##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

|    |  |                                                                                        
|--- |  | ---------------------------------------------------------------------------------------
|[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

or

|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|[   ] |  | 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 06183
(Address of principal executive offices)

(860) 277-0111
(Registrants telephone number, including area code)



---

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

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

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date:

Common stock outstanding as of July 28, 2003:

|        |  |  |             | 
|------- |  |  | ----------- | 
|Class A |  |  | 507,089,579 | 
|Class B |  |  | 499,901,062 | 





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##### 



TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES

TABLE OF CONTENTS

|                               |  |                                                                                                                           |  |     
|------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                                           |  | Page
|                               |  |                                                                                                                           |  |     
|Part
I - Financial Information |  |                                                                                                                          
|Item 1.                        |  | Financial Statements:                                                                                                     |  |     
|                               |  | Condensed Consolidated Statement of Income (Unaudited) -
Three and Six Months Ended June 30, 2003 and 2002                |  | 3   
|                               |  | Condensed Consolidated Balance Sheet - June 30, 2003 (Unaudited)
and December 31, 2002                                    |  | 4   
|                               |  | Condensed Consolidated Statement of Changes in Shareholders Equity
(Unaudited) - Six Months Ended June 30, 2003 and 2002 |  | 5   
|                               |  | Condensed Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended June 30, 2003 and 2002                      |  | 6   
|                               |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                          |  | 7   
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations                                     |  | 24  
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                                                |  | 49  
|Item 4.                        |  | Controls and Procedures                                                                                                   |  | 50  
|Part
II - Other Information    |  |                                                                                                                          
|Item 1.                        |  | Legal Proceedings                                                                                                         |  | 51  
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                                       |  | 54  
|Item 5.                        |  | Other Information                                                                                                         |  | 56  
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                                                          |  | 56  
|Signatures                     |  | 57                                                                                                                       
|Exhibit Index                  |  | 58                                                                                                                       

