3    | )        |   |      |        |          |  |   |        |        
|Restricted stock amortization                                                                             |                                               |      | 6.0      |          |   |      |        |          |  |   |        |        
|                                                                                                         
|                                                                                                          | Balance, end of year                          |      |          | (23.3    | ) |      |         |         |  |   |         |        | 
|                                                                                                         
|                                                                                                          | Total shareholders equity                    |      | $        | 10,137.3 |   |      | $       | 10,686.3 |  |   | $       | 9,214.0 | 
|                                                                                                         
|Common shares outstanding                                                                                 |                                               |      |          |          |   |      |         |          |  |   |         |        
|Balance, beginning of year                                                                                |                                               |      | 769.0    |          |   |      | 769.0   |          |  |   | 769.0   |        
|Shares issued in Initial Public Offering                                                                  |                                               |      | 231.0    |          |   |      |        |          |  |   |        |        
|Net shares issued for employee stock based
    compensation plans                                         |                                               |      | 4.2      |          |   |      |        |          |  |   |        |        
|Shares reacquired                                                                                         |                                               |      | (.3      | )        |   |      |        |          |  |   |        |        
|                                                                                                         
|                                                                                                          | Balance, end of year                          |      |          | 1,003.9  |   |      |         | 769.0    |  |   |         | 769.0   | 
|                                                                                                         
|Summary of changes in equity from nonowner
    sources                                                    |                                               |      |          |          |   |      |         |          |  |   |         |        
|Net income (loss)                                                                                         |                                               | $    | (27.0    | )        |   | $    | 1,065.4 |          |  | $ | 1,312.2 |        
|Other changes in equity from nonowner sources,
    net of tax                                             |                                               |      | 415.2    |          |   |      | (180.4  | )        |  |   | 571.7   |        
|                                                                                                         
|                                                                                                          | Total changes in equity from nonowner sources |      | $        | 388.2    |   |      | $       | 885.0    |  |   | $       | 1,883.9 | 
|                                                                                                         



|    |                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes foreign currency translation
    adjustments, hedged futures contracts and the cumulative effect
    of the change in accounting for derivative instruments and
    hedging activities.

See notes to consolidated financial statements.

68



---



##### 



TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)


| |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  | 
|

|                                                                  |                                                                                      |                                                                       |                                                         |           |          |          |          |           |          |          |          |           |          |          |  
|----------------------------------------------------------------- | ------------------------------------------------------------------------------------ | --------------------------------------------------------------------- | ------------------------------------------------------- | --------- | -------- | -------- | -------- | --------- | -------- | -------- | -------- | --------- | -------- | -------- | -
|For the year ended December 31,                                   |                                                                                      | 2002                                                                  |                                                         | 2001      |          | 2000    
|                                                                 
|                                                                 
|Cash flows from operating activities                              |                                                                                      |                                                                       |                                                         |           |          |          |          |           |          |          |          |          
|Net income (loss)                                                 |                                                                                      | $                                                                     | (27.0                                                   | )         |          | $        | 1,065.4  |           |          | $        | 1,312.2  |          
|                                                                  | Adjustments to reconcile net income to net cash
    provided by operating activities |                                                                       |                                                         |           |          |          |          |           |          |          |          |           |         
|                                                                  |                                                                                      | Realized investment gains                                             |                                                         |           | (146.7   | )        |          |           | (322.5   | )        |          |           | (47.0    | )       
|                                                                  |                                                                                      | Cumulative effect of changes in accounting
    principles, net of tax |                                                         |           | 242.6    |          |          |           | (3.2     | )        |          |           |         |         
|                                                                  |                                                                                      | Depreciation and amortization                                         |                                                         |           | 41.8     |          |          |           | 121.9    |          |          |           | 90.4     |         
|                                                                  |                                                                                      | Deferred federal income taxes                                         |                                                         |           | (588.8   | )        |          |           | 11.1     |          |          |           | 166.7    |         
|                                                                  |                                                                                      | Amortization of deferred policy acquisition costs                     |                                                         |           | 1,810.2  |          |          |           | 1,538.7  |          |          |           | 1,298.4  |         
|                                                                  |                                                                                      | Premium balances receivable                                           |                                                         |           | (204.4   | )        |          |           | (174.1   | )        |          |           | (179.1   | )       
|                                                                  |                                                                                      | Reinsurance recoverables                                              |                                                         |           | 69.8     |          |          |           | (1,386.2 | )        |          |           | (168.4   | )       
|                                                                  |                                                                                      | Deferred policy acquisition costs                                     |                                                         |           | (1,915.1 | )        |          |           | (1,619.8 | )        |          |           | (1,355.0 | )       
|                                                                  |                                                                                      | Insurance reserves                                                    |                                                         |           | 3,792.4  |          |          |           | 1,886.6  |          |          |           | (102.0   | )       
|                                                                  |                                                                                      | Trading account activities                                            |                                                         |           | 115.6    |          |          |           | (73.8    | )        |          |           |         |         
|                                                                  |                                                                                      | Other                                                                 |                                                         |           | (264.8   | )        |          |           | 175.1    |          |          |           | (352.7   | )       
|                                                                 
|                                                                  |                                                                                      |                                                                       | Net cash provided by operating
    activities           |           |          | 2,925.6  |          |           |          | 1,219.2  |          |           |          | 663.5    |  
|                                                                 
|Cash flows from investing activities                              |                                                                                      |                                                                       |                                                         |           |          |          |          |           |          |          |          |          
|Proceeds from maturities of investments                           |                                                                                      |                                                                       |                                                         |           |          |          |          |           |          |          |          |          
|                                                                  | Fixed maturities                                                                     |                                                                       |                                                         | 3,013.3   |          |          |          | 2,081.4   |          |          |          | 1,805.6   |         
|                                                                  | Mortgage loans                                                                       |                                                                       |                                                         | 21.6      |          |          |          | 15.8      |          |          |          | 288.6     |         
|Proceeds from sales of investments                                |                                                                                      |                                                                       |                                                         |           |          |          |          |           |          |          |          |          
|                                                                  | Fixed maturities                                                                     |                                                                       |                                                         | 14,699.0  |          |          |          | 14,469.2  |          |          |          | 12,506.6  |         
|                                                                  | Equity securities                                                                    |                                                                       |                                                         | 127.2     |          |          |          | 469.7     |          |          |          | 2,354.7   |         
|                                                                  | Real estate held for sale                                                            |                                                                       |                                                         | 23.3      |          |          |          |          |          |          |          | 18.7      |         
|Purchases of investments                                          |                                                                                      |                                                                       |                                                         |           |          |          |          |           |          |          |          |          
|                                                                  | Fixed maturities                                                                     |                                                                       |                                                         | (20,861.4 | )        |          |          | (16,008.7 | )        |          |          | (12,802.8 | )       
|                                                                  | Equity securities                                                                    |                                                                       |                                                         | (99.6     | )        |          |          | (67.4     | )        |          |          | (2,331.8  | )       
|                                                                  | Mortgage loans                                                                       |                                                                       |                                                         | (5.2      | )        |          |          | (4.1      | )        |          |          | (40.4     | )       
|                                                                  | Real estate                                                                          |                                                                       |                                                         | (1.2      | )        |          |          | (6.2      | )        |          |          |          |         
|                                                                  | Tender offer of minority interest shareholders                                       |                                                                       |                                                         |          |          |          |          |          |          |          |          | (2,398.6  | )       
|Short-term securities, (purchases) sales, net                     |                                                                                      |                                                                       | (2,055.3                                                | )         |          |          | (106.1   | )         |          |          | (1,086.5 | )        
|Other investments, net                                            |                                                                                      |                                                                       | 244.7                                                   |           |          |          | (667.9   | )         |          |          | (595.9   | )        
|Securities transactions in course of settlement                   |                                                                                      |                                                                       | 2,623.4                                                 |           |          |          | 58.3     |           |          |          | 491.4    |          
|Business acquisitions                                             |                                                                                      |                                                                       |                                                        |           |          |          | (329.5   | )         |          |          | (298.0   | )        
|                                                                 
|                                                                  |                                                                                      |                                                                       | Net cash used in investing
    activities               |           |          | (2,270.2 | )        |           |          | (95.5    | )        |           |          | (2,088.4 | )
|                                                                 
|Cash flows from financing activities                              |                                                                                      |                                                                       |                                                         |           |          |          |          |           |          |          |          |          
|Issuance of convertible notes, net                                |                                                                                      |                                                                       | 917.3                                                   |           |          |          |         |           |          |          |         |          
|Issuance of short-term debt                                       |                                                                                      |                                                                       |                                                        |           |          |          | 211.8    |           |          |          |         |          
|Payment of short-term debt                                        |                                                                                      |                                                                       |                                                        |           |          |          | (211.8   | )         |          |          |         |          
|Issuance of long-term debt                                        |                                                                                      |                                                                       | 549.4                                                   |           |          |          |         |           |          |          |         |          
|Payment of long-term debt                                         |                                                                                      |                                                                       | (3.0                                                    | )         |          |          | (500.0   | )         |          |          |         |          
|Issuance of note payable to former affiliate                      |                                                                                      |                                                                       | 250.0                                                   |           |          |          | 500.0    |           |          |          | 2,391.3  |          
|Payments of notes payable to former affiliate                     |                                                                                      |                                                                       | (6,349.0                                                | )         |          |          | (1,040.0 | )         |          |          | (1,687.7 | )        
|Issuance of long-term debt to former affiliate                    |                                                                                      |                                                                       |                                                        |           |          |          | 275.0    |           |          |          |         |          
|Payment of long-term debt to former affiliate                     |                                                                                      |                                                                       |                                                        |           |          |          | (275.0   | )         |          |          |         |          
|Proceeds from initial public offering                             |                                                                                      |                                                                       | 4,089.5                                                 |           |          |          |         |           |          |          |         |          
|Issuance of common stock  employee
    stock options             |                                                                                      |                                                                       | 10.1                                                    |           |          |          |         |           |          |          |         |          
|Treasury stock acquired                                           |                                                                                      |                                                                       | (3.7                                                    | )         |          |          |         |           |          |          |         |          
|Receipts from former affiliates                                   |                                                                                      |                                                                       | 157.5                                                   |           |          |          | 474.9    |           |          |          | 859.2    |          
|Dividends to former affiliate                                     |                                                                                      |                                                                       | (157.5                                                  | )         |          |          | (526.0   | )         |          |          |         |          
|Payment of dividend of preferred stock of
    subsidiary          |                                                                                      |                                                                       | (2.2                                                    | )         |          |          |         |           |          |          |         |          
|Purchase of real estate from former affiliate                     |                                                                                      |                                                                       | (68.2                                                   | )         |          |          |         |           |          |          |         |          
|Transfer of employee benefit obligations to
    former affiliates |                                                                                      |                                                                       | (172.4                                                  | )         |          |          |         |           |          |          |         |          
|Transfer of lease obligations to former affiliate                 |                                                                                      |                                                                       | (87.8                                                   | )         |          |          |         |           |          |          |         |          
|Return of capital from former subsidiaries                        |                                                                                      |                                                                       |                                                        |           |          |          | 8.0      |           |          |          | 3.0      |          
|Proceeds from minority investment in subsidiary                   |                                                                                      |                                                                       | 89.5                                                    |           |          |          |         |           |          |          |         |          
|Other                                                             |                                                                                      |                                                                       | (19.6                                                   | )         |          |          |         |           |          |          |         |          
|                                                                 
|                                                                  |                                                                                      |                                                                       | Net cash provided by (used in) financing
    activities |           |          | (800.1   | )        |           |          | (1,083.1 | )        |           |          | 1,565.8  |  
|                                                                 
|Net increase (decrease) in cash                                   |                                                                                      |                                                                       | (144.7                                                  | )         |          |          | 40.6     |           |          |          | 140.9    |          
|Cash at beginning of period                                       |                                                                                      |                                                                       | 236.9                                                   |           |          |          | 196.3    |           |          |          | 55.4     |          
|                                                                 
|Cash at end of period                                             |                                                                                      | $                                                                     | 92.2                                                    |           |          | $        | 236.9    |           |          | $        | 196.3    |          
|                                                                 
|Supplemental disclosure of cash flow
    information              |                                                                                      |                                                                       |                                                         |           |          |          |          |           |          |          |          |          
|Income taxes paid                                                 |                                                                                      | $                                                                     | 83.4                                                    |           |          | $        | 325.6    |           |          | $        | 310.2    |          
|Interest paid                                                     |                                                                                      | $                                                                     | 140.6                                                   |           |          | $        | 129.7    |           |          | $        | 155.3    |          
|                                                                 

See notes to consolidated financial statements.

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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 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 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 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 include a $360.6 million receivable 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. See note 6.

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, 2002, Citigroup held 9.95% of
TPCs common equity and 9.98% 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 is 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 11.

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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. See note 16.

Certain equity securities with readily
determinable fair values in the amount of $361.2 million
and owned directly by the Company were reported in trading
securities at December 31, 2001. As part of the Citigroup
Distribution, these investments have been restructured such that
the Company no longer controls the investments. As a result,
these investments are now equity securities accounted for under
the equity method. There is no impact on earnings related to
this change. These investments have been reclassified to other
investments. In addition, similar investments included in equity
securities at December 31, 2001, in the amount of
$96.4 million and $98.3 million at December 31,
2002 and 2001, respectively, have been reclassified to other
investments.

During April 2000, TPC completed a cash tender
offer to purchase all of the outstanding shares of Class A
Common Stock of TIGHI at a price of $41.95 per share. See
note 2.

Accounting Changes

Accounting for Stock-Based
Compensation  
 Transition and Disclosure

In December 2002, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Standards
No. 148 Accounting for Stock-Based
Compensation  Transition and Disclosure
(FAS 148), an amendment to FASB Statement 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 has adopted the
applicable disclosure requirements of this statement for
year-end reporting. The transition provisions of this statement
apply upon adoption of the FAS 123 fair value based method.
See Stock-Based Compensation in note 1 for discussion of
adoption of FAS 123 and transition alternative.


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.


The Company stopped amortizing goodwill on
January 1, 2002. Net income and earnings per share adjusted
to

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exclude goodwill amortization expense for the
years ended December 31, 2001 and 2000 are as follows:


| |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  | 
|

|                                         |  |      |         |      |  |   |         | 
|---------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|(for the year ended December 31,         |  |      |         |     
|in millions, except per share data)      |  | 2001 |         | 2000
|                                        
|                                        
|Net income                               |  |      |         |      |  |   |         | 
|Reported net income                      |  | $    | 1,065.4 |      |  | $ | 1,312.2 | 
|Goodwill amortization                    |  |      | 71.8    |      |  |   | 63.1    | 
|                                        
|Adjusted net income                      |  | $    | 1,137.2 |      |  | $ | 1,375.3 | 
|                                        
|Basic and diluted earnings
    per share |  |      |         |      |  |   |         | 
|Reported earnings per share              |  | $    | 1.39    |      |  | $ | 1.71    | 
|Goodwill amortization                    |  |      | 0.09    |      |  |   | 0.08    | 
|                                        
|Adjusted earnings per share              |  | $    | 1.48    |      |  | $ | 1.79    | 
|                                        

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.

The Company had customer-related intangible
assets with a gross carrying amount of $470.6 million as of
both December 31, 2002 and 2001, and with accumulated
amortization of $90.8 million and $55.4 million as of
December 31, 2002 and 2001, respectively, which are
included in other assets in the consolidated balance sheet.
Amortization expense was $35.4 million, $34.5 million
and $20.9 million for the years ended December 31,
2002, 2001 and 2000, respectively. Intangible assets
amortization expense is estimated to be $35.4 million,
$34.2 million, $31.3 million, $29.6 million and
$29.6 million in 2003, 2004, 2005, 2006 and 2007, respectively.

Impairment or Disposal of Long-Lived
Assets

Effective January 1, 2002, the Company
adopted FASB Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (FAS 144). FAS 144 establishes
a single accounting model for long-lived assets to be disposed
of by sale. A long-lived asset classified as held for sale is to
be measured at the lower of its carrying amount or fair value
less cost to sell and depreciation (amortization of the asset)
ceases. Impairment is recognized only if the carrying amount of
a long-lived asset is not recoverable from its undiscounted cash
flows and is measured as the difference between the carrying
amount and fair value of the asset. Long-lived assets to be
abandoned, exchanged for a similar productive asset, or
distributed to owners in a spin-off are considered held and used
until disposed of. Accordingly, discontinued operations are no
longer to be measured on a net realizable value basis, and
future operating losses are no longer recognized before they
occur. The provisions of the new standard are to be applied
prospectively. The adoption of FAS 144 did not have a
significant effect on results of operations, financial condition
or liquidity.


Accounting by Certain Entities (Including
Entities With Trade Receivables) That Lend to or Finance the
Activities of Others

Effective January 1, 2002, the Company
adopted American Institute of Certified Public Accountants
Accounting Standards Executive Committee Statement of
Position 01-06, Accounting by Certain Entities
(Including Entities With Trade Receivables) That Lend to or
Finance the Activities of Others (SOP 01-06). This
SOP applies to any entity that lends to or finances the
activities of others. SOP 01-06 clarifies that accounting
and financial reporting practices for lending and financing
activities should be the same regardless of the type of entity
engaging in those activities. SOP 01-06 provides certain
presentation and disclosure changes for entities with trade
receivables as part of the objective of requiring consistent
accounting and reporting for like transactions. This SOP also
provides specific guidance for other types of transactions
specific to certain financial institutions. To the extent an
entity is not considered such a financial institution, the other
guidance provided is not applicable. The adoption of this SOP
did not have a significant impact on the Companys results
of operations, financial condition or liquidity.


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


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value of a derivative (that is, gains and losses)
depends on the intended use of the derivative and the resulting
designation. See note 14.


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 shareholders
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 realized
investment gains (losses).

Recognition of Interest Income and Impairment
on Purchased and Retained Beneficial Interests in Securitized
Financial Assets

Effective April 1, 2001, the Company adopted
FASB Emerging Issues Task Force (EITF) 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 for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities

In September 2000, the FASB issued Statement of
Financial Accounting Standards No. 140, Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a replacement of FASB Statement
No. 125 (FAS 140). Provisions of FAS 140
primarily relating to transfers of financial assets and
securitizations that differ from provisions of Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (FAS 125) are
effective for transfers taking place after March 31, 2001.
Special purpose entities (SPEs) used in securitizations that are
currently qualifying SPEs under FAS 125 will continue to be
treated as qualifying SPEs as long as they issue no new
beneficial interests and accept no new asset transfers after
March 31, 2001, other than transfers committed to prior to
that date. Under FAS 140, qualifying SPEs are not
consolidated by the transferor. FAS 140 also amends the
accounting for collateral and requires new disclosures for
collateral, securitizations and retained interests in
securitizations. These provisions were effective for financial
statements for fiscal years ending after December 15, 2000.
The accounting for collateral, as amended, requires
(a) certain assets pledged as collateral to be separately
reported in the consolidated balance sheet from assets not so
encumbered and (b) disclosure of assets pledged as
collateral that have not been reclassified and separately
reported. The adoption of FAS 140 did not have a
significant effect on results of operations, financial condition
or liquidity. See note 4.


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 (see note 4), 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 are charged or
credited directly to shareholders equity, net of income
taxes.

Mortgage loans are carried at amortized cost. A
mortgage loan is considered impaired when it is probable that
the Company will be unable to collect principal and interest
amounts due. For mortgage loans that are determined to be
impaired, a reserve is established for the difference between
the amortized cost and fair market value of the underlying
collateral. In estimating fair value, the Company uses interest
rates reflecting the current real estate financing market
returns. Impaired loans were not significant at
December 31, 2002 and 2001.

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

73



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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 accounted for on the equity method of
accounting. Undistributed income is reported in net investment
income.

Investment Gains and Losses

Realized investment gains and losses are included
as a component of pretax revenues based upon specific
identification of the investments sold on the trade date. An
investment in a debt or equity security is impaired if its fair
value falls below its book value and the decline is considered
other than temporary. Factors considered in determining whether
a loss is other than temporary include the length of time and
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.
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.
Other-than-temporary declines in fair value of investments are
included in realized investment gains and losses.


Reinsurance Recoverables

Amounts recoverable from reinsurers are estimated
in a manner consistent with the claim liability associated with
the reinsured business. 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. See
note 5.


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.


Goodwill and Intangible Assets

The Company adopted FAS 141 and FAS 142
effective January 1, 2002. See note 1, Summary of
Significant Accounting Policies, Accounting Changes. 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, 2002.


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.

Prior to the adoption of FAS 141 and
FAS 142, goodwill was generally being amortized on a
straight-line basis over a 40-year period. TPCs purchase
of the outstanding shares of Class A Common Stock of TIGHI
(see note 2) generated goodwill of $984.5 million,
which was amortized on a straight-line basis over a 36-year
period. The

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Companys acquisition of The Northland
Company and its subsidiaries (see note 2) included goodwill
and intangible assets of $242.6 million, which were
amortized on a straight-line basis over a 20-year period for
goodwill and periods of 15 to 20 years for the intangible
assets. The Companys acquisition of the surety business of
Reliance Group Holdings, Inc. (Reliance Surety) (see
note 2) included an intangible asset of
$450.0 million, which is being amortized on a straight-line
basis over a 15-year period.


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, 2002 and 2001 are $1.370 billion
and $1.358 billion, respectively, of reserves related to
workers compensation that have been discounted using an
interest rate of 5%. Also included at December 31, 2002,
are $456.1 million of reserves related to certain fixed and
determinable asbestos-related settlements, where all payment
amounts and their timing are known (see note 6), 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.


Securities Lending Payable

The Company engages in securities lending whereby
certain securities from its portfolio are loaned to other
institutions for short periods of time. The Company generally
maintains cash collateral received from the borrower, equal to
at least the market value of the loaned securities plus accrued
interest, and reinvests it in a short-term investment pool. The
loaned securities remain a recorded asset of the Company;
however, the Company records a liability for the amount of the
collateral held, representing its obligation to return the
collateral related to these loaned securities.


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, 2002 and 2001, the Company had a
liability of $171.1 million and $200.3 million,
respectively, for guaranty-fund and other assessments and
related recoveries of $14.3 million and $23.4 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 2%, 2% and 4% of total Company net
written premiums for the years ended December 31, 2002,
2001 and 2000, respectively. Policyholder dividends are accrued
against earnings using best available estimates of amounts to be
paid. Policyholder dividends were $14.4 million,
$28.3 million and $31.5 million for the years ended
December 31, 2002, 2001 and 2000, 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


75



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##### 



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.


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. See
note 6.


Other Revenues

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


Federal Income Taxes

The provision for federal income taxes 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. See note 11.


The Company accounts for these programs under the
recognition and measurement principles of Accounting Principles
Board Opinion No. 25 (APB 25), Accounting for
Stock Issued to Employees, and related interpretations.
Under APB 25 the restricted stock awards are valued based
upon fair value at the date of issuance and charged to
compensation expense ratably over the vesting period. Prior to
the Citigroup Distribution, the restricted stock awards were in
Citigroup common stock. The after-tax compensation cost charged
to earnings for these restricted stock awards was
$17.0 million, $19.4 million and $16.3 million
for the years ended December 31, 2002, 2001, and 2000,
respectively.

The stock option programs provide for the issuing
of stock option awards at an exercise price equal to the market
value of the underlying common stock on the date of the grant.
Additionally, the Company replacement awards for Citigroup
awards issued in conjunction with the Citigroup Distribution
were 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 has been no employee
compensation cost recognized in earnings for the stock option
programs.

FAS 123 provides an alternative to
APB 25 whereby fair values may be ascribed to options using
a valuation model and amortized to compensation cost over the
vesting period of the options. In 2002, in conjunction with the
IPO in March and the Citigroup Distribution in August, 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 pro forma
effect on net income (loss) and earnings per share for each
period indicated as if the Company applied the fair value
recognition provisions of FAS 123 to its employee stock
option incentive compensation programs. See note 11 for a
description of the method and fair value assumptions used in
estimating the fair value of options.

The 2002 pro forma fair value of stock-based
employee compensation in the Companys class A common
shares is as follows:

| |  |  |  | 
| |  |  |  | 
|

|                                                                                                                                  |                                 |   |        |       |  
|--------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | - | ------ | ----- | -
|(for the year ended December 31, 2002, in millions)                                                                               |                                 |  
|                                                                                                                                 
|                                                                                                                                 
|Net loss, as reported                                                                                                             |                                 | $ | (27.0  | )    
|Add:   Stock-based employee
    compensation expense included in reported net loss, net of
    related tax effects (1)            |                                 |   | 17.0   |      
|Deduct: Stock-based employee compensation
    expense determined under fair value based method, net of related
    tax effects(2) |                                 |   | (96.1  | )    
|                                                                                                                                 
|Net loss, pro forma                                                                                                               |                                 | $ | (106.1 | )    
|                                                                                                                                 
|Earnings per share                                                                                                                |                                 |   |        |      
|                                                                                                                                  | Basic and diluted  as reported |   | $      | (0.03 | )
|                                                                                                                                  | Basic and diluted  pro forma   |   |        | (0.11 | )
|                                                                                                                                 



|    |                                                
|--- | -----------------------------------------------
|(1) | Restricted stock compensation expense.         
|   
|(2) | Includes restricted stock compensation expense.

76



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##### 



The 2001 and 2000 pro forma fair value of
stockbased employee compensation in Citigroups
common stock is as follows:

| |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  | 
|

|                                                                                                                                  |                                 |      |         |      |  |   |         |      | 
|--------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ---- | ------- | ---- |  | - | ------- | ---- | 
|(for the year ended December 31, in millions)                                                                                     |                                 | 2001 |         | 2000
|                                                                                                                                 
|                                                                                                                                 
|Net income, as reported                                                                                                           |                                 | $    | 1,065.4 |      |  | $ | 1,312.2 |     
|Add:   Stock-based employee
    compensation expense included in reported net income, net of
    related tax effects(1)           |                                 |      | 19.4    |      |  |   | 16.3    |     
|Deduct: Stock-based employee compensation
    expense determined under fair value based method, net of related
    tax effects(2) |                                 |      | (68.1   | )    |  |   | (66.9   | )   
|                                                                                                                                 
|Net income, pro forma                                                                                                             |                                 | $    | 1,016.7 |      |  | $ | 1,261.6 |     
|                                                                                                                                 
|Earnings per share                                                                                                                |                                 |      |         |      |  |   |         |     
|                                                                                                                                  | Basic and diluted  as reported |      | $       | 1.39 |  |   | $       | 1.71 | 
|                                                                                                                                  | Basic and diluted  pro forma   |      |         | 1.32 |  |   |         | 1.64 | 
|                                                                                                                                 



|    |                                                
|--- | -----------------------------------------------
|(1) | Restricted stock compensation expense.         
|   
|(2) | Includes restricted stock compensation expense.

Effective January 1, 2003, the Company
adopted the fair value based 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 Company does not expect the impact of adopting the
FAS 123 fair value based method to be significant in 2003.

Earnings per Share (EPS)

Basic EPS is computed by dividing income
available to common shareholders by the weighted average number
of common shares available during the period. The computation of
diluted EPS reflects the effect of potentially dilutive
securities, principally the incremental shares which are assumed
to be issued under the Companys 2002 Incentive Plan (see
note 11). Excluded from the computation of diluted EPS were
38.6 million of potentially dilutive shares related to
convertible junior subordinated notes (see note 8) because
the contingency conditions for their issuance have not been
satisfied. Shares have been adjusted for all periods 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.


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)                                                             |  | 2002 |        | 2001 |  | 2000
|                                                                                               
|                                                                                               
|Income before cumulative effect of accounting
    changes                                       |  | $    | 215.6  |      |  | $    | 1,062.2 |  |  | $ | 1,312.2 | 
|Cumulative effect of accounting changes                                                         |  |      | (242.6 | )    |  |      | 3.2     |  |  |   |        | 
|                                                                                               
|Net income (loss) available to common
    shareholders for basic EPS (numerator)                |  |      | (27.0  | )    |  |      | 1,065.4 |  |  |   | 1,312.2 | 
|Effect of dilutive securities                                                                   |  |      |       |      |  |      |        |  |  |   |        | 
|                                                                                               
|Net income (loss) available to common
    shareholders for diluted EPS (numerator)              |  | $    | (27.0  | )    |  | $    | 1,065.4 |  |  | $ | 1,312.2 | 
|                                                                                               
|Weighted average common shares outstanding
    applicable to basic EPS (denominator)            |  |      | 949.5  |      |  |      | 769.0   |  |  |   | 769.0   | 
|Effect of dilutive shares                                                                       |  |      | 1.7    |      |  |      |        |  |  |   |        | 
|                                                                                               
|Adjusted weighted average common shares
    outstanding applicable to diluted EPS (denominator) |  |      | 951.2  |      |  |      | 769.0   |  |  |   | 769.0   | 
|                                                                                               
|Basic and diluted earnings per share                                                            |  |      |        |      |  |      |         |  |  |   |         | 
|Income before cumulative effect of accounting
    changes                                       |  | $    | 0.23   |      |  | $    | 1.38    |  |  | $ | 1.71    | 
|Cumulative effect of accounting changes                                                         |  |      | (0.26  | )    |  |      | 0.01    |  |  |   |        | 
|                                                                                               
|Net income (loss)                                                                               |  | $    | (0.03  | )    |  | $    | 1.39    |  |  | $ | 1.71    | 
|                                                                                               

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. Beginning January 1, 2001, the Company
adopted FAS 133 which establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts, 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. 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.


77



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##### 



Interest rate swaps, equity swaps, credit
derivatives, options, forward contracts and financial futures
were not significant at December 31, 2002 and 2001. See
note 14.

Accounting Standards Not Yet Adopted

Consolidation of Variable Interest
Entities

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest
Entities (FIN 46). FIN 46 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
from other parties. It 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 (the subject of
FIN 46). FIN 46 clarifies how to identify a variable
interest entity and how to determine when a business enterprise
should include the assets, liabilities, noncontrolling interests
and results of activities of a variable interest entity in its
consolidated financial statements. FIN 46 is effective
immediately for variable interest entities created after
January 31, 2003. It also applies to interim periods
beginning after June 15, 2003 and to variable interest
entities acquired before February 1, 2003. If it is
reasonably possible that an enterprise will consolidate or
disclose information about a variable interest entity when
FIN 46 becomes effective, the enterprise is required to
disclose in all financial statements issued after
January 31, 2003, the nature, purpose, size and activities
of the variable interest entity and the enterprises
maximum exposure to loss as a result of its involvement with the
variable interest entity.


At December 31, 2002, the Company held the
following investments that, for purposes of FIN 46, will
need to be evaluated to determine whether such investments
should be consolidated or disclosed as a variable interest
entity in the Companys future financial statements:



|  |                                                                                                                                                                                                                                                                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Real estate partnerships and joint ventures that
    are accounted for under the equity method of accounting and have
    a total carrying value of $250.8 million on the
    consolidated balance sheet; the Companys unfunded
    commitments associated with real estate partnerships and joint
    ventures were $192.2 million.                                                                    
| 
| | Investment partnerships that are accounted for
    under the equity method of accounting and have a carrying value
    of $1.022 billion on the consolidated balance sheet; the
    Companys unfunded commitments associated with investment
    partnerships were $662.4 million.                                                                                                                      
| 
| | Below investment grade asset-backed securities
    and commercial mortgage-backed securities that are reported at
    fair value and have a carrying value of $128.1 million on
    the consolidated balance sheet.                                                                                                                                                                                      
| 
| | Equity investments that are reported at fair
    value and have a carrying value of $39.1 million on the
    balance sheet and private equity investments that are accounted
    for under the equity method of accounting and have a carrying
    value of $483.3 million on the balance sheet. The
    Companys unfunded commitments associated with private
    equity investments were $9.7 million.

The Company is currently assessing the impact, if
any, that the consolidation provisions of FIN 46 may have
on the consolidated financial statements.

Stock-Based Compensation

Effective January 1, 2003, the Company
adopted the fair value method of accounting for its employee
stock-based compensation plans as defined in Statement of
Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (FAS 123). FAS 123
indicates that the fair value method is the preferable method of
accounting. The Company adopted the fair value method
prospectively to awards granted or modified after
January 1, 2003 as currently required by FAS 123. The
Company does not expect the impact of adopting FAS 123 to
be significant in 2003.


Asset Retirement Obligations

In June 2001, the FASB issued Statement of
Financial Accounting Standards No. 143, Accounting
for Asset Retirement Obligations (FAS 143).
FAS 143 changes the measurement of an asset retirement
obligation from a cost-accumulation approach to a fair value
approach, where the fair value (discounted value) of an asset
retirement obligation is recognized as a liability in the period
in which it is incurred and accretion expense is recognized
using the credit-adjusted risk-free interest rate in effect when
the liability was initially recognized. The associated asset
retirement costs are capitalized as part of the carrying amount
of the long-lived asset and subsequently amortized into expense.
The pre-FAS 143 prescribed practice of reporting a
retirement obligation as a contra-asset will no longer be
allowed. The Company does not expect the impact of this new
standard, which will take effect on January 1, 2003, to be
significant.


Accounting for Costs Associated with Exit or
Disposal Activities

In June 2002, the FASB issued Statement of
Financial Accounting Standards No. 146, Accounting
for Costs Associated with Exit or Disposal Activities
(FAS 146). FAS 146 requires that a liability for costs
associated with exit or disposal activities be recognized when
the liability is incurred. Existing generally accepted
accounting principles


78



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##### 



provide for the recognition of such costs at the
date of managements commitment to an exit plan. In
addition, FAS 146 requires that the liability be measured
at fair value and be adjusted for changes in estimated cash
flows. The provisions of the new standard are effective for exit
or disposal activities initiated after December 31, 2002.
The Company does not expect the impact of this new standard to
be significant.


Nature of Operations

The Company comprises two business segments:
Commercial Lines and Personal Lines. See note 3.

Commercial Lines

Commercial Lines offers a broad array of property
and casualty insurance and insurance-related services.
Protection is afforded to customers of Commercial Lines for the
risks of property loss such as fire and windstorm, financial
loss such as business interruption from property damage,
liability claims arising from operations and workers
compensation benefits through insurance products where risk is
transferred from the customer to Commercial Lines. Coverages
include workers compensation, general liability,
commercial multi-peril, commercial automobile, property,
fidelity and surety, professional liability, and several
miscellaneous coverages.


Commercial Lines is 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 trucking 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, excess SIPC, 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 diverse product and
program portfolio of specialty insurance lines, with particular
emphasis on management and professional liability insurance.
Products include various types of directors and
officers insurance, fiduciary, employment practices
liability insurance, errors and omissions coverages, and
fidelity and commercial crime coverages.