2



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##### 



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

|                                                                                                              |                           |   |                    |         |                  |   |         |         |      |   |         |         |  |   |         |         | 
|------------------------------------------------------------------------------------------------------------- | ------------------------- | - | ------------------ | ------- | ---------------- | - | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                                                                                              |                           |   | Three Months Ended |         | Six Months Ended
|                                                                                                              |                           |   | June 30,           |         | June 30,        
|                                                                                                              |                           |   |                    |         |                 
|                                                                                                              |                           |   | 2003               |         | 2002             |   | 2003    |         | 2002
|                                                                                                              |                           |   |                    |         |                  |   |         |         |     
|Revenues                                                                                                      |                           |   |                    |         |                  |   |         |         |      |   |         |         |  |   |         |        
|Premiums                                                                                                      |                           | $ | 3,100.4            |         |                  | $ | 2,756.7 |         |      | $ | 6,079.0 |         |  | $ | 5,341.3 |        
|Net investment income                                                                                         |                           |   | 455.9              |         |                  |   | 464.8   |         |      |   | 911.8   |         |  |   | 952.6   |        
|Fee income                                                                                                    |                           |   | 133.7              |         |                  |   | 108.8   |         |      |   | 270.0   |         |  |   | 211.5   |        
|Realized investment gains (losses), net                                                                       |                           |   | 16.1               |         |                  |   | (36.0   | )       |      |   | 22.6    |         |  |   | (7.2    | )      
|Other revenues                                                                                                |                           |   | 42.6               |         |                  |   | 25.5    |         |      |   | 68.3    |         |  |   | 54.3    |        
|                                                                                                              |                           |   |                    |         |                  |   |         |         |      |   |         |         |  |   |         |        
|                                                                                                              | Total revenues            |   |                    | 3,748.7 |                  |   |         | 3,319.8 |      |   |         | 7,351.7 |  |   |         | 6,552.5 | 
|                                                                                                              |                           |   |                    |         |                  |   |         |         |      |   |         |         |  |   |         |        
|Claims and expenses                                                                                           |                           |   |                    |         |                  |   |         |         |      |   |         |         |  |   |         |        
|Claims and claim adjustment expenses                                                                          |                           |   | 2,211.0            |         |                  |   | 2,094.3 |         |      |   | 4,498.9 |         |  |   | 4,080.4 |        
|Amortization of deferred acquisition costs                                                                    |                           |   | 483.4              |         |                  |   | 446.1   |         |      |   | 946.1   |         |  |   | 872.5   |        
|Interest expense                                                                                              |                           |   | 40.3               |         |                  |   | 39.8    |         |      |   | 92.0    |         |  |   | 75.6    |        
|General and administrative expenses                                                                           |                           |   | 413.3              |         |                  |   | 304.4   |         |      |   | 806.7   |         |  |   | 634.5   |        
|                                                                                                              |                           |   |                    |         |                  |   |         |         |      |   |         |         |  |   |         |        
|                                                                                                              | Total claims and expenses |   |                    | 3,148.0 |                  |   |         | 2,884.6 |      |   |         | 6,343.7 |  |   |         | 5,663.0 | 
|                                                                                                              |                           |   |                    |         |                  |   |         |         |      |   |         |         |  |   |         |        
|Income before federal income taxes, minority
interest and
cumulative effect of change in accounting principle |                           |   | 600.7              |         |                  |   | 435.2   |         |      |   | 1,008.0 |         |  |   | 889.5   |        
|Federal income taxes                                                                                          |                           |   | 155.1              |         |                  |   | 103.2   |         |      |   | 244.9   |         |  |   | 212.8   |        
|Minority interest, net of tax                                                                                 |                           |   | 4.4                |         |                  |   |        |         |      |   | (18.1   | )       |  |   |        |        
|                                                                                                              |                           |   |                    |         |                  |   |         |         |      |   |         |         |  |   |         |        
|Income before cumulative effect of change
in accounting principle                                             |                           |   | 441.2              |         |                  |   | 332.0   |         |      |   | 781.2   |         |  |   | 676.7   |        
|Cumulative effect of change in accounting for goodwill
and other intangible assets, net of tax                |                           |   |                   |         |                  |   |        |         |      |   |        |         |  |   | (242.6  | )      
|                                                                                                              |                           |   |                    |         |                  |   |         |         |      |   |         |         |  |   |         |        
|Net income                                                                                                    |                           | $ | 441.2              |         |                  | $ | 332.0   |         |      | $ | 781.2   |         |  | $ | 434.1   |        
|                                                                                                              |                           |   |                    |         |                  |   |         |         |      |   |         |         |  |   |         |        
|Basic earnings per share                                                                                      |                           |   |                    |         |                  |   |         |         |      |   |         |         |  |   |         |        
|Income before cumulative effect of change in
accounting principle                                             |                           | $ | 0.44               |         |                  | $ | 0.33    |         |      | $ | 0.78    |         |  | $ | 0.75    |        
|Cumulative effect of change in accounting principle                                                           |                           |   |                   |         |                  |   |        |         |      |   |        |         |  |   | (0.27   | )      
|                                                                                                              |                           |   |                    |         |                  |   |         |         |      |   |         |         |  |   |         |        
|Net income                                                                                                    |                           | $ | 0.44               |         |                  | $ | 0.33    |         |      | $ | 0.78    |         |  | $ | 0.48    |        
|                                                                                                              |                           |   |                    |         |                  |   |         |         |      |   |         |         |  |   |         |        
|Weighted average number of common shares outstanding                                                          |                           |   | 1,002.3            |         |                  |   | 1,000.0 |         |      |   | 1,002.4 |         |  |   | 897.9   |        
|                                                                                                              |                           |   |                    |         |                  |   |         |         |      |   |         |         |  |   |         |        
|Diluted earnings per share                                                                                    |                           |   |                    |         |                  |   |         |         |      |   |         |         |  |   |         |        
|Income before cumulative effect of change in
accounting principle                                             |                           | $ | 0.44               |         |                  | $ | 0.33    |         |      | $ | 0.78    |         |  | $ | 0.75    |        
|Cumulative effect of change in accounting principle                                                           |                           |   |                   |         |                  |   |        |         |      |   |        |         |  |   | (0.27   | )      
|                                                                                                              |                           |   |                    |         |                  |   |         |         |      |   |         |         |  |   |         |        
|Net income                                                                                                    |                           | $ | 0.44               |         |                  | $ | 0.33    |         |      | $ | 0.78    |         |  | $ | 0.48    |        
|                                                                                                              |                           |   |                    |         |                  |   |         |         |      |   |         |         |  |   |         |        
|Weighted average number of common shares outstanding
and common stock equivalents                             |                           |   | 1,007.7            |         |                  |   | 1,000.0 |         |      |   | 1,007.6 |         |  |   | 897.9   |        
|                                                                                                              |                           |   |                    |         |                  |   |         |         |      |   |         |         |  |   |         |        

See notes to condensed consolidated financial statements.