Net written premiums by market were as follows:

| |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  | 
|

|                                              |                     |      |         |         |  |      |         |         |  |   |         |         | 
|--------------------------------------------- | ------------------- | ---- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|(for the year ended December 31, in millions) |                     | 2002 |         | 2001    |  | 2000
|                                              |                     |      |         |         |  |     
|                                             
|                                             
|Core                                          |                     |      |         |         |  |      |         |         |  |   |         |        
|                                              | National Accounts   |      | $       | 734.6   |  |      | $       | 418.9   |  |   | $       | 352.3   | 
|                                              | Commercial Accounts |      |         | 3,556.1 |  |      |         | 2,407.1 |  |   |         | 2,098.9 | 
|                                              | Select Accounts     |      |         | 1,869.5 |  |      |         | 1,713.2 |  |   |         | 1,575.4 | 
|                                             
|                                              | Total Core          |      |         | 6,160.2 |  |      |         | 4,539.2 |  |   |         | 4,026.6 | 
|                                             
|Specialty                                     |                     |      |         |         |  |      |         |         |  |   |         |        
|                                              | Bond                |      |         | 629.9   |  |      |         | 590.2   |  |   |         | 486.5   | 
|                                              | Gulf                |      |         | 579.4   |  |      |         | 608.2   |  |   |         | 517.4   | 
|                                             
|                                              | Total Specialty     |      |         | 1,209.3 |  |      |         | 1,198.4 |  |   |         | 1,003.9 | 
|                                             
|Total net written premiums                    |                     | $    | 7,369.5 |         |  | $    | 5,737.6 |         |  | $ | 5,030.5 |        
|                                             

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


79



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##### 



organizations such as employee and affinity
groups, and joint marketing arrangements with other insurers.


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

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

Net written premiums by product line were as
follows:

| |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  | 
|

|                                              |  |      |         |      |  |      |         |  |  |   |         | 
|--------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|(for the year ended December 31, in millions) |  | 2002 |         | 2001 |  | 2000
|                                              |  |      |         |      |  |     
|                                             
|                                             
|Personal automobile                           |  | $    | 2,842.9 |      |  | $    | 2,590.7 |  |  | $ | 2,366.3 | 
|Homeowners and other                          |  |      | 1,732.1 |      |  |      | 1,517.2 |  |  |   | 1,446.5 | 
|                                             
|Total net written premiums                    |  | $    | 4,575.0 |      |  | $    | 4,107.9 |  |  | $ | 3,812.8 | 
|                                             

Catastrophe Exposure

The Company has geographic exposure to
catastrophe losses in certain areas of the country. Catastrophes
can be caused by various natural and man-made 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 is 7% for 2003, 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
$570.0 million for 2003 subject to final rules to be
established by the U.S. Treasury.

2. ACQUISITIONS AND DISPOSITIONS

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 $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. 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 CIRI 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

80



---



##### 



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.


In the third quarter of 2000, the Company
purchased the renewal rights to a portion of Reliance Group
Holdings, Inc.s commercial lines middle-market book of
business. The Company also acquired the renewal rights to
Frontier Insurance Group, Inc.s environmental, excess and
surplus lines casualty businesses and certain classes of surety
business. The final purchase price for these transactions, which
was dependent on the level of business renewed by the Company,
was approximately $26.2 million.

On May 31, 2000, the Company completed the
acquisition of the surety business of Reliance Group Holdings,
Inc. (Reliance Surety) for $580.0 million. In connection
with the acquisition, the Company entered into a reinsurance
arrangement for pre-existing business, and the resulting net
cash outlay for this transaction was approximately
$278.4 million. This transaction included the acquisition
of an intangible asset of approximately $450.0 million,
which is being amortized over 15 years. The results of
operations and the assets and liabilities acquired from Reliance
Surety are included in the financial statements beginning
June 1, 2000. This acquisition was accounted for as a
purchase.

During April 2000, TPC completed a cash tender
offer to purchase all of the outstanding shares of TIGHI that it
did not already own at a price of $41.95 per share. The
total cost of the shares acquired was approximately
$2.413 billion and generated goodwill of approximately
$1.006 billion. The goodwill represents the excess of the
cost of the acquired shares over the minority interest liability
recorded by TPC. In conjunction with the purchase of
TIGHIs outstanding shares, TPC entered into a note
agreement with Citigroup to borrow up to a maximum of
$2.600 billion.

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.

| |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  | 
|

|                                                     |                                    |                |          |          |         |            |         |         |         |   |          |          |          | 
|---------------------------------------------------- | ---------------------------------- | -------------- | -------- | -------- | ------- | ---------- | ------- | ------- | ------- | - | -------- | -------- | -------- | 
|                                                     |                                    |                |          |          |         | Total     
|                                                     |                                    | Commercial     |          | Personal |         | Reportable
|(at and for the year ended December 31, in millions) |                                    | Lines          |          | Lines    |         | Segments  
|                                                    
|                                                    
|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    |         
|                                                     | Realized investment gains (losses) |                |          | 190.1    |         |            |         | (43.8   | )       |   |          | 146.3    |         
|                                                     | Recoveries from former affiliate   |                |          | 520.0    |         |            |         |        |         |   |          | 520.0    |         
|                                                     | Other revenues                     |                |          | 32.1     |         |            |         | 80.1    |         |   |          | 112.2    |         
|                                                    
|                                                     |                                    | Total revenues |          | $        | 9,493.6 |            |         | $       | 4,775.1 |   |          | $        | 14,268.7 | 
|                                                    
|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    |         
|                                                     | Realized investment gains          |                |          | 319.1    |         |            |         | 6.3     |         |   |          | 325.4    |         
|                                                     | Other revenues                     |                |          | 41.4     |         |            |         | 73.3    |         |   |          | 114.7    |         
|                                                    
|                                                     |                                    | Total revenues |          | $        | 7,771.2 |            |         | $       | 4,453.7 |   |          | $        | 12,224.9 | 
|                                                    
|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 |         
|                                                    
|2000                                                 |                                    |                |          |          |         |            |         |         |         |   |          |         
|Revenues                                             |                                    |                |          |          |         |            |         |         |         |   |          |         
|                                                     | Premiums                           |                | $        | 4,746.8  |         |            | $       | 3,715.4 |         |   | $        | 8,462.2  |         
|                                                     | Net investment income              |                |          | 1,713.2  |         |            |         | 446.1   |         |   |          | 2,159.3  |         
|                                                     | Fee income                         |                |          | 312.4    |         |            |         |        |         |   |          | 312.4    |         
|                                                     | Realized investment gains (losses) |                |          | 47.1     |         |            |         | (0.6    | )       |   |          | 46.5     |         
|                                                     | Other revenues                     |                |          | 16.1     |         |            |         | 70.8    |         |   |          | 86.9     |         
|                                                    
|                                                     |                                    | Total revenues |          | $        | 6,835.6 |            |         | $       | 4,231.7 |   |          | $        | 11,067.3 | 
|                                                    
|Amortization and depreciation                        |                                    | $              | 749.5    |          |         | $          | 637.3   |         |         | $ | 1,386.8  |         
|Federal income taxes                                 |                                    |                | 444.3    |          |         |            | 156.6   |         |         |   | 600.9    |         
|Operating income                                     |                                    |                | 1,189.3  |          |         |            | 360.5   |         |         |   | 1,549.8  |         
|Assets                                               |                                    |                | 45,166.2 |          |         |            | 7,961.1 |         |         |   | 53,127.3 |         
|                                                    

Operating income is reflected net of tax and
excludes realized investment gains (losses), restructuring
charges, the cumulative effect of changes in accounting
principles and TPC minority interest in 2000.

81



---



##### 



Business Segment Reconciliations

| |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  | 
|

|                                                          |                                      |      |          |          |   |      |          |          |  |   |          |          | 
|--------------------------------------------------------- | ------------------------------------ | ---- | -------- | -------- | - | ---- | -------- | -------- |  | - | -------- | -------- | 
|(at and for the year ended December 31, in millions)      |                                      | 2002 |          | 2001     |   | 2000
|                                                         
|                                                         
|Revenue reconciliation                                    |                                      |      |          |          |   |      |          |          |  |   |          |         
|Total revenues for reportable segments                    |                                      | $    | 14,268.7 |          |   | $    | 12,224.9 |          |  | $ | 11,067.3 |         
|Other revenues                                            |                                      |      | 1.0      |          |   |      | 5.6      |          |  |   | 3.7      |         
|                                                         
|                                                          | Total consolidated revenues          |      | $        | 14,269.7 |   |      | $        | 12,230.5 |  |   | $        | 11,071.0 | 
|                                                         
|Income reconciliation, net of tax                         |                                      |      |          |          |   |      |          |          |  |   |          |         
|Total operating income for reportable segments            |                                      | $    | 221.1    |          |   | $    | 993.2    |          |  | $ | 1,549.8  |         
|Other operating loss(1)                                   |                                      |      | (102.9   | )        |   |      | (137.5   | )        |  |   | (208.1   | )       
|Realized investment gains                                 |                                      |      | 99.0     |          |   |      | 209.9    |          |  |   | 30.6     |         
|Cumulative effect of changes in accounting
    principles |                                      |      | (242.6   | )        |   |      | 3.2      |          |  |   |         |         
|Restructuring charge                                      |                                      |      | (1.6     | )        |   |      | (3.4     | )        |  |   |         |         
|Minority interest                                         |                                      |      |         |          |   |      |         |          |  |   | (60.1    | )       
|                                                         
|                                                          | Total consolidated net income (loss) |      | $        | (27.0    | ) |      | $        | 1,065.4  |  |   | $        | 1,312.2  | 
|                                                         
|Asset reconciliation                                      |                                      |      |          |          |   |      |          |          |  |   |          |         
|Total assets for reportable segments                      |                                      | $    | 63,625.3 |          |   | $    | 56,604.0 |          |  | $ | 53,127.3 |         
|Other assets(2)                                           |                                      |      | 512.2    |          |   |      | 1,173.8  |          |  |   | 723.1    |         
|                                                         
|                                                          | Total consolidated
    assets        |      | $        | 64,137.5 |   |      | $        | 57,777.8 |  |   | $        | 53,850.4 | 
|                                                         



|    |                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The primary component of the other operating loss
    is after-tax interest expense of $99.6 million,
    $133.2 million and $192.1 million in 2002, 2001 and
    2000, respectively.                   
|   
|(2) | Other assets consists primarily of a receivable
    under the Citigroup indemnification agreement in 2002, goodwill
    in 2002, 2001 and 2000 and the investment in CitiInsurance in
    2001 and 2000.

Enterprise-Wide Disclosures

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

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

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 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 | 
|                                                                                                       

|                                                                                                        |       |           |          |                  |  |        |       |       |  |   |       |       |  |   |          |          | 
|------------------------------------------------------------------------------------------------------- | ----- | --------- | -------- | ---------------- |  | ------ | ----- | ----- |  | - | ----- | ----- |  | - | -------- | -------- | 
|                                                                                                        |       |           |          |                  |  |       
|                                                                                                        |       |           |          | Gross Unrealized |  |       
|                                                                                                        |       | Amortized |          |                  |  | Fair  
|(at December 2001, in millions)                                                                         |       | Cost      |          | Gains            |  | Losses |       | Value
|                                                                                                       
|                                                                                                       
|Mortgage-backed securities  CMOs and
    pass-through securities                                       |       | $         | 5,558.9  |                  |  | $      | 106.5 |       |  | $ | 56.6  |       |  | $ | 5,608.8  |         
|U.S. Treasury securities and obligations of U.S.
    Government and government agencies and authorities |       |           | 1,361.4  |                  |  |        | 36.9  |       |  |   | 15.2  |       |  |   | 1,383.1  |         
|Obligations of states, municipalities and
    political subdivisions                                    |       |           | 10,842.6 |                  |  |        | 240.7 |       |  |   | 73.6  |       |  |   | 11,009.7 |         
|Debt securities issued by foreign governments                                                           |       |           | 592.7    |                  |  |        | 29.7  |       |  |   | 4.4   |       |  |   | 618.0    |         
|All other corporate bonds                                                                               |       |           | 6,917.4  |                  |  |        | 256.0 |       |  |   | 125.1 |       |  |   | 7,048.3  |         
|Redeemable preferred stock                                                                              |       |           | 187.5    |                  |  |        | 6.8   |       |  |   | 11.5  |       |  |   | 182.8    |         
|                                                                                                       
|                                                                                                        | Total |           | $        | 25,460.5         |  |        | $     | 676.6 |  |   | $     | 286.4 |  |   | $        | 25,850.7 | 
|                                                                                                       

82



---



##### 



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.

|                                    |       |           |          |          |  |   |          |          | 
|----------------------------------- | ----- | --------- | -------- | -------- |  | - | -------- | -------- | 
|                                   
|                                   
|                                    |       | Amortized |          | Fair    
|(at December 31, 2002, in millions) |       | Cost      |          | Value   
|                                   
|                                   
|Due in one year or less             |       | $         | 580.6    |          |  | $ | 591.8    |         
|Due after 1 year through 5 years    |       |           | 3,355.4  |          |  |   | 3,458.6  |         
|Due after 5 years through 10 years  |       |           | 6,090.7  |          |  |   | 6,299.1  |         
|Due after 10 years                  |       |           | 10,255.7 |          |  |   | 10,713.2 |         
|                                   
|                                    |       |           | 20,282.4 |          |  |   | 21,062.7 |         
|Mortgage-backed securities          |       |           | 8,595.4  |          |  |   | 8,940.5  |         
|                                   
|                                    | Total |           | $        | 28,877.8 |  |   | $        | 30,003.2 | 
|                                   

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, 2002 and 2001, the Company
held CMOs classified as available for sale with a fair value of
$4.120 billion and $3.345 billion, respectively.
Approximately 58% and 54% of the Companys CMO holdings are
fully collateralized by GNMA, FNMA or FHLMC securities at
December 31, 2002 and 2001, respectively. In addition, the
Company held $4.815 billion and $2.273 billion of
GNMA, FNMA, FHLMC or FHA mortgage-backed pass-through securities
classified as available for sale at December 31, 2002 and
2001, respectively. Virtually all of these securities are rated
Aaa.

The Company engages in securities lending
agreements whereby certain securities from its portfolio are
loaned to other institutions for short periods of time. The
Company generally receives cash collateral from the borrower,
equal to at least the market value of the loaned securities plus
accrued interest, and reinvests it in a short-term investment
pool. See note 16. The loaned securities remain a recorded asset
of the Company, however, the Company records a liability for the
amount of the collateral held, representing its obligation to
return the collateral related to these loaned securities, and
reports that liability as part of other liabilities in the
consolidated balance sheet. At December 31, 2002 and 2001,
the Company held collateral of $597.9 million and
$1.002 billion, respectively.

At December 31, 2002 and 2001, TPCs
insurance subsidiaries had $2.052 billion and
$1.668 billion, respectively, of securities on deposit at
financial institutions in certain states pursuant to the
respective states insurance regulatory authorities.

Proceeds from sales of fixed maturities
classified as available for sale were $14.699 billion,
$14.469 billion and $12.507 billion in 2002, 2001 and
2000, respectively. Gross gains of $570.9 million,
$599.3 million and $267.2 million and gross losses of
$148.4 million, $158.6 million and
$273.4 million, respectively, were realized on those sales.

Equity Securities

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

| |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|

|                                    |       |      |       |            |  |        |      |       |  |   |      |      |  |   |       |       | 
|----------------------------------- | ----- | ---- | ----- | ---------- |  | ------ | ---- | ----- |  | - | ---- | ---- |  | - | ----- | ----- | 
|                                    |       |      |       |            |  |       
|                                    |       |      |       | Gross      |  |       
|                                    |       |      |       | Unrealized |  |       
|                                    |       |      |       |            |  | Fair  
|(at December 31, 2002, in millions) |       | Cost |       | Gains      |  | Losses |      | Value
|                                   
|                                   
|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 | 
|                                   

|                                    |       |   |       |       |  |   |      |      |  |   |      |      |  |   |       |       | 
|----------------------------------- | ----- | - | ----- | ----- |  | - | ---- | ---- |  | - | ---- | ---- |  | - | ----- | ----- | 
|(at December 31, 2001, in millions) |       |   |       |       |  |   |      |     
|                                   
|Common stocks                       |       | $ | 65.7  |       |  | $ | 5.0  |      |  | $ | 15.9 |      |  | $ | 54.8  |      
|Nonredeemable preferred stocks      |       |   | 914.7 |       |  |   | 29.0 |      |  |   | 14.5 |      |  |   | 929.2 |      
|                                   
|                                    | Total |   | $     | 980.4 |  |   | $    | 34.0 |  |   | $    | 30.4 |  |   | $     | 984.0 | 
|                                   

Proceeds from sales of equity securities were
$127.2 million, $469.7 million and $2.355 billion
in 2002, 2001 and 2000, respectively, resulting in gross
realized gains of $18.1 million, $61.1 million and
$154.3 million and gross realized losses of
$13.7 million, $33.4 million and $74.1 million,
respectively.

Mortgage Loans

Aggregate annual maturities on mortgage loans are
$35.8 million, $28.3 million, $9.0 million,
$15.8 million, $40.0 million and $129.0 million
for 2003, 2004, 2005, 2006, 2007 and 2008 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 not significant at
December 31, 2002 and 2001.

83



---



##### 



Concentrations

At December 31, 2002 and 2001, the Company
had concentrations of credit risk in tax-exempt investments of
the State of Texas of $1.386 billion and
$1.187 billion, respectively, and of the State of New York
of $1.269 billion and $1.027 billion, respectively.

Prior to the Citigroup Distribution, the Company
participated in a short-term investment pool maintained by a
former affiliate. See note 16.

Included in fixed maturities are below investment
grade assets totaling $1.945 billion and
$1.748 billion at December 31, 2002 and 2001,
respectively. The Company defines its below investment grade
assets as those securities rated Ba1 or lower by
external rating agencies, or the equivalent by internal analysts
when a public rating does not exist. Such assets include
publicly traded below investment grade bonds and certain other
privately issued bonds that are classified as below investment
grade loans.

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

Net Investment Income

| |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  | 
|

|                                              |  |      |         |      |  |      |         |  |  |   |         | 
|--------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                             
|                                             
|(for the year ended December 31, in millions) |  | 2002 |         | 2001 |  | 2000
|                                             
|                                             
|Gross investment income                       |  |      |         |      |  |      |         |  |  |   |         | 
|Fixed maturities                              |  | $    | 1,629.8 |      |  | $    | 1,657.3 |  |  | $ | 1,708.3 | 
|Mortgage loans                                |  |      | 26.8    |      |  |      | 28.3    |  |  |   | 57.9    | 
|Other, including trading                      |  |      | 280.6   |      |  |      | 394.6   |  |  |   | 435.9   | 
|                                             
|                                              |  |      | 1,937.2 |      |  |      | 2,080.2 |  |  |   | 2,202.1 | 
|Investment expenses                           |  |      | 56.7    |      |  |      | 46.2    |  |  |   | 40.5    | 
|                                             
|Net investment income                         |  | $    | 1,880.5 |      |  | $    | 2,034.0 |  |  | $ | 2,161.6 | 
|                                             

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) |  | 2002 |       | 2001 |  | 2000
|                                             
|                                             
|Realized investment gains (losses)            |  |      |       |      |  |      |       |   |  |   |       |  
|Fixed maturities                              |  | $    | 167.5 |      |  | $    | 331.0 |   |  | $ | (16.8 | )
|Equity securities                             |  |      | (4.1  | )    |  |      | (8.1  | ) |  |   | 59.9  |  
|Mortgage loans                                |  |      |      |      |  |      |      |   |  |   | 9.8   |  
|Real estate held for sale                     |  |      |      |      |  |      |      |   |  |   | 12.6  |  
|Other                                         |  |      | (16.7 | )    |  |      | (.4   | ) |  |   | (18.5 | )
|                                             
|                                              |  |      | 146.7 |      |  |      | 322.5 |   |  |   | 47.0  |  
|Related taxes                                 |  |      | 47.7  |      |  |      | 112.6 |   |  |   | 16.4  |  
|                                             
|Net realized investment gains                 |  | $    | 99.0  |      |  | $    | 209.9 |   |  | $ | 30.6  |  
|                                             

Included in net realized investment gains were
impairment charges related to other than temporary declines in
value of $284.1 million, $146.2 million and
$30.9 million for the years ended December 31, 2002,
2001 and 2000, respectively.

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)             |  | 2002 |       | 2001 |  | 2000
|                                                                
|                                                                
|Change in unrealized investments gains
    (losses)              |  |      |       |      |  |      |        |   |  |   |         |  
|Fixed maturities                                                 |  | $    | 735.6 |      |  | $    | (279.0 | ) |  | $ | 1,074.8 |  
|Equity securities                                                |  |      | (14.0 | )    |  |      | 47.0   |   |  |   | (138.4  | )
|                                                                
|                                                                 |  |      | 721.6 |      |  |      | (232.0 | ) |  |   | 936.4   |  
|Related taxes                                                    |  |      | 249.4 |      |  |      | (81.1  | ) |  |   | 327.8   |  
|Change in minority interest                                      |  |      | 3.2   |      |  |      |       |   |  |   | (30.8   | )
|                                                                
|Change in unrealized gains (losses) on
    investment securities |  |      | 475.4 |      |  |      | (150.9 | ) |  |   | 577.8   |  
|Balance, beginning of year                                       |  |      | 256.2 |      |  |      | 407.1  |   |  |   | (170.7  | )
|                                                                
|Balance, end of year                                             |  | $    | 731.6 |      |  | $    | 256.2  |   |  | $ | 407.1   |  
|                                                                

5. REINSURANCE

The Company participates in reinsurance in order
to limit losses, minimize exposure to large risks, provide
additional capacity for future growth and to effect
business-sharing arrangements. In addition, the Company assumes
100% of the workers compensation premiums written by the
Accident Department of its 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.

84



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##### 



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.

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

| |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  | 
|

|                                              |                               |      |          |          |   |      |          |          |   |   |         |          |  
|--------------------------------------------- | ----------------------------- | ---- | -------- | -------- | - | ---- | -------- | -------- | - | - | ------- | -------- | -
|(for the year ended December 31, in millions) |                               | 2002 |          | 2001     |   | 2000
|                                             
|                                             
|Written premiums                              |                               |      |          |          |   |      |          |          |   |   |         |         
|Direct                                        |                               | $    | 13,468.3 |          |   | $    | 10,995.3 |          |   | $ | 9,762.5 |         
|Assumed from:                                 |                               |      |          |          |   |      |          |          |   |   |         |         
|                                              | Formerly affiliated companies |      |          | 82.9     |   |      |          | 143.7    |   |   |         | 196.9    |  
|                                              | Non-affiliated companies      |      |          | 524.0    |   |      |          | 529.4    |   |   |         | 689.0    |  
|Ceded to:                                     |                               |      |          |          |   |      |          |          |   |   |         |         
|                                              | Formerly affiliated companies |      |          | (118.4   | ) |      |          | (120.0   | ) |   |         | (105.0   | )
|                                              | Non-affiliated companies      |      |          | (2,012.3 | ) |      |          | (1,702.9 | ) |   |         | (1,700.1 | )
|                                             
|Total net written premiums                    |                               | $    | 11,944.5 |          |   | $    | 9,845.5  |          |   | $ | 8,843.3 |         
|                                             
|Earned premiums                               |                               |      |          |          |   |      |          |          |   |   |         |         
|Direct                                        |                               | $    | 12,525.1 |          |   | $    | 10,460.1 |          |   | $ | 9,356.9 |         
|Assumed from:                                 |                               |      |          |          |   |      |          |          |   |   |         |         
|                                              | Formerly affiliated companies |      |          | 109.3    |   |      |          | 181.1    |   |   |         | 218.2    |  
|                                              | Non-affiliated companies      |      |          | 562.1    |   |      |          | 596.0    |   |   |         | 646.7    |  
|Ceded to:                                     |                               |      |          |          |   |      |          |          |   |   |         |         
|                                              | Formerly affiliated companies |      |          | (116.1   | ) |      |          | (113.0   | ) |   |         | (100.2   | )
|                                              | Non-affiliated companies      |      |          | (1,925.1 | ) |      |          | (1,713.3 | ) |   |         | (1,659.4 | )
|                                             
|Total net earned premiums                     |                               | $    | 11,155.3 |          |   | $    | 9,410.9  |          |   | $ | 8,462.2 |         
|                                             
|Percentage of amount assumed to net earned    |                               |      | 6.0      | %        |   |      | 8.3      | %        |   |   | 10.2    | %       
|                                             
|Ceded claims incurred                         |                               | $    | 2,111.6  |          |   | $    | 1,844.5  |          |   | $ | 1,248.0 |         
|                                             

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

| |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  | 
|

|                               |                                |                              |          |         |       |   |          |         |       | 
|------------------------------ | ------------------------------ | ---------------------------- | -------- | ------- | ----- | - | -------- | ------- | ----- | 
|(at December 31, in millions)  |                                | 2002                         |          | 2001   
|                              
|                              
|Pools and associations         |                                | $                            | 2,094.9  |         |       | $ | 2,082.0  |        
|Structured settlements:        |                                |                              |          |         |       |   |          |        
|                               | Non-affiliated companies       |                              |          | 1,563.9 |       |   |          | 1,573.8 |      
|                               | Formerly affiliated companies: |                              |          |         |       |   |          |         |      
|                               |                                | Property-casualty business   |          |         | 810.4 |   |          |         | 824.7 | 
|                               |                                | Accident and health business |          |         | 107.6 |   |          |         | 120.1 | 
|Other:                         |                                |                              |          |         |       |   |          |        
|                               | Non-affiliated companies       |                              |          | 6,398.8 |       |   |          | 6,445.5 |      
|                               | Formerly affiliated companies  |                              |          | 1.9     |       |   |          | 1.2     |      
|                              
|Total reinsurance recoverables |                                | $                            | 10,977.5 |         |       | $ | 11,047.3 |        
|                              

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, 2002 and 2001 include $296.5 million and
$247.9 million, respectively, recoverable from Equitas. The
outcome of the restructuring of Lloyds is uncertain and
the impact, if any, on collectibility of amounts recoverable by
the Company from Equitas cannot be quantified at this time. 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, 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 $329.1 million and
$286.2 million at December 31, 2002 and 2001,
respectively.

6. INSURANCE CLAIMS RESERVES

Claims and claim adjustment expense reserves were
as follows:

| |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  | 
|

|                              |  |      |          |      |  |   |          | 
|----------------------------- |  | ---- | -------- | ---- |  | - | -------- | 
|(at December 31, in millions) |  | 2002 |          | 2001
|                             
|                             
|Property-casualty             |  | $    | 33,628.4 |      |  | $ | 30,616.5 | 
|Accident and health           |  |      | 107.6    |      |  |   | 120.1    | 
|                             
|Total                         |  | $    | 33,736.0 |      |  | $ | 30,736.6 | 
|                             

85



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##### 



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)                                          |              | 2002            |          | 2001    |          | 2000
|                                                                                             
|                                                                                             
|Claims and claim adjustment expense reserves at
    beginning of year                         |              | $               | 30,616.5 |         |          | $    | 28,312.0 |         |         | $ | 28,853.3 |        
|Less reinsurance recoverables on unpaid losses                                                |              |                 | 10,419.2 |         |          |      | 8,878.1  |         |         |   | 8,870.6  |        
|                                                                                             
|Net balance at beginning of year                                                              |              |                 | 20,197.3 |         |          |      | 19,433.9 |         |         |   | 19,982.7 |        
|                                                                                             
|Provision for claims and claim adjustment
    expenses for claims arising in the current year |              |                 | 7,872.1  |         |          |      | 7,600.6  |         |         |   | 6,508.9  |        
|Estimated claims and claim adjustment expenses
    for claims arising in prior
    years      |              |                 | 3,031.0  |         |          |      | (41.0    | )       |         |   | (247.0   | )      
|Acquisitions                                                                                  |              |                 |         |         |          |      | 622.7    |         |         |   |         |        
|                                                                                             
|                                                                                              |              | Total increases |          |         | 10,903.1 |      |          |         | 8,182.3 |   |          |         | 6,261.9 | 
|                                                                                             
|Claims and claim adjustment expense payments for
    claims arising in:                       |              |                 |          |         |          |      |          |         |         |   |          |        
|                                                                                              | Current year |                 |          | 2,814.3 |          |      |          | 3,044.9 |         |   |          | 2,728.7 |        
|                                                                                              | Prior years  |                 |          | 5,018.0 |          |      |          | 4,374.0 |         |   |          | 4,082.0 |        
|                                                                                             
|                                                                                              |              | Total payments  |          |         | 7,832.3  |      |          |         | 7,418.9 |   |          |         | 6,810.7 | 
|                                                                                             
|Net balance at end of year                                                                    |              |                 | 23,268.1 |         |          |      | 20,197.3 |         |         |   | 19,433.9 |        
|Plus reinsurance recoverables on unpaid losses                                                |              |                 | 10,360.3 |         |          |      | 10,419.2 |         |         |   | 8,878.1  |        
|                                                                                             
|Claims and claim adjustment expense reserves at
    end of year                               |              | $               | 33,628.4 |         |          | $    | 30,616.5 |         |         | $ | 28,312.0 |        
|                                                                                             

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 $578.0 million in
2002 for asbestos, environmental and cumulative injury claims.

The increase in the claims and claim adjustment
expense reserves in 2001 from 2000 was primarily due to the
additional reserves recorded as part of the acquisition and
contribution of certain affiliates (see note 2), and the
impact of the terrorist attack on September 11th, 2001.
Partially offsetting the above were net payments of
$426.6 million in 2001 for asbestos, environmental and
cumulative injury claims.

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 CIOTA 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. For each of the years ended December 31, 2002,
2001 and 2000, changes in allocations between policy years of
unallocated 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 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 CIOTA 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.

In 2000, estimated claims and claim adjustment
expenses for claims arising in prior years was a net favorable
development of $247.0 million which included
$76.1 million of net favorable development which impacted
results of operations, primarily relating to certain Commercial
Lines coverages, predominantly in the commercial multi-peril
line of business, and in certain Personal Lines coverages,
predominantly personal umbrella coverages. Included in the
$76.1 million net favorable development was the impact of
unfavorable development of $50.0 million for asbestos
claims, $64.4 million for environmental claims and
$15.9 million for CIOTA claims. In 2000, Commercial Lines
experienced favorable loss development of $53.4 million on
loss sensitive policies in various lines; however, since the

86



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##### 



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 $3.790 billion and $1.216 billion for
asbestos and environmental-related claims, net of reinsurance,
at December 31, 2002 and 2001, respectively.

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
policyholder-by-policyholder basis. In the course of this
evaluation, the Company considers: available insurance coverage,
including the role 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. Once the gross ultimate
exposure for indemnity and related claim adjustment expense is
determined for each policyholder by each policy year, the
Company calculates 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 meaningful data from which an average
asbestos defense or indemnity payment may be determined.

With respect to its 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. Losses paid have increased in 2002
compared to prior years. There has been an acceleration in
recent quarters in the amount of payments, including those from
prior settlements of coverage disputes entered into between the
Company and certain of its policyholders. For 2002,
approximately 54% of total paid losses relate to policyholders
with whom the Company previously entered into settlement
agreements that limit the Companys liability. Net losses
paid were $361.1 million for 2002 compared to
$174.8 million for 2001 reflective of the items described
above.

At December 31, 2002, asbestos reserves were
$3.404 billion, an increase of $2.584 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. This charge was partially offset by an after tax benefit
of $520.0 million, included in revenues, related to
recoveries from full utilization of the Citigroup
indemnification agreement. The increase in reserves is 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.

In establishing environmental reserves, the
Company evaluates the exposure presented by each policyholder
and the anticipated cost of resolution, if any, for each
policyholder on a quarterly basis. 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.

As a result of the processes and procedures
described above, management believes that the reserves carried
for asbestos and environmental claims at December 31, 2002
are appropriately established based upon known facts, current
law and managements judgment. However, the uncertainties
surrounding the final resolution of these claims

87



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##### 



continue, which may result in the estimates being
subject to revision as new information becomes available. These
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 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 results of operations and financial
condition in future periods.

In August 2002, the Company entered into a
settlement agreement with Shook & Fletcher Insulation
Co. (Shook) settling coverage litigation under insurance
policies, which the Company issued to Shook. After payments made
in the fourth quarter of 2002 under this settlement, the
remaining obligations are valued at approximately
$99.2 million (after reinsurance and discounting).

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 based upon substantial
progress in negotiations during the fourth quarter of 2002. The
Companys single payment contribution to the proposed
settlement, expected in June 2004, is approximately
$388.8 million after reinsurance.

7. TERRORIST ATTACK ON SEPTEMBER 11TH

During 2001, the Company recorded a charge of
$489.5 million representing the estimated loss for both
reported and unreported claims incurred and related claim
adjustment expenses, net of reinsurance recoverables and taxes,
related to the terrorist attack on September 11th. The
associated reserves and related reinsurance recoverables
represent the estimated ultimate net costs of all incurred
claims and claim adjustment expenses related to the attack.
Since the reserves and related reinsurance recoverables are
based on estimates, the ultimate net liability may be more or
less than such amounts.

8. DEBT

Notes payable to former affiliates were as
follows:

| |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  | 
|

|                                         |       |      |       |       |  |   |         |         | 
|---------------------------------------- | ----- | ---- | ----- | ----- |  | - | ------- | ------- | 
|(at December 31, in millions)            |       | 2002 |       | 2001 
|                                        
|                                        
|3.60% Note due 2003 under line of credit |       | $    | 500.0 |       |  | $ | 500.0   |        
|Floating rate loan under line of credit  |       |      | 200.0 |       |  |   |        |        
|Floating rate note payable               |       |      |      |       |  |   | 1,197.7 |        
|                                        
|                                         | Total |      | $     | 700.0 |  |   | $       | 1,697.7 | 
|                                        

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.

88



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TIGHI has an additional $250.0 million
revolving line of credit from Citigroup. TIGHI pays 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 1.92% for 2002.

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 (see note 2). 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.