3



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##### 



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

|                                                                                                                                                                                    |                                            |                                                                                                                                                                     |          |             |     |              |          |          |     | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------- | ----------- | --- | ------------ | -------- | -------- | --- | 
|                                                                                                                                                                                    |                                            |                                                                                                                                                                     |          | June 30,    |     |              |          |         
|                                                                                                                                                                                    |                                            |                                                                                                                                                                     |          | 2003        |     | December 31,
|                                                                                                                                                                                    |                                            |                                                                                                                                                                     |          | (Unaudited) |     | 2002        
|                                                                                                                                                                                    |                                            |                                                                                                                                                                     |          |             |     |             
|Assets                                                                                                                                                                              |                                            |                                                                                                                                                                     |          |             |     |              |          |         
|Fixed maturities, available for sale at fair value (including $3,316.7 and $580.5 subject to
securities lending and repurchase agreements) (amortized cost $29,849.5 and $28,877.8) |                                            | $                                                                                                                                                                   | 31,668.3 |             |     | $            | 30,003.2 |         
|Equity securities, at fair value (cost $755.3 and $861.9)                                                                                                                           |                                            |                                                                                                                                                                     | 811.3    |             |     |              | 851.5    |         
|Mortgage loans                                                                                                                                                                      |                                            |                                                                                                                                                                     | 251.9    |             |     |              | 257.9    |         
|Real estate held for sale                                                                                                                                                           |                                            |                                                                                                                                                                     | 1.7      |             |     |              | 12.5     |         
|Short-term securities                                                                                                                                                               |                                            |                                                                                                                                                                     | 5,210.7  |             |     |              | 4,853.6  |         
|Trading securities, at fair value                                                                                                                                                   |                                            |                                                                                                                                                                     | 43.8     |             |     |              | 40.7     |         
|Other investments                                                                                                                                                                   |                                            |                                                                                                                                                                     | 2,240.8  |             |     |              | 2,405.8  |         
|                                                                                                                                                                                    |                                            |                                                                                                                                                                     |          |             |     |              |          |         
|                                                                                                                                                                                    | Total investments                          |                                                                                                                                                                     |          | 40,228.5    |     |              |          | 38,425.2 |    
|                                                                                                                                                                                    |                                            |                                                                                                                                                                     |          |             |     |              |          |         
|Cash                                                                                                                                                                                |                                            |                                                                                                                                                                     | 209.1    |             |     |              | 92.2     |         
|Investment income accrued                                                                                                                                                           |                                            |                                                                                                                                                                     | 337.7    |             |     |              | 339.3    |         
|Premium balances receivable                                                                                                                                                         |                                            |                                                                                                                                                                     | 4,095.3  |             |     |              | 3,861.4  |         
|Reinsurance recoverables                                                                                                                                                            |                                            |                                                                                                                                                                     | 11,043.8 |             |     |              | 10,977.5 |         
|Deferred acquisition costs                                                                                                                                                          |                                            |                                                                                                                                                                     | 923.0    |             |     |              | 873.0    |         
|Deferred federal income taxes                                                                                                                                                       |                                            |                                                                                                                                                                     | 734.5    |             |     |              | 1,447.1  |         
|Contractholder receivables                                                                                                                                                          |                                            |                                                                                                                                                                     | 2,710.8  |             |     |              | 2,544.1  |         
|Goodwill                                                                                                                                                                            |                                            |                                                                                                                                                                     | 2,411.5  |             |     |              | 2,411.5  |         
|Receivables for investment sales                                                                                                                                                    |                                            |                                                                                                                                                                     | 631.1    |             |     |              | 138.7    |         
|Other assets                                                                                                                                                                        |                                            |                                                                                                                                                                     | 2,705.4  |             |     |              | 3,027.5  |         
|                                                                                                                                                                                    |                                            |                                                                                                                                                                     |          |             |     |              |          |         
|                                                                                                                                                                                    | Total assets                               |                                                                                                                                                                     | $        | 66,030.7    |     |              | $        | 64,137.5 |    
|                                                                                                                                                                                    |                                            |                                                                                                                                                                     |          |             |     |              |          |         
|Liabilities                                                                                                                                                                         |                                            |                                                                                                                                                                     |          |             |     |              |          |         