Long-term debt and convertible notes payable
outstanding were as follows:

| |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  | 
|

|                                                           |       |      |         |         |  |   |       |       | 
|---------------------------------------------------------- | ----- | ---- | ------- | ------- |  | - | ----- | ----- | 
|(at December 31, in millions)                              |       | 2002 |         | 2001   
|                                                          
|                                                          
|Promissory Note due 2004                                   |       | $    | 550.0   |         |  | $ |      |      
|6.75% Notes due 2006                                       |       |      | 150.0   |         |  |   | 150.0 |      
|7.81% Note various due dates through 2011                  |       |      | 27.0    |         |  |   | 30.0  |      
|7.75% Notes due 2026                                       |       |      | 200.0   |         |  |   | 200.0 |      
|Convertible junior subordinated notes payable due
    2032 |       |      | 892.5   |         |  |   |      |      
|Convertible notes payable due 2032                         |       |      | 49.7    |         |  |   |      |      
|                                                          
|                                                           |       |      | 1,869.2 |         |  |   | 380.0 |      
|Debt issuance costs                                        |       |      | 25.5    |         |  |   | .2    |      
|                                                          
|                                                           | Total |      | $       | 1,843.7 |  |   | $     | 379.8 | 
|                                                          

At December 31, 2000, TPC had a note payable
to Citigroup, which had a principal balance outstanding of
$287.0 million. Interest accrued at a rate of 5.06%,
compounded semi-annually. On March 29, 2001, this note was
repaid in its entirety, plus accrued interest.

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 rate of the 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.

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

89



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##### 



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). TIGHI
has the right, at any time, to defer distributions on the TIGHI
Securities for a period not exceeding 20 consecutive quarterly
interest periods (though such distributions would continue to
accrue interest during any such extended payment period). TIGHI
cannot pay dividends during such deferments.


In August 2002, Commercial Insurance Resources,
Inc. (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
(see note 2). 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 Initial Public Offering
(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 mandatory
convertible preferred stock during August 2002 (see note 2). 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 $2.2 million were declared
and paid during 2002.

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 Promissory Note. The Floating Rate Notes also carry a
variable interest rate of LIBOR plus 25 basis points per annum
and are callable by the Company after August 5, 2003.

TPCs primary source of funds for debt
service is dividends from subsidiaries, which are subject to
various restrictions. See note 10.

9. FEDERAL INCOME TAXES

| |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  | 
|

|                                                                                                                               |                                                            |       |        |        |        |      |         |        |       |   |         |        |       | 
|------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------- | ----- | ------ | ------ | ------ | ---- | ------- | ------ | ----- | - | ------- | ------ | ----- | 
|(for the year ended December 31, in millions)                                                                                  |                                                            | 2002  |        | 2001   |        | 2000
|                                                                                                                              
|                                                                                                                              
|Effective tax rate                                                                                                             |                                                            |       |        |        |        |      |         |        |       |   |         |       
|Income (loss) before federal income taxes,
    minority interest and cumulative effect of changes in accounting
    principles |                                                            | $     | (259.8 | )      |        | $    | 1,389.0 |        |       | $ | 1,863.6 |       
|Statutory tax rate                                                                                                             |                                                            |       | 35.0   | %      |        |      | 35.0    | %      |       |   | 35.0    | %     
|                                                                                                                              
|Expected federal income taxes (benefit)                                                                                        |                                                            |       | (90.9  | )      |        |      | 486.2   |        |       |   | 652.3   |       
|Tax effect of:                                                                                                                 |                                                            |       |        |        |        |      |         |        |       |   |         |       
|                                                                                                                               | Nontaxable investment income                               |       |        | (180.1 | )      |      |         | (169.2 | )     |   |         | (166.3 | )    
|                                                                                                                               | Recoveries under Citigroup Indemnification
    Agreement . |       |        | (182.0 | )      |      |         |       |       |   |         |       |      
|                                                                                                                               | Other, net                                                 |       |        | (23.5  | )      |      |         | 9.8    |       |   |         | 5.3    |      
|                                                                                                                              
|Federal income taxes (benefit)                                                                                                 |                                                            | $     | (476.5 | )      |        | $    | 326.8   |        |       | $ | 491.3   |       
|                                                                                                                              
|Effective tax rate                                                                                                             |                                                            |       | (183.4 | )%     |        |      | 23.5    | %      |       |   | 26.4    | %     
|                                                                                                                              
|Composition of federal income taxes                                                                                            |                                                            |       |        |        |        |      |         |        |       |   |         |       
|Current expense:                                                                                                               |                                                            |       |        |        |        |      |         |        |       |   |         |       
|                                                                                                                               | United States                                              |       | $      | 109.0  |        |      | $       | 310.6  |       |   | $       | 307.3  |      
|                                                                                                                               | Foreign                                                    |       |        | 3.3    |        |      |         | 5.1    |       |   |         | 17.3   |      
|                                                                                                                              
|                                                                                                                               |                                                            | Total |        |        | 112.3  |      |         |        | 315.7 |   |         |        | 324.6 | 
|                                                                                                                              
|Deferred expense:                                                                                                              |                                                            |       |        |        |        |      |         |        |       |   |         |       
|                                                                                                                               | United States                                              |       |        | (588.5 | )      |      |         | 11.0   |       |   |         | 167.2  |      
|                                                                                                                               | Foreign                                                    |       |        | (.3    | )      |      |         | .1     |       |   |         | (.5    | )    
|                                                                                                                              
|                                                                                                                               |                                                            | Total |        |        | (588.8 | )    |         |        | 11.1  |   |         |        | 166.7 | 
|                                                                                                                              
|Federal income tax expense (benefit)                                                                                           |                                                            | $     | (476.5 | )      |        | $    | 326.8   |        |       | $ | 491.3   |       
|                                                                                                                              

Additional tax benefits attributable to employee
stock plans allocated directly to shareholders equity were
$2.6 million, $.3 million and $.4 million for the
years ended December 31, 2002, 2001 and 2000, respectively.

The current federal income tax payable at
December 31, 2002 and 2001 was $179.5 million and
$155.3 million, respectively.

90



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

| |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  | 
|

|                                             |       |      |         |         |  |   |         |         | 
|-------------------------------------------- | ----- | ---- | ------- | ------- |  | - | ------- | ------- | 
|(at December 31, in millions)                |       | 2002 |         | 2001   
|                                            
|                                            
|Deferred tax assets                          |       |      |         |         |  |   |         |        
|Claims and claim adjustment expense reserves |       | $    | 923.4   |         |  | $ | 944.6   |        
|Net operating loss carryforward              |       |      | 486.5   |         |  |   |        |        
|Unearned premium reserves                    |       |      | 388.2   |         |  |   | 323.4   |        
|Employee benefits                            |       |      | 74.6    |         |  |   | 135.7   |        
|Insurance-related assessments                |       |      | 45.1    |         |  |   | 51.6    |        
|Acquisition-related reserves                 |       |      |        |         |  |   | 32.6    |        
|Other                                        |       |      | 145.4   |         |  |   | 173.2   |        
|                                            
|                                             | Total |      |         | 2,063.2 |  |   |         | 1,661.1 | 
|                                            
|Deferred tax liabilities                     |       |      |         |         |  |   |         |        
|Deferred acquisition costs                   |       |      | 304.4   |         |  |   | 268.4   |        
|Investments                                  |       |      | 261.0   |         |  |   | 144.7   |        
|Other                                        |       |      | 50.7    |         |  |   | 65.6    |        
|                                            
|                                             | Total |      |         | 616.1   |  |   |         | 478.7   | 
|                                            
|Net deferred tax asset                       |       | $    | 1,447.1 |         |  | $ | 1,182.4 |        
|                                            

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.

The Company has a net operating loss carryforward
of $1.390 billion as of December 31, 2002, which
expires December 31, 2022. 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. These years have sufficient taxable
income to utilize the entire operating loss carryback. If the
carryback is approved, the Companys deferred tax asset
would be reduced by $486.5 million with an offset to the
current federal income tax payable.

In the opinion of the Companys management,
realization of the recognized deferred tax asset of
$1.447 billion is more likely than not based on
expectations as to the Companys future taxable income.
Excluding the effect of the asbestos reserve increase in 2002
(see note 6), the Company has reported pretax financial
statement income of $1.848 billion on average over the last
three years and has generated federal taxable income exceeding
$1.071 billion on average in each year during the same
period. Projections of taxable income for 2003 are in excess of
the December 31, 2002 net operating loss carryforward of
$1.390 billion.



|    |                                               
|--- | ----------------------------------------------
|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. The
financial structure of each of Travelers P&C Capital I
and Travelers P&C Capital II (the subsidiary trusts) at
December 31, 2002 and 2001 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.

91



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##### 



The subsidiary trusts will use the proceeds from
any redemption of TIGHI Securities to redeem a like amount of
TIGHI Debentures.

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. TIGHI has the right, at any time,
to defer payments of interest on the TIGHI Debentures and
consequently the distributions on the TIGHI Securities and
common securities would be deferred (though such distributions
would continue to accrue with interest thereon since interest
would accrue on the TIGHI Debentures during any such extended
interest payment period). TIGHI cannot pay dividends on its
common stock during such deferments. Distributions on the TIGHI
Securities have been classified as interest expense in the
consolidated statement of income.

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 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. See
note 1.

On January 23, 2003, the Company, through
its Capital Accumulation Program (CAP), issued 1,943,627 shares
of class A common stock in the form of restricted stock to
participating officers and other key employees. The fair market
value per share of the class A common stock was $16.18. The
restricted stock generally vests after a three-year period. See
note 11.

Rights Plan

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. 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 power.

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 junior
participating 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.

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 through September 2004 in the open market, and it
is expected that funding for the program will principally come
from operating cash flow. There were no shares repurchased under
this plan in 2002.

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, 2002, TPC had purchased
$3.7 million 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 Distribution shares held by the Citigroup Capital
Accumulation Program (CAP) upon forfeiture of plan participants.
See note 11. This commitment expires over three years upon
vesting of the Citigroup CAP participants. At December 31,
2002, TPC had acquired $1.3 million of its common stock
pursuant to this arrangement.

Shares acquired under these plans are authorized
and unissued and are reported as treasury stock in the
consolidated balance sheet.

92



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Dividends

TPC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
$727.7 million will be available by the end of 2003 for
such dividends without prior approval of the Connecticut
Insurance Department. However, the payment of a portion of this
amount is likely to be subject to approval by the Connecticut
Insurance Department, depending upon the amount and timing of
the payments. See note 1.

Statutory Net Income and Surplus

Statutory net income (loss) of TPCs
insurance subsidiaries was ($973.6) million,
$1.090 billion and $1.368 billion for the years ended
December 31, 2002, 2001 and 2000, respectively. Statutory
capital and surplus of TPCs insurance subsidiaries was
$7.287 billion and $7.687 billion at December 31,
2002 and 2001, respectively. Effective January 1, 2001, the
Company began preparing its statutory basis financial statements
in accordance with the NAIC Accounting Practices and Procedures
Manual subject to any deviations prescribed or permitted by its
domiciliary insurance commissioner (see note 1, Summary of
Significant Accounting Policies, Permitted Statutory Accounting
Practices). The impact of this change was an increase to the
statutory capital and surplus of the TPCs insurance
subsidiaries of approximately $350.0 million. In addition,
the acquisition of The Northland Company and Associates Lloyds
Insurance Company and the contribution of Associates Insurance
Company (see note 2) increased the statutory capital and
surplus of TPCs insurance subsidiaries by approximately
$340.0 million as of December 31, 2001.

93



---



##### 



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, 1999                                                                                        |  | $           | (170.7 | )          |  | $        |      |             |  | $ | (.3   | ) |  | $ | (171.0 | )
|Net unrealized gains on investment securities,
    net of tax of $372.7                                           |  |             | 606.8  |            |  |          |      |             |  |   |      |   |  |   | 606.8  |  
|Less: Reclassification adjustment for net
    realized gains included in net income, net of tax of ($14.1)        |  |             | (29.0  | )          |  |          |      |             |  |   |      |   |  |   | (29.0  | )
|Other, net of tax of ($1.1)                                                                                       |  |             |       |            |  |          |      |             |  |   | (6.1  | ) |  |   | (6.1   | )
|                                                                                                                 
|Current period change                                                                                             |  |             | 577.8  |            |  |          |      |             |  |   | (6.1  | ) |  |   | 571.7  |  
|                                                                                                                 
|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 of $297.1                                           |  |             | 574.4  |            |  |          |      |             |  |   |      |   |  |   | 574.4  |  
|Less: Reclassification adjustment for net
    realized gains included in net income, net of tax of
    ($47.7)(2) |  |             | (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  |  
|                                                                                                                 



|    |                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes foreign currency translation
    adjustments, hedged futures contracts and the cumulative effect
    of the change in accounting for derivative instruments and
    hedging activities.                                            
|   
|(2) | Certain equity investments were reclassified to
    other investments at December 31, 2002. See note 1. As a
    result of this change, the realized gains/(losses) from these
    investments are reported in net income beginning in 2002.

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 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 interest
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.

94



---



##### 



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 Program 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 may be exercised
for a period of ten years from the date of grant, vest 20% each
year over a five-year period and are exercisable 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, are exercisable for the remaining term of the related
original option, and vest six months after the grant date. 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.

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 options relate and the per share
exercise price of the replacement options 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 option for the Companys class A common stock;
    and                                                                   
| 
| | the ratio of the exercise price of the
    replacement option 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 year ended
December 31, 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 |      
|                              

95



---



##### 



The following table summarizes the information
about stock options outstanding under the Companys stock
option plans at December 31, 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 Program

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.

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.

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 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 awards was
$17.0 million, $19.4 million and $16.3 million
for the years ended December 31, 2002, 2001 and 2000,
respectively.

Information with respect to restricted stock
awards is as follows:

| |  |  |  | 
| |  |  |  | 
|

|                                                                    |  |      |           | 
|------------------------------------------------------------------- |  | ---- | --------- | 
|                                                                    |  | 2002
|                                                                   
|                                                                   
|New shares granted in 2002                                          |  |      |          | 
|Replacement grants at August 20, 2002                               |  |      | 3,311,551 | 
|Weighted average fair market value per share at
    August 20, 2002 |  |      | $17.31    | 
|                                                                   

96



---



##### 



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. The Company matches employee contributions up to 3%
of eligible pay but not more than $1,500 annually. The
expense related to this plan was $17.0 million for the year
ended December 31, 2002. Prior to the IPO and the Citigroup
Distribution, substantially all the Company 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 reported
in note 1, Stock-Based Compensation, is derived by
application of a variation of the Black-Scholes option pricing
model.

The significant assumptions used during the year
in estimating the fair value on the date of the grant for
original options and reload options granted in 2002 and for
replacement awards issued August 20, 2002 to Company
employees who held Citigroup stock option awards on that date
were as follows:

| |  |  |  | 
| |  |  |  | 
|

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

Also 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 fair value effect of stock options
reported in note 1, Stock-Based Compensation, for 2001 and
2000 applied assumptions underlying the Citigroup stock option
plan. The significant assumptions used for prior years in
estimating the fair values for Citigroup stock options were as
follows:

| |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  | 
|

|                                             |  |      |         |      |  |   |         |  
|-------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                             |  | 2001 |         | 2000
|                                            
|                                            
|Expected life of stock options               |  |      | 3 years |      |  |   | 3 years |  
|Expected volatility of Citigroup stock       |  |      | 38.6    | %    |  |   | 41.5    | %
|Risk-free interest rate                      |  |      | 4.52    | %    |  |   | 6.23    | %
|Expected annual dividend per Citigroup share |  |      | $0.92   |      |  | $ | 0.78    |  
|Expected annual forfeiture rate              |  |      | 5       | %    |  |   | 5       | %
|                                            

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

97



---



##### 



weighted average grant date fair value
information with respect to these grants:


| |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  | 
|

|                                         |  |         |            |                |  |            |       |  |  |   |      | 
|---------------------------------------- |  | ------- | ---------- | -------------- |  | ---------- | ----- |  |  | - | ---- | 
|                                         |  |         |            |                |  | Weighted  
|                                         |  |         |            | Weighted       |  | Average   
|                                         |  | Options |            | Average        |  | Grant Date
|                                         |  | Granted |            | Exercise Price |  | Fair Value
|                                        
|                                        
|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                       |  |         |            |                |  |            |       |  |  |   |      | 
|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                            |  |         | 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, postretirement 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 is expected to
be paid to Citigroup during the first quarter of 2003.

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 is expected in the first quarter of 2003.

The following tables summarize the funded status
and amounts recognized in the consolidated balance sheet for
TPCs plans.

| |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  | 
|

|                                                                                 |                    |               |        |                |   |   |       |     |  
|-------------------------------------------------------------------------------- | ------------------ | ------------- | ------ | -------------- | - | - | ----- | --- | -
|                                                                                 |                    |               |        | Postretirement
|(in millions)                                                                    |                    | Pension Plans |        | Benefit Plans 
|                                                                                
|                                                                                
|Change in benefit obligation                                                     |                    |               |        |                |   |   |       |    
|Benefit obligation at August 20, 2002                                            |                    | $             | 466.3  |                |   | $ | 14.2  |    
|Benefits earned                                                                  |                    |               | 11.1   |                |   |   | .1    |    
|Interest cost on benefit obligation                                              |                    |               | 11.5   |                |   |   | .4    |    
|Actuarial loss                                                                   |                    |               | 17.0   |                |   |   | .8    |    
|Benefits paid                                                                    |                    |               | (3.3   | )              |   |   | (.1   | )  
|                                                                                
|Benefit obligation at December 31, 2002                                          |                    | $             | 502.6  |                |   | $ | 15.4  |    
|                                                                                
|Change in plan assets                                                            |                    |               |        |                |   |   |       |    
|Fair value of plan assets at August 20, 2002                                     |                    | $             | 429.3  |                |   | $ |      |    
|Actual return on plan assets                                                     |                    |               | (16.3  | )              |   |   |      |    
|Company contributions                                                            |                    |               | .3     |                |   |   | .1    |    
|Benefits paid                                                                    |                    |               | (3.3   | )              |   |   | (.1   | )  
|                                                                                
|Fair value of plan assets at December 31,
    2002                               |                    | $             | 410.0  |                |   | $ |      |    
|                                                                                
|Reconciliation of prepaid (accrued) benefit
    cost and total amount recognized |                    |               |        |                |   |   |       |    
|Funded status of plan                                                            |                    | $             | (92.6  | )              |   | $ | (15.4 | )  
|Unrecognized:                                                                    |                    |               |        |                |   |   |       |    
|                                                                                 | Prior service cost |               |        | (42.9          | ) |   |       | (.2 | )
|                                                                                 | Net actuarial loss |               |        | 168.3          |   |   |       | 3.7 |  
|                                                                                
|Net amount recognized                                                            |                    | $             | 32.8   |                |   | $ | (11.9 | )  
|                                                                                
|Amounts recognized in the statement of
    financial position consist of:        |                    |               |        |                |   |   |       |    
|Prepaid benefit cost                                                             |                    | $             | 49.0   |                |   | $ |      |    
|Accrued benefit liability                                                        |                    |               | (121.2 | )              |   |   | (11.9 | )  
|Accumulated other comprehensive income                                           |                    |               | 105.0  |                |   |   |      |    
|                                                                                
|Net amount recognized                                                            |                    | $             | 32.8   |                |   | $ | (11.9 | )  
|                                                                                

98



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##### 



For the pension plans, the aggregate projected
benefit obligation and the aggregate accumulated benefit
obligation were $502.6 million and $482.2 million,
respectively, at December 31, 2002.

The principal assumptions used in determining
pension and postretirement benefit obligation are shown in the
following table:

| |  |  |  | 
| |  |  |  | 
|

|                                                |                             |  |       |       | 
|----------------------------------------------- | --------------------------- |  | ----- | ----- | 
|(at December 31, 2002)                          |                             | 
|                                               
|                                               
|Discount rate                                   |                             |  | 6.75% |      
|Expected long-term rate of return on assets     |                             |  | 8.0%  |      
|Future compensation increase rate               |                             |  | 4.5%  |      
|Health care cost increase rate (ultimate rate): |                             |  |       |      
|                                                | Following year              |  |       | 10.0% | 
|                                                | Decreasing to the year 2008 |  |       | 5.0%  | 
|                                               

As an indicator of sensitivity, increasing the
assumed health care cost trend rate by 1% would have increased
the accumulated postretirement benefit obligation as of
December 31, 2002 by $.8 million and the aggregate of
the service and interest cost components of 2002 net
postretirement benefit expense by less than $.1 million.
Decreasing the assumed health care cost trend rate by 1% would
have decreased the accumulated postretirement benefit obligation
as of December 31, 2002 by $.7 million and the
aggregate of the service and interest cost components of 2002
net postretirement benefit expense by less than $.1 million.

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.

| |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  | 
|

|                                    |                    |               |       |                |   |   |    |    | 
|----------------------------------- | ------------------ | ------------- | ----- | -------------- | - | - | -- | -- | 
|                                    |                    |               |       | Postretirement
|(in millions)                       |                    | Pension Plans |       | Benefit Plans 
|                                   
|                                   
|Service cost                        |                    | $             | 11.1  |                |   | $ | .1 |   
|Interest cost on benefit obligation |                    |               | 11.5  |                |   |   | .4 |   
|Expected return on plan assets      |                    |               | (14.0 | )              |   |   |   |   
|Amortization of unrecognized:       |                    |               |       |                |   |   |    |   
|                                    | Prior service cost |               |       | (2.1           | ) |   |    | .1 | 
|                                    | Net actuarial loss |               |       | 2.1            |   |   |    |   | 
|                                   
|Net benefit expense                 |                    | $             | 8.6   |                |   | $ | .6 |   
|                                   

Prior to the Citigroup Distribution, the Company
participated in noncontributory 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,
$11.7 million for 2001, and $14.5 million for 2000.

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. See
note 16. In conjunction with the Citigroup Distribution,
the Company purchased certain properties from Citigroup. See
note 1. Rent expense was $123.3 million,
$121.0 million and $113.3 million in 2002, 2001 and
2000, respectively.

Future minimum annual rentals under
noncancellable operating leases are $84.5 million,
$64.7 million, $49.3 million, $36.5 million,
$25.7 million and $40.7 million for 2003, 2004, 2005,
2006, 2007 and 2008 and thereafter, respectively. Future
sublease rental income of approximately $4.9 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.

Beginning January 1, 2001, the Company
adopted FAS 133, which establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognizes all
derivatives as either assets or liabilities in the consolidated
balance sheet and measure those instruments at fair value. Where
applicable, hedge accounting is used to account for derivatives.

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.

99



---



##### 



For fair value hedges, changes in the fair value
of derivatives are reflected in 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, 2002 and 2001.

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, 2002, the Company
expects to include realized investment losses of approximately
$.1 million in earnings over the next twelve months for
these cash flow hedges. To the extent these derivatives are not
effective, changes in their fair value are immediately included
in 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 are 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, 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, 2002 and 2001, the amount included in the
foreign currency translation adjustment in equity from nonowner
sources was an $8.5 million gain and $3.2 million
loss. The ineffective portion is reflected in realized
investment gains (losses).

Derivatives that are either hedging instruments
that are not designated or do not qualify as hedges under the
new rules are also carried at fair value with changes in value
reflected in realized investment gains (losses). The Company has
certain foreign currency forward contracts, which are not
designated as hedges at December 31, 2002 and 2001.

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
realized investment gains (losses). During the year ended
December 31, 2002, the Company realized a gain of
$3.8 million from hedge ineffectiveness. During the year
ended December 31, 2001, there was no hedge ineffectiveness.

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 or a forecasted transaction
is not expected to occur when scheduled, any changes in fair
value of the end-user derivative are immediately reflected in
realized investment gains (losses). During the year ended
December 31, 2002, the Company recognized a
$4.9 million gain from discontinued forecasted
transactions. During the year ended December 31, 2001,
there were no such 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 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.

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, 2002 and 2001, investments
in fixed maturities had a fair value, which equaled carrying
value, of $30.003 billion and $25.851 billion,
respectively. The fair value of investments in fixed maturities
for which a quoted market price or dealer quote are not
available was

100



---



##### 



$892.5 million and $789.9 million at
December 31, 2002 and 2001, respectively. See note 1.


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.

At December 31, 2002 and 2001, the carrying
value of $700.0 million and $1.698 billion,
respectively, of the notes payable to former affiliates
approximated their fair value. Fair value is based upon
discounted cash flows.

At December 31, 2002, long-term debt had a
carrying value and a fair value of $926.2 million and
$971.7 million, respectively. At December 31, 2001,
long-term debt had a carrying value of $379.8 million,
which approximated its fair value. At December 31, 2002,
the convertible junior subordinated notes payable had a carrying
value and a fair value of $867.8 million and
$797.9 million, respectively. The convertible notes payable
had a carrying value of $49.7 million, which approximated
its fair value. Fair value is based upon bid price at
December 31, 2002 and 2001. At December 31, 2002 and
2001, the TIGHI Debentures had a carrying value of
$900.0 million, which approximated their fair value. Fair
value is based upon the closing price at December 31, 2002
and 2001.

The carrying values of $607.5 million and
$392.7 million of financial instruments classified as other
assets approximated their fair values at December 31, 2002
and 2001, respectively. The carrying values of
$2.272 billion and $2.556 billion of financial
instruments classified as other liabilities at December 31,
2002 and 2001, respectively, also approximated their fair
values. Fair value is determined using various methods including
discounted cash flows, as appropriate for the various financial
instruments.



|    |                              
|--- | -----------------------------
|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 $864.3 million and $1.025 billion at
December 31, 2002 and 2001, respectively.

Litigation

The Company is involved in numerous lawsuits,
other than asbestos and environmental claims, arising mostly in
the ordinary course of business operations either as a liability
insurer defending third-party claims brought against insureds 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.

For asbestos and environmental claims matters see
note 6.



|    |                           
|--- | --------------------------
|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 $47.2 million for the period from
April 1, 2002 through December 31, 2002. Either party
may terminate the agreement effective on the end of a month upon
90 days prior notice. 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.

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.

101



---



##### 



Prior to the Citigroup Distribution, a former
affiliate maintained a short-term investment pool in which the
Company participated. The positions of each company
participating in the pool were calculated and adjusted daily. At
December 31, 2001, the total of the pool and the
Companys share of the pool were $5.632 billion and
$2.406 billion, respectively. Subsequent to the Citigroup
Distribution, the former affiliate, which provides investment
and advisory services to the Company (see note 1),
established a separate investment pool for the Company.

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 $360.6 million receivable under the
Citigroup indemnification agreement. See note 6.

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. At
December 31, 2001 the outstanding balance of the note
payable to Citigroup was $1.198 billion. This note was
prepaid following the offerings. Interest expense included in
the consolidated statement of income was $5.5 million,
$79.2 million and $112.7 million in 2002, 2001 and
2000, respectively. See notes 2 and 8.

The Company had notes payable to Citigroup of
$700.0 million and $500.0 million at December 31,
2002 and 2001, respectively. Interest expense included in the
consolidated statement of income was $18.1 million and
$8.7 million in 2002 and 2001, respectively. See
note 8.

At December 31, 2000, the Company had a note
payable to Citigroup of $287.0 million. This was repaid
during 2001. Interest expense included in the consolidated
statement of income was $3.5 million and $48.8 million
in 2001 and 2000, 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.

At December 31, 2002 and 2001, the Company
had $60.2 million and $102.0 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. In addition, Citigroup
performs investment banking and advisory services for the
Company. 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 5.

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, 2002 and 2001 included
$810.4 million and $824.7 million, respectively,
related to these annuities.



|    |                                           
|--- | ------------------------------------------
|17. | NONCASH FINANCING AND INVESTING ACTIVITIES

In 2002, TPC paid dividends of
$5.095 billion to Citigroup in the form of notes payable.
These notes were all repaid during 2002. See notes 1 and 8.
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. There were no
significant noncash financing or investing activities for the
year ended December 31, 2000.

102



---



##### 



18. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

| |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|

|                                                                                                                              |  |         |         |         |  |         |         |         |  |       |         |  |  |   |          |   |  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | ----- | ------- |  |  | - | -------- | - |  | - | -------- | -
|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 principles 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 principles                                                 |  |         | 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 before cumulative effect of change in
    accounting principles                                                        |  | $       | 0.43    |         |  | $       | 0.33    |         |  | $     | 0.33    |  |  | $ | (0.79    | ) |  | $ | 0.23     |  
|Cumulative effect of change in accounting
    principles                                                                      |  |         | (0.30   | )       |  |         |        |         |  |       |        |  |  |   |         |   |  |   | (0.26    | )
|                                                                                                                             
|Net income (loss)                                                                                                             |  | $       | 0.13    |         |  | $       | 0.33    |         |  | $     | 0.33    |  |  | $ | (0.79    | ) |  | $ | (0.03    | )
|                                                                                                                             

| |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|

|                                                                                                        |                                                               |         |         |         |  |         |         |         |   |       |         |   |  |   |         |   |  |   |          |      |  
|------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------- | ------- | ------- |  | ------- | ------- | ------- | - | ----- | ------- | - |  | - | ------- | - |  | - | -------- | ---- | -
|2001                                                                                                    |                                                               | First   |         | Second  |  | Third   |         | Fourth  |   |      
|(in millions, except per share data)                                                                    |                                                               | Quarter |         | Quarter |  | Quarter |         | Quarter |   | Total
|                                                                                                       
|                                                                                                       
|Total revenues                                                                                          |                                                               | $       | 3,058.1 |         |  | $       | 2,983.0 |         |   | $     | 3,012.5 |   |  | $ | 3,176.9 |   |  | $ | 12,230.5 |     
|Total expenses                                                                                          |                                                               |         | 2,389.9 |         |  |         | 2,513.3 |         |   |       | 3,165.1 |   |  |   | 2,773.2 |   |  |   | 10,841.5 |     
|                                                                                                       
|Income (loss) before federal income taxes
    and cumulative effect of changes in accounting principles |                                                               |         | 668.2   |         |  |         | 469.7   |         |   |       | (152.6  | ) |  |   | 403.7   |   |  |   | 1,389.0  |     
|Federal income taxes (benefit)                                                                          |                                                               |         | 194.1   |         |  |         | 125.0   |         |   |       | (92.7   | ) |  |   | 100.4   |   |  |   | 326.8    |     
|                                                                                                       
|Income (loss) before cumulative effect of
    changes in accounting principles                          |                                                               |         | 474.1   |         |  |         | 344.7   |         |   |       | (59.9   | ) |  |   | 303.3   |   |  |   | 1,062.2  |     
|Cumulative effect of change in accounting for:                                                          |                                                               |         |         |         |  |         |         |         |   |       |         |   |  |   |         |   |  |   |          |     
|                                                                                                        | Derivative instruments and hedging activities,
    net of tax |         |         | 4.5     |  |         |         |        |   |       |         |  |  |   |         |  |  |   |          | 4.5  |  
|                                                                                                        | Securitized financial assets, net of tax                      |         |         |        |  |         |         | (1.3    | ) |       |         |  |  |   |         |  |  |   |          | (1.3 | )
|                                                                                                       
|Net income (loss)                                                                                       |                                                               | $       | 478.6   |         |  | $       | 343.4   |         |   | $     | (59.9   | ) |  | $ | 303.3   |   |  | $ | 1,065.4  |     
|                                                                                                       
|Basic and diluted earnings per
    share(1)                                                             |                                                               |         |         |         |  |         |         |         |   |       |         |   |  |   |         |   |  |   |          |     
|Income before cumulative effect of changes in
    accounting principles                                 |                                                               | $       | 0.61    |         |  | $       | 0.45    |         |   | $     | (0.08   | ) |  | $ | 0.39    |   |  | $ | 1.38     |     
|Cumulative effect of changes in accounting
    principles                                               |                                                               |         | 0.01    |         |  |         |        |         |   |       |        |   |  |   |        |   |  |   | 0.01     |     
|                                                                                                       
|Net income (loss)                                                                                       |                                                               | $       | 0.62    |         |  | $       | 0.45    |         |   | $     | (0.08   | ) |  | $ | 0.39    |   |  | $ | 1.39     |     
|                                                                                                       



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

103



---



##### 





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




Not Applicable.



PART III




|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT




The information required by this item regarding
the directors of the Company is set forth under the caption
Item 1  Election Of Directors 
The Class I Nominees  Directors Continuing In
Office in the definitive Proxy Statement for the
Companys Annual Meeting of Shareholders to be held on
April 24, 2003, filed or to be filed with the Securities
and Exchange Commission within 120 days after the
Companys 2002 fiscal year end (the Proxy
Statement), and is incorporated herein by reference. The
information required by this item regarding executive officers
is set forth in Item 1, Business  Other
Information  Executive Officers of the Company
herein. Information required by this item regarding
Section 16 reporting compliance is set forth under the
caption Section 16(a) Beneficial Ownership
Reporting Compliance in the Proxy Statement and is
incorporated herein by reference.



|         |                       
|-------- | ----------------------
|Item 11. | EXECUTIVE COMPENSATION




The information required by this item is set
forth under the caption Executive Compensation in
the Proxy Statement, (except for the information under the
caption Report on Executive Compensation by the
Compensation and Governance Committee), and is
incorporated herein by reference.



|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
    MANAGEMENT AND RELATED STOCKHOLDER MATTERS




The information required by this item is set
forth under the captions About the Annual Meeting -
does any single shareholder control as much as 5% of any class
of Travelers stock? and Stock Ownership and
Item 2  Approval and Adoption Of The
Travelers Property Casualty Corp. 2002 Stock Incentive
Plan in the Proxy Statement, and is incorporated herein by
reference.



|         |                                               
|-------- | ----------------------------------------------
|Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS




The information required by this item is set
forth under the caption Certain Relationships And
Transactions in the Proxy Statement, and is incorporated
herein by reference.



|         |                        
|-------- | -----------------------
|Item 14. | CONTROLS AND PROCEDURES




The Company has established and maintains
disclosure controls and procedures (as those terms
are defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934 (the Exchange Act).
Robert I. Lipp, Chairman and Chief Executive Officer of the
Company, and Jay S. Benet, Chief Financial Officer of the
Company, have evaluated the Companys disclosure controls
and procedures within ninety days of the filing of this
Form 10-K. Based on their evaluations, Messrs. Lipp
and Benet have concluded that the Companys disclosure
controls and procedures are effective to ensure that the
information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified by SEC rules and Forms.

There were no significant changes in the
Companys internal controls or in other factors that could
significantly affect these controls after the date of their
evaluations. There were no significant deficiencies or material
weaknesses, and therefore there were no corrective actions taken.