|Claims and claim adjustment expense reserves                                                                                                                                        |                                            | $                                                                                                                                                                   | 33,650.9 |             |     | $            | 33,736.0 |         
|Unearned premium reserves                                                                                                                                                           |                                            |                                                                                                                                                                     | 6,818.8  |             |     |              | 6,459.9  |         
|Contractholder payables                                                                                                                                                             |                                            |                                                                                                                                                                     | 2,710.8  |             |     |              | 2,544.1  |         
|Short-term debt                                                                                                                                                                     |                                            |                                                                                                                                                                     | 450.4    |             |     |              |         |         
|Notes payable to former affiliates                                                                                                                                                  |                                            |                                                                                                                                                                     |         |             |     |              | 700.0    |         
|Long-term debt                                                                                                                                                                      |                                            |                                                                                                                                                                     | 1,758.1  |             |     |              | 926.2    |         
|Convertible junior subordinated notes payable                                                                                                                                       |                                            |                                                                                                                                                                     | 868.3    |             |     |              | 867.8    |         
|Convertible notes payable                                                                                                                                                           |                                            |                                                                                                                                                                     | 49.7     |             |     |              | 49.7     |         
|Payables for investment purchases                                                                                                                                                   |                                            |                                                                                                                                                                     | 1,046.5  |             |     |              | 3,737.9  |         
|Payables for securities lending and repurchase agreements                                                                                                                           |                                            |                                                                                                                                                                     | 3,302.4  |             |     |              | 597.9    |         
|Other liabilities                                                                                                                                                                   |                                            |                                                                                                                                                                     | 4,059.0  |             |     |              | 3,480.7  |         
|                                                                                                                                                                                    |                                            |                                                                                                                                                                     |          |             |     |              |          |         
|                                                                                                                                                                                    | Total liabilities                          |                                                                                                                                                                     |          | 54,714.9    |     |              |          | 53,100.2 |    
|                                                                                                                                                                                    |                                            |                                                                                                                                                                     |          |             |     |              |          |         
|TIGHI-obligated mandatorily redeemable securities of subsidiary trusts
holding solely junior subordinated debt securities of TIGHI                                                  |                                            |                                                                                                                                                                     |         |             |     |              | 900.0    |         
|                                                                                                                                                                                    |                                            |                                                                                                                                                                     |          |             |     |              |          |         
|Shareholders equity                                                                                                                                                                |                                            |                                                                                                                                                                     |          |             |     |              |          |         
|Common Stock:                                                                                                                                                                       |                                            |                                                                                                                                                                     |          |             |     |              |          |         
|                                                                                                                                                                                    |                                            | Class A, $.01 par value, 1.5 billion shares authorized, 508.1 million and 504.2 million
issued and outstanding at June 30, 2003 and December 31, 2002, respectively |          |             | 5.1 |              |          |          | 5.0 | 
|                                                                                                                                                                                    |                                            | Class B, $.01 par value, 1.5 billion shares authorized, 500.0 million issued and outstanding                                                                        |          |             | 5.0 |              |          |          | 5.0 | 
|Additional paid-in capital                                                                                                                                                          |                                            |                                                                                                                                                                     | 8,667.5  |             |     |              | 8,618.4  |         
|Retained earnings                                                                                                                                                                   |                                            |                                                                                                                                                                     | 1,538.7  |             |     |              | 880.5    |         
|Accumulated other changes in equity from nonowner sources                                                                                                                           |                                            |                                                                                                                                                                     | 1,162.2  |             |     |              | 656.6    |         
|Treasury stock, at cost (1.3 million and .3 million shares)                                                                                                                         |                                            |                                                                                                                                                                     | (19.7    | )           |     |              | (4.9     | )       
|Unearned compensation                                                                                                                                                               |                                            |                                                                                                                                                                     | (43.0    | )           |     |              | (23.3    | )       
|                                                                                                                                                                                    |                                            |                                                                                                                                                                     |          |             |     |              |          |         
|                                                                                                                                                                                    | Total shareholders equity                 |                                                                                                                                                                     |          | 11,315.8    |     |              |          | 10,137.3 |    
|                                                                                                                                                                                    |                                            |                                                                                                                                                                     |          |             |     |              |          |         
|                                                                                                                                                                                    | Total liabilities and shareholders equity |                                                                                                                                                                     | $        | 66,030.7    |     |              | $        | 64,137.5 |    
|                                                                                                                                                                                    |                                            |                                                                                                                                                                     |          |             |     |              |          |         

See notes to condensed consolidated financial statements.