104



---



##### 



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 64 hereof.                            
|   
|(2) | Financial Statement Schedules. See Index to
    Consolidated Financial Statements and Schedules on page 110
    hereof.
|   
|(3) | Exhibits:                                                                                                              

See Exhibit Index on pages 120-122
hereof.



|    |                     
|--- | --------------------
|(b) | Reports on Form 8-K:

On October 17, 2002, the Company filed a
Current Report on Form 8-K, dated October 17, 2002,
reporting under Item 5 thereof the results of the
Companys operations for the quarter ended
September 30, 2002, and certain other selected financial
data.

No other reports on Form 8-K were filed
during the 2002 fourth quarter.

105



---



##### 



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 4th day of March,
2003.



| |                                  
| | ---------------------------------
| | 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 4th day of March, 2003.

|                                           |  |                                                                                     
|------------------------------------------ |  | ------------------------------------------------------------------------------------
|Signature                                  |  | Title                                                                               
|                                           |  |                                                                                     
|                                          
|/s/ ROBERT I. LIPPRobert I. Lipp           |  | Chief Executive Officer
    (Principal Executive Officer), and Chairman of the Board
|                                          
|/s/ JAY S. BENETJay S. Benet               |  | Chief Financial Officer
    (Principal Financial Officer)                           
|                                          
|/s/ DOUGLAS K. RUSSELLDouglas K. Russell   |  | Chief Accounting Officer
    (Principal Accounting Officer)                         
|                                          
|/s/ HOWARD P. BERKOWITZHoward P. Berkowitz |  | Director                                                                            
|                                          
|/s/ KENNETH J. BIALKINKenneth J. Bialkin   |  | Director                                                                            
|                                          
|/s/ CHARLES J. CLARKECharles J. Clarke     |  | President and Director                                                              
|                                          
|/s/ LESLIE B. DISHAROONLeslie B. Disharoon |  | Director                                                                            
|                                          
|/s/ MERYL D. HARTZBANDMeryl D. Hartzband   |  | Director                                                                            
|                                          
|/s/ CLARENCE OTIS, JR.Clarence Otis, Jr.   |  | Director                                                                            
|                                          
|/s/ JEFFREY M. PEEKJeffrey M. Peek         |  | Director                                                                            

106



---



##### 



|                                       |  |         
|-------------------------------------- |  | --------
|Signature                              |  | Title   
|                                       |  |         
|                                      
|/s/ NANCY A. ROSEMANNancy A. Roseman   |  | Director
|                                      
|/s/ CHARLES W. SCHARFCharles W. Scharf |  | Director
|                                      
|/s/ FRANK J. TASCOFrank J. Tasco       |  | Director
|                                      
|/s/ LAURIE J. THOMSENLaurie J. Thomsen |  | Director

107



---



##### 



CERTIFICATION

I,
Robert I. Lipp, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of Travelers Property Casualty Corp.;                                                                                                                                                                                                                                                   
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                       
|
| | 4. | The registrants other certifying officer
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                           



| |    |                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) | presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officer
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officer
    and I have indicated in this annual report whether there were
    significant changes in internal controls or in other factors
    that could significantly affect internal controls subsequent to
    the date of our most recent evaluation, including any corrective
    actions with regard to significant deficiencies and material
    weaknesses.

Date: March 4, 2003



| |                        
| | -----------------------
| | /s/ ROBERT I. LIPP     
| |                        
| | Robert I. Lipp         
| | Chief Executive Officer

108



---



##### 



CERTIFICATION

I, Jay S. Benet, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of Travelers Property Casualty Corp.;                                                                                                                                                                                                                                                   
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                       
|
| | 4. | The registrants other certifying officer
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                           



| |    |                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) | presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officer
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officer
    and I have indicated in this annual report whether there were
    significant changes in internal controls or in other factors
    that could significantly affect internal controls subsequent to
    the date of our most recent evaluation, including any corrective
    actions with regard to significant deficiencies and material
    weaknesses.

Date: March 4, 2003



| |                        
| | -----------------------
| | /s/ JAY S. BENET       
| |                        
| | Jay S. Benet           
| | Chief Financial Officer

109



---



##### 



Index to Consolidated Financial Statements and Schedules

|                                                                                                                       |  |      |     | 
|---------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                       |  | Page
|                                                                                                                       |  |     
|Independent Auditors Report                                                                                           |  |      | *   | 
|Consolidated Statement of Income (Loss) for the
    years ended December 31, 2002, 2001 and 2000                       |  |      | *   | 
|Consolidated Balance Sheet at December 31,
    2002 and 2001                                                           |  |      | *   | 
|Consolidated Statement of Changes in
    Shareholders Equity for the years ended December 31,
    2002, 2001 and 2000 |  |      | *   | 
|Consolidated Statement of Cash Flows for the
    years ended December 31, 2002, 2001 and 2000                          |  |      | *   | 
|Notes to Consolidated Financial Statements                                                                             |  |      | *   | 
|Schedules:                                                                                                             |  |      |     | 
|Schedule II  Condensed Financial
    Information of Registrant (Parent Company Only)                                  |  |      | 112 | 
|Schedule III  Supplementary
    Insurance Information                                                                 |  |      | 117 | 
|Schedule V  Valuation and
    Qualifying Accounts                                                                     |  |      | 118 | 
|Schedule VI  Supplementary
    Information Concerning Property-Casualty Insurance Operations                          |  |      | 119 | 



---



|  |                      
|- | ---------------------
|* | See index on page 64.

110



---



##### 



Independent Auditors Report

The Board of Directors and Shareholders

Travelers Property Casualty Corp.:


Under date of January 23, 2003, we reported
on the consolidated balance sheets of Travelers Property
Casualty Corp. and subsidiaries as of December 31, 2002 and
2001, 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, 2002,
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 23, 2003


111



---



##### 



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,                                                              |                   | 2002 |        | 2001  |   | 2000
|                                                                                            
|                                                                                            
|Revenues                                                                                     |                   |      |        |       |   |      |         |         |  |   |         |        
|Net investment income                                                                        |                   | $    | 4.8    |       |   | $    | 2.5     |         |  | $ | 1.4     |        
|Realized investment gains (losses)                                                           |                   |      | (.3    | )     |   |      | 19.0    |         |  |   | 9.1     |        
|Recoveries from former affiliate                                                             |                   |      | 520.0  |       |   |      |        |         |  |   |        |        
|Other revenues                                                                               |                   |      |       |       |   |      |        |         |  |   | .3      |        
|                                                                                            
|                                                                                             | Total revenues    |      |        | 524.5 |   |      |         | 21.5    |  |   |         | 10.8    | 
|                                                                                            
|Expenses                                                                                     |                   |      |        |       |   |      |         |         |  |   |         |        
|Interest                                                                                     |                   |      | 36.9   |       |   |      | 82.7    |         |  |   | 161.4   |        
|Other                                                                                        |                   |      | 81.1   |       |   |      | 5.9     |         |  |   | 4.5     |        
|                                                                                            
|                                                                                             | Total expenses    |      |        | 118.0 |   |      |         | 88.6    |  |   |         | 165.9   | 
|                                                                                            
|Income (loss) before federal income tax
    benefit and equity in net income of subsidiaries |                   |      | 406.5  |       |   |      | (67.1   | )       |  |   | (155.1  | )      
|Federal income tax benefit                                                                   |                   |      | 44.8   |       |   |      | 22.2    |         |  |   | 53.3    |        
|                                                                                            
|Income (loss) before equity in net income of
    subsidiaries                                |                   |      | 451.3  |       |   |      | (44.9   | )       |  |   | (101.8  | )      
|Equity in net income (loss) of subsidiaries, net
    of minority interest                    |                   |      | (478.3 | )     |   |      | 1,110.3 |         |  |   | 1,414.0 |        
|                                                                                            
|                                                                                             | Net income (loss) |      | $      | (27.0 | ) |      | $       | 1,065.4 |  |   | $       | 1,312.2 | 
|                                                                                            

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

112



---



##### 



SCHEDULE II

TRAVELERS PROPERTY CASUALTY CORP.

(Parent Company Only)


CONDENSED FINANCIAL INFORMATION OF REGISTRANT

(In millions)


CONDENSED BALANCE SHEET

|                                                              |                                                                                                                                                                        |      |          |          |  |   |          |          | 
|------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | -------- | -------- |  | - | -------- | -------- | 
|                                                             
|                                                             
|At December 31,                                               |                                                                                                                                                                        | 2002 |          | 2001    
|                                                             
|                                                             
|Assets                                                        |                                                                                                                                                                        |      |          |          |  |   |          |         
|Short-term securities                                         |                                                                                                                                                                        | $    | 8.9      |          |  | $ | 152.4    |         
|Investment in subsidiaries at equity                          |                                                                                                                                                                        |      | 11,142.1 |          |  |   | 11,152.5 |         
|Receivable from former affiliate                              |                                                                                                                                                                        |      | 360.6    |          |  |   | 418.4    |         
|Goodwill                                                      |                                                                                                                                                                        |      | 155.0    |          |  |   | 155.0    |         
|Other assets                                                  |                                                                                                                                                                        |      | 133.6    |          |  |   | 40.5     |         
|                                                             
|                                                              | Total assets                                                                                                                                                           |      | $        | 11,800.2 |  |   | $        | 11,918.8 | 
|                                                             
|Liabilities                                                   |                                                                                                                                                                        |      |          |          |  |   |          |         
|Notes payable to former affiliates                            |                                                                                                                                                                        | $    |         |          |  | $ | 1,197.7  |         
|Long-term debt                                                |                                                                                                                                                                        |      | 549.5    |          |  |   |         |         
|Convertible junior subordinated notes payable                 |                                                                                                                                                                        |      | 867.8    |          |  |   |         |         
|Other liabilities                                             |                                                                                                                                                                        |      | 245.6    |          |  |   | 34.8     |         
|                                                             
|                                                              | Total liabilities                                                                                                                                                      |      |          | 1,662.9  |  |   |          | 1,232.5  | 
|                                                             
|Shareholders equity                                          |                                                                                                                                                                        |      |          |          |  |   |          |         
|Common stock:                                                 |                                                                                                                                                                        |      |          |          |  |   |          |         
|                                                              | Class A, $.01 par value, 1.5 billion
    shares authorized, 504.2 million and 269.0 million
    issued and outstanding at December 31, 2002 and 2001,
    respectively |      |          | 5.0      |  |   |          | 2.7      | 
|                                                              | Class B, $.01 par value, 1.5 billion
    shares authorized, 500.0 million issued and outstanding                                                                       |      |          | 5.0      |  |   |          | 5.0      | 
|Additional paid-in capital                                    |                                                                                                                                                                        |      | 8,618.4  |          |  |   | 4,433.0  |         
|Retained earnings                                             |                                                                                                                                                                        |      | 880.5    |          |  |   | 6,004.2  |         
|Accumulated other changes in equity from nonowner
    sources |                                                                                                                                                                        |      | 656.6    |          |  |   | 241.4    |         
|Treasury stock, at cost (338,068 and 0)                       |                                                                                                                                                                        |      | (4.9     | )        |  |   |         |         
|Unearned compensation                                         |                                                                                                                                                                        |      | (23.3    | )        |  |   |         |         
|                                                             
|                                                              | Total shareholders equity                                                                                                                                             |      |          | 10,137.3 |  |   |          | 10,686.3 | 
|                                                             
|                                                              | Total liabilities and shareholders
    equity                                                                                                                         |      | $        | 11,800.2 |  |   | $        | 11,918.8 | 
|                                                             

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

113



---



##### 



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,                                                       |                                                   | 2002                                                    |          | 2001  |          | 2000
|                                                                                     
|                                                                                     
|Cash flows from operating activities                                                  |                                                   |                                                         |          |       |          |      |          |          |          |   |          |         
|Net income (loss)                                                                     |                                                   | $                                                       | (27.0    | )     |          | $    | 1,065.4  |          |          | $ | 1,312.2  |         
|Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                   |                                                         |          |       |          |      |          |          |          |   |          |         
|                                                                                      | Equity in net income (loss) of subsidiaries       |                                                         |          | 478.3 |          |      |          | (1,110.3 | )        |   |          | (1,414.0 | )       
|                                                                                      | Dividends received from consolidated subsidiaries |                                                         |          | 60.0  |          |      |          | 1,100.0  |          |   |          | 1,226.0  |         
|                                                                                      | Deferred federal income tax benefit (expense)     |                                                         |          | (92.8 | )        |      |          | 29.0     |          |   |          | 2.7      |         
|                                                                                      | Federal income taxes receivable (payable)         |                                                         |          | (5.8  | )        |      |          | 26.5     |          |   |          | (28.4    | )       
|                                                                                      | Other                                             |                                                         |          | 99.5  |          |      |          | 87.2     |          |   |          | (228.4   | )       
|                                                                                     
|                                                                                      |                                                   | Net cash provided by operating
    activities           |          |       | 512.2    |      |          |          | 1,197.8  |   |          |          | 870.1    |  
|                                                                                     
|Cash flows from investing activities                                                  |                                                   |                                                         |          |       |          |      |          |          |          |   |          |         
|Tender offer of minority interest
    shareholders                                   |                                                   |                                                         |         |       |          |      |         |          |          |   | (2,398.6 | )       
|Short-term securities, (purchases) sales, net                                         |                                                   |                                                         | 143.5    |       |          |      | (114.7   | )        |          |   | (36.3    | )       
|Other investments, net                                                                |                                                   |                                                         | 402.6    |       |          |      |         |          |          |   | (1.0     | )       
|                                                                                     
|                                                                                      |                                                   | Net cash provided by (used in) investing
    activities |          |       | 546.1    |      |          |          | (114.7   | ) |          |          | (2,435.9 | )
|                                                                                     
|Cash flows from financing activities                                                  |                                                   |                                                         |          |       |          |      |          |          |          |   |          |         
|Issuance of convertible notes, net                                                    |                                                   |                                                         | 867.2    |       |          |      |         |          |          |   |         |         
|Issuance of long-term debt                                                            |                                                   |                                                         | 549.4    |       |          |      |         |          |          |   |         |         
|Issuance of notes payable to former affiliate                                         |                                                   |                                                         |         |       |          |      |         |          |          |   | 2,391.3  |         
|Payment of notes payable to former affiliate                                          |                                                   |                                                         | (6,299.0 | )     |          |      | (1,040.0 | )        |          |   | (1,687.7 | )       
|Initial public offering                                                               |                                                   |                                                         | 4,089.5  |       |          |      |         |          |          |   |         |         
|Treasury stock acquired                                                               |                                                   |                                                         | (3.7     | )     |          |      |         |          |          |   |         |         
|Receipts from former subsidiaries, net                                                |                                                   |                                                         | 157.5    |       |          |      | 474.9    |          |          |   | 859.2    |         
|Dividends to former affiliate                                                         |                                                   |                                                         | (157.5   | )     |          |      | (526.0   | )        |          |   |         |         
|Transfer of employee benefit obligations to
    former affiliates                     |                                                   |                                                         | (172.4   | )     |          |      |         |          |          |   |         |         
|Transfer of lease obligations to former affiliate                                     |                                                   |                                                         | (87.8    | )     |          |      |         |          |          |   |         |         
|Return of capital from former subsidiaries                                            |                                                   |                                                         |         |       |          |      | 8.0      |          |          |   | 3.0      |         
|                                                                                     
|                                                                                      |                                                   | Net cash provided by (used in) financing
    activities |          |       | (1,056.8 | )    |          |          | (1,083.1 | ) |          |          | 1,565.8  |  
|                                                                                     
|Net increase in cash                                                                  |                                                   |                                                         | 1.5      |       |          |      |         |          |          |   |         |         
|Cash at beginning of period                                                           |                                                   |                                                         |         |       |          |      |         |          |          |   |         |         
|                                                                                     
|Cash at end of period                                                                 |                                                   | $                                                       | 1.5      |       |          | $    |         |          |          | $ |         |         
|                                                                                     
|Supplemental disclosure of cash flow
    information                                  |                                                   |                                                         |          |       |          |      |          |          |          |   |          |         
|Cash received during the period for taxes                                             |                                                   | $                                                       | 24.1     |       |          | $    | 88.4     |          |          | $ | 29.4     |         
|Cash paid during the period for interest                                              |                                                   | $                                                       | 22.1     |       |          | $    | 10.5     |          |          | $ | 20.6     |         
|                                                                                     

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

114



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##### 



NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT

1. GENERAL

The condensed financial statements include the
accounts of Travelers Property Casualty Corp. (TPC) and, on an
equity basis, its subsidiaries and should be read in conjunction
with the consolidated financial statements and notes thereto.
Certain reclassifications have been made to prior years
financial statements to conform to the current years
presentation.

TPC was reorganized in connection with its
initial public offering (IPO) in March 2002. Pursuant to the
reorganization, which was completed on March 19, 2002,
TPCs 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.

In March 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. On December 31,
2002, the $1.000 billion note was repaid in its entirety.
The proceeds of the offerings were used to prepay the
$395.0 million note and substantially prepay the
$3.700 billion note.

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, 2002, Citigroup was a holder
of 9.95% of TPCs common equity and 9.98% 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 is 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.

2. DEBT

Long-term debt outstanding was as follows:

|                                                           |       |       |       |          |  |       |      |      |  |   |       |         | 
|---------------------------------------------------------- | ----- | ----- | ----- | -------- |  | ----- | ---- | ---- |  | - | ----- | ------- | 
|                                                          
|                                                          
|                                                           |       | Debt  |       |         
|                                                           |       | Face  |       | Issuance |  |      
|(at December 31, 2002, in millions)                        |       | Value |       | Costs    |  | Total
|                                                          
|                                                          
|Promissory Note due 2004                                   |       | $     | 550.0 |          |  | $     | .5   |      |  | $ | 549.5 |        
|Convertible junior subordinated notes payable due
    2032 |       |       | 892.5 |          |  |       | 24.7 |      |  |   | 867.8 |        
|                                                          
|                                                           | Total |       | $     | 1,442.5  |  |       | $    | 25.2 |  |   | $     | 1,417.3 | 
|                                                          

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 (see note 2). 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.

At December 31, 2000, TPC had a note payable
to Citigroup, which had a principal balance outstanding of
$287.0 million. Interest accrued at a rate of 5.06%,
compounded semi-annually. On March 29, 2001, this note was
repaid in its entirety, plus accrued interest.

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 rate of the 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

115



---



##### 



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.

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). TIGHI
has the right, at any time, to defer distributions on the TIGHI
Securities for a period not exceeding 20 consecutive quarterly
interest periods (though such distributions would continue to
accrue interest during any such extended payment period). TIGHI
cannot pay dividends during such deferments.

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 Promissory Note. The Floating Rate Notes also carry a
variable interest rate of LIBOR plus 25 basis points per annum
and are callable by the Company after August 5, 2003.

116



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##### 



SCHEDULE III

Travelers Property Casualty Corp. and Subsidiaries

Supplementary Insurance Information

2000  2002

(in millions)


|                            |  |                   |       |          |  |              |          |             |  |            |         |            |  |             |          |             |  |          |         |  |  |   |          |  |  |   |         |  |  |   |         |  |  |   |          | 
|--------------------------- |  | ----------------- | ----- | -------- |  | ------------ | -------- | ----------- |  | ---------- | ------- | ---------- |  | ----------- | -------- | ----------- |  | -------- | ------- |  |  | - | -------- |  |  | - | ------- |  |  | - | ------- |  |  | - | -------- | 
|                           
|                           
|                            |  | Claims            |       |          |  | Amortization |          |            
|                            |  | and Claim         |       |          |  | Claims and   |          | of Deferred |  |           
|                            |  | Adjustment        |       |          |  | Net          |          | Claim       |  | Policy     |         | Other      |  |            
|                            |  | Deferred Policy   |       | Expense  |  | Unearned     |          | Premium     |  | Investment |         | Adjustment |  | Acquisition |          | Operating   |  | Premiums
|Segment                     |  | Acquisition Costs |       | Reserves |  | Premiums     |          | Revenue     |  | Income(a)  |         | Expenses   |  | Costs       |          | Expenses(b) |  | Written 
|                           
|                           
|2002                        |  |                   |       |          |  |              |          |             |  |            |         |            |  |             |          |             |  |          |         |  |  |   |          |  |  |   |         |  |  |   |         |  |  |   |          | 
|                           
|Commercial Lines            |  | $                 | 540.8 |          |  | $            | 30,593.8 |             |  | $          | 4,292.5 |            |  | $           | 6,801.2  |             |  | $        | 1,495.3 |  |  | $ | 7,932.1  |  |  | $ | 1,072.8 |  |  | $ | 1,034.5 |  |  | $ | 7,369.5  | 
|                           
|Personal Lines              |  |                   | 332.2 |          |  |              | 3,034.6  |             |  |            | 2,167.4 |            |  |             | 4,354.1  |             |  |          | 384.7   |  |  |   | 3,206.4  |  |  |   | 737.4   |  |  |   | 387.5   |  |  |   | 4,575.0  | 
|                           
|Total  Reportable Segments |  |                   | 873.0 |          |  |              | 33,628.4 |             |  |            | 6,459.9 |            |  |             | 11,155.3 |             |  |          | 1,880.0 |  |  |   | 11,138.5 |  |  |   | 1,810.2 |  |  |   | 1,422.0 |  |  |   | 11,944.5 | 
|                           
|Other                       |  |                   |      |          |  |              | 107.6    |             |  |            |        |            |  |             |         |             |  |          | .5      |  |  |   |         |  |  |   |        |  |  |   | 158.8   |  |  |   |         | 
|                           
|Consolidated                |  | $                 | 873.0 |          |  | $            | 33,736.0 |             |  | $          | 6,459.9 |            |  | $           | 11,155.3 |             |  | $        | 1,880.5 |  |  | $ | 11,138.5 |  |  | $ | 1,810.2 |  |  | $ | 1,580.8 |  |  | $ | 11,944.5 | 
|                           
|2001                        |  |                   |       |          |  |              |          |             |  |            |         |            |  |             |          |             |  |          |         |  |  |   |          |  |  |   |         |  |  |   |         |  |  |   |          | 
|                           
|Commercial Lines            |  | $                 | 466.0 |          |  | $            | 27,749.4 |             |  | $          | 3,728.8 |            |  | $           | 5,447.0  |             |  | $        | 1,616.3 |  |  | $ | 4,711.7  |  |  | $ | 864.9   |  |  | $ | 932.2   |  |  | $ | 5,737.6  | 
|                           
|Personal Lines              |  |                   | 302.1 |          |  |              | 2,867.0  |             |  |            | 1,938.1 |            |  |             | 3,963.9  |             |  |          | 410.2   |  |  |   | 3,053.0  |  |  |   | 673.8   |  |  |   | 388.0   |  |  |   | 4,107.9  | 
|                           
|Total  Reportable Segments |  |                   | 768.1 |          |  |              | 30,616.4 |             |  |            | 5,666.9 |            |  |             | 9,410.9  |             |  |          | 2,026.5 |  |  |   | 7,764.7  |  |  |   | 1,538.7 |  |  |   | 1,320.2 |  |  |   | 9,845.5  | 
|                           
|Other                       |  |                   |      |          |  |              | 120.2    |             |  |            |        |            |  |             |         |             |  |          | 7.5     |  |  |   |         |  |  |   |        |  |  |   | 217.9   |  |  |   |         | 
|                           
|Consolidated                |  | $                 | 768.1 |          |  | $            | 30,736.6 |             |  | $          | 5,666.9 |            |  | $           | 9,410.9  |             |  | $        | 2,034.0 |  |  | $ | 7,764.7  |  |  | $ | 1,538.7 |  |  | $ | 1,538.1 |  |  | $ | 9,845.5  | 
|                           
|2000                        |  |                   |       |          |  |              |          |             |  |            |         |            |  |             |          |             |  |          |         |  |  |   |          |  |  |   |         |  |  |   |         |  |  |   |          | 
|                           
|Commercial Lines            |  | $                 | 340.6 |          |  | $            | 25,671.8 |             |  | $          | 3,028.0 |            |  | $           | 4,746.8  |             |  | $        | 1,713.2 |  |  | $ | 3,738.9  |  |  | $ | 680.4   |  |  | $ | 751.9   |  |  | $ | 5,030.5  | 
|                           
|Personal Lines              |  |                   | 273.3 |          |  |              | 2,640.2  |             |  |            | 1,764.3 |            |  |             | 3,715.4  |             |  |          | 446.1   |  |  |   | 2,734.0  |  |  |   | 618.0   |  |  |   | 362.9   |  |  |   | 3,812.8  | 
|                           
|Total  Reportable Segments |  |                   | 613.9 |          |  |              | 28,312.0 |             |  |            | 4,792.3 |            |  |             | 8,462.2  |             |  |          | 2,159.3 |  |  |   | 6,472.9  |  |  |   | 1,298.4 |  |  |   | 1,114.8 |  |  |   | 8,843.3  | 
|                           
|Other                       |  |                   |      |          |  |              | 130.4    |             |  |            |        |            |  |             |         |             |  |          | 2.3     |  |  |   |         |  |  |   |        |  |  |   | 321.3   |  |  |   |         | 
|                           
|Consolidated                |  | $                 | 613.9 |          |  | $            | 28,442.4 |             |  | $          | 4,792.3 |            |  | $           | 8,462.2  |             |  | $        | 2,161.6 |  |  | $ | 6,472.9  |  |  | $ | 1,298.4 |  |  | $ | 1,436.1 |  |  | $ | 8,843.3  | 
|                           



|    |                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

117



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##### 



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: |      |            |   |            |  |             |   |               |  |            |   |       |  |  |   |      |  |  |   |      
|                         
|                          | 2002 |            | $ | 286.2      |  |             | $ |              |  |            | $ | 49.8  |  |  | $ | 6.9  |  |  | $ | 329.1 | 
|                         
|                          | 2001 |            | $ | 213.0      |  |             | $ |              |  |            | $ | 130.5 |  |  | $ | 57.3 |  |  | $ | 286.2 | 
|                         
|                          | 2000 |            | $ | 219.5      |  |             | $ |              |  |            | $ |      |  |  | $ | 6.5  |  |  | $ | 213.0 | 



---



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

118



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##### 



SCHEDULE VI

Travelers Property Casualty Corp. and Subsidiaries

Supplementary Information Concerning Property-Casualty
Insurance Operations(1)

2000-2002

(in millions)


|     |  |                                             |  |             |       |            |  |            |          |          |  |          |       |            |  |   |         |  |  |   |          |  |  |   |         |  |  | 
|---- |  | ------------------------------------------- |  | ----------- | ----- | ---------- |  | ---------- | -------- | -------- |  | -------- | ----- | ---------- |  | - | ------- |  |  | - | -------- |  |  | - | ------- |  |  | 
|    
|    
|     |  | Reserves for                                |  |            
|     |  | Unpaid                                      |  | Discount    |       |           
|     |  | Deferred                                    |  | Claims      |       | from       |  |           
|     |  | Affiliation                                 |  | Policy      |       | and Claim  |  | Reserves   |          |          |  | Net     
|     |  | with                                        |  | Acquisition |       | Adjustment |  | for Unpaid |          | Unearned |  | Earned   |       | Investment
|     |  | Registrant                                  |  | Costs       |       | Expenses   |  | Claims(2)  |          | Premiums |  | Premiums |       | Income    
|    
|    
|2002 |  | Consolidated property  -casualty operations |  | $           | 873.0 |            |  | $          | 33,628.4 |          |  | $        | 802.9 |            |  | $ | 6,459.9 |  |  | $ | 11,155.3 |  |  | $ | 1,880.0 | 
|    
|2001 |  | Consolidated property  -casualty operations |  | $           | 768.1 |            |  | $          | 30,616.5 |          |  | $        | 792.4 |            |  | $ | 5,666.9 |  |  | $ | 9,410.9  |  |  | $ | 2,026.5 | 
|    
|2000 |  | Consolidated property  -casualty operations |  | $           | 613.9 |            |  | $          | 28,312.0 |          |  | $        | 799.6 |            |  | $ | 4,792.3 |  |  | $ | 8,462.2  |  |  | $ | 2,159.3 | 

[Additional columns below]

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

|     |  |                      |         |              |  |             |         |            |  |          |         |  |  |   |         |  |  |   |          | 
|---- |  | -------------------- | ------- | ------------ |  | ----------- | ------- | ---------- |  | -------- | ------- |  |  | - | ------- |  |  | - | -------- | 
|     |  |                     
|     |  |                     
|     |  |                      |         |             
|     |  | Claims and Claim     |         |             
|     |  | Adjustment Expenses  |         | Amortization |  |            
|     |  | Incurred Related to: |         | of Deferred  |  | Paid Claims |         |           
|     |  |                      |         | Policy       |  | and Claim   |         |           
|     |  | Current              |         | Prior        |  | Acquisition |         | Adjustment |  | Premiums
|     |  | Year                 |         | Year         |  | Costs       |         | Expenses   |  | Written 
|     |  |                     
|     |  |                     
|2002 |  | $                    | 7,872.1 |              |  | $           | 3,031.0 |            |  | $        | 1,810.2 |  |  | $ | 7,832.3 |  |  | $ | 11,944.5 | 
|2001 |  | $                    | 7,600.6 |              |  | $           | (41.0   | )          |  | $        | 1,538.7 |  |  | $ | 7,418.9 |  |  | $ | 9,845.5  | 
|2000 |  | $                    | 6,508.9 |              |  | $           | (247.0  | )          |  | $        | 1,298.4 |  |  | $ | 6,811.0 |  |  | $ | 8,843.3  | 



---



|    |                                       
|--- | --------------------------------------
|(1) | Excludes accident and health business.
|(2) | See Discounting on page 11.         

119



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##### 



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.                                               
|        | 3.1.1 |                        |  | Restated Certificate of Incorporation of the
    Company, effective March 19, 2002, was filed as
    Exhibit 3.1.1 to the Companys quarterly report on
    Form 10-Q for the fiscal quarter ended March 31, 2002,
    and is incorporated herein by reference.                                                                                                                                                          
|        | 3.1.2 |                        |  | Amendment to Restated Certificate of
    Incorporation of the Company, effective March 20, 2002, was
    filed as Exhibit 3.1.2 to the Companys quarterly
    report on Form 10-Q for the fiscal quarter ended
    March 31, 2002, and is incorporated herein by reference.                                                                                                                                             
|        | 3.2  |                        |  | Amended and Restated Bylaws of the Company, as
    amended on January 23, 2003.                                                                                                                                                                                                                                                                                                                                          
|        | 4.1   |                        |  | Rights Agreement, dated as of March 21,
    2002, between the Company and EquiServe Trust Company, N.A., 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   |                        |  | Restated Certificate of Incorporation of the
    Company, Amendment to Restated Certificate of Incorporation of
    the Company, and Amended and Restated Bylaws of the Company
    (filed herewith as Exhibits 3.1.1, 3.1.2 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.                                                                                                          
|        | 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.                                                                                                                     

120



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##### 



|        |         |                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- | ------- | ---------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |                       
|Number  |         | Description of Exhibit
|        |         |                       
|        | 10.10   |                        |  | Promissory note, dated as of April 13, 2001,
    by and between Travelers Insurance Group Holdings Inc. (then
    known as Travelers Property Casualty Corp.) and Citicorp Banking
    Corporation was filed as Exhibit 10.3 to the Companys
    Registration Statement on Form S-1 (Amendment No. 4)
    dated March 12, 2002 (Registration No. 333-82388), and
    is incorporated herein by reference.                                                                                                                     
|        | 10.11   |                        |  | Line of credit agreement, dated December 19,
    2001 between Travelers Insurance Group Holdings Inc. (then known
    as Travelers Property Casualty Corp.) and Citigroup Inc. was
    filed as Exhibit 10.2 to the Companys Registration
    Statement on Form S-1 (Amendment No. 4) dated
    March 12, 2002 (Registration No. 333-82388), and is
    incorporated herein by reference.                                                                                                                                     
|        | 10.12   |                        |  | 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.                                                                                                                                                                                                                                                   
|        | 10.13   |                        |  | 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 7 3/4% Notes due 2026 and
    $150,000,000 aggregate principal amount of TIGHIs
    6 3/4% 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.                                                                      
|        | 10.14   |                        |  | 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.
|        | 10.15   |                        |  | 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.                  
|        | 10.16   |                        |  | 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.                  
|        | 10.17   |                        |  | Lease for office space at CityPlace, Hartford,
    Connecticut, dated March 28, 1996, by and between Aetna Life and
    Casualty Company and The Travelers Indemnity Company, was filed
    as Exhibit 10.10 to the registration statement on
    Form S-1 of Travelers Insurance Group Holdings Inc. (then
    known as Travelers/ Aetna Property Casualty Corp.) on
    April 22, 1996 (File No. 333-2254), and is
    incorporated herein by reference.                                                                     
|        | 10.18   |                        |  | Lease for office space in Hartford, Connecticut,
    dated as of April 2, 1996, by and between The Travelers
    Insurance Company and The Travelers Indemnity Company, was filed
    as Exhibit 10.14 to the annual report on Form 10-K of
    Travelers Insurance Group Holdings Inc. (then known as
    Travelers/ Aetna Property Casualty Corp.), and is incorporated
    herein by reference.                                                                                                                             
|        | 10.19   |                        |  | 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.                                                                                                                                                                             
|        | 10.20*  |                        |  | Travelers Property Casualty Corp. Compensation
    Plan for Non-Employee Directors was filed as Exhibit 10.8
    to the Companys quarterly report on Form 10-Q for the
    fiscal quarter ended June 30, 2002, and is incorporated
    herein by reference.                                                                                                                                                                                                                                                                   
|        | 10.21*  |                        |  | 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.                                                                                                                                                                                                                                                                        
|        | 10.22* |                        |  | Travelers Property Casualty Corp. 2002 Stock
    Incentive Plan, as amended effective January 23, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                        

121



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##### 



|        |         |                        |  |                                                                                                                                                                                                                                                                                                                
|------- | ------- | ---------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |                       
|Number  |         | Description of Exhibit
|        |         |                       
|        | 10.23* |                        |  | Travelers Deferred Compensation Plan.                                                                                                                                                                                                                                                                          
|        | 10.24* |                        |  | Travelers Benefit Equalization Plan.                                                                                                                                                                                                                                                                           
|        | 10.25*  |                        |  | 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.                                                 
|        | 10.26*  |                        |  | 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.
|        | 10.27* |                        |  | Employment Letter Agreement dated
    October 25, 2002 between the Company and Stewart R.
    Morrison, Chief Investment Officer of the Company.                                                                                                                                                               
|        | 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.                                                                                 
|        | 99.1   |                        |  | Certification of Robert I. Lipp, Chief
    Executive Officer of the Company, as required by
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                 
|        | 99.2   |                        |  | 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.


122