4



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##### 



TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN SHAREHOLDERS EQUITY (Unaudited)
(in millions)

|                                                                               |                            |      |         |          |  |   |          |          | 
|------------------------------------------------------------------------------ | -------------------------- | ---- | ------- | -------- |  | - | -------- | -------- | 
|For the six months ended June 30,                                              |                            | 2003 |         | 2002    
|                                                                               |                            |      |         |         
|Common stock and additional paid in capital                                    |                            |      |         |          |  |   |          |         
|Balance, beginning of period                                                   |                            | $    | 8,628.4 |          |  | $ | 4,440.7  |         
|Net employee stock-based compensation plans                                    |                            |      | 52.9    |          |  |   |         |         
|Net proceeds from initial public offering                                      |                            |      |        |          |  |   | 4,089.5  |         
|Other                                                                          |                            |      | (3.7    | )        |  |   | 18.2     |         
|                                                                               |                            |      |         |          |  |   |          |         
|Balance, end of period                                                         |                            |      | 8,677.6 |          |  |   | 8,548.4  |         
|                                                                               |                            |      |         |          |  |   |          |         
|Retained earnings                                                              |                            |      |         |          |  |   |          |         
|Balance, beginning of period                                                   |                            |      | 880.5   |          |  |   | 6,004.2  |         
|Net income                                                                     |                            |      | 781.2   |          |  |   | 434.1    |         
|Receipts from former subsidiaries                                              |                            |      |        |          |  |   | 157.5    |         
|Dividends                                                                      |                            |      | (123.0  | )        |  |   | (5,252.5 | )       
|                                                                               |                            |      |         |          |  |   |          |         
|Balance, end of period                                                         |                            |      | 1,538.7 |          |  |   | 1,343.3  |         
|                                                                               |                            |      |         |          |  |   |          |         
|Accumulated other changes in equity from nonowner sources,
net of tax          |                            |      |         |          |  |   |          |         
|Balance, beginning of period                                                   |                            |      | 656.6   |          |  |   | 241.4    |         
|Net unrealized gain on investment securities                                   |                            |      | 492.5   |          |  |   | 120.6    |         
|Other                                                                          |                            |      | 13.1    |          |  |   | 10.4     |         
|                                                                               |                            |      |         |          |  |   |          |         
|Balance, end of period                                                         |                            |      | 1,162.2 |          |  |   | 372.4    |         
|                                                                               |                            |      |         |          |  |   |          |         
|Treasury stock (at cost)                                                       |                            |      |         |          |  |   |          |         
|Balance, beginning of period                                                   |                            |      | (4.9    | )        |  |   |         |         
|Net employee stock-based compensation plans                                    |                            |      | (14.8   | )        |  |   |         |         
|                                                                               |                            |      |         |          |  |   |          |         
|Balance, end of period                                                         |                            |      | (19.7   | )        |  |   |         |         
|                                                                               |                            |      |         |          |  |   |          |         
|Unearned compensation                                                          |                            |      |         |          |  |   |          |         
|Balance, beginning of period                                                   |                            |      | (23.3   | )        |  |   |         |         
|Net issuance of restricted stock under employee
stock-based compensation plans |                            |      | (33.5   | )        |  |   |         |         
|Restricted stock amortization                                                  |                            |      | 13.8    |          |  |   |         |         
|                                                                               |                            |      |         |          |  |   |          |         
|Balance, end of period                                                         |                            |      | (43.0   | )        |  |   |         |         
|                                                                               |                            |      |         |          |  |   |          |         
|                                                                               | Total shareholders equity |      | $       | 11,315.8 |  |   | $        | 10,264.1 | 
|                                                                               |                            |      |         |          |  |   |          |         
|Common shares outstanding                                                      |                            |      |         |          |  |   |          |         
|Balance, beginning of period                                                   |                            |      | 1,003.9 |          |  |   | 769.0    |         
|Shares issued in Initial Public Offering                                       |                            |      |        |          |  |   | 231.0    |         
|Net shares issued for employee stock-based compensation
plans                  |                            |      | 2.9     |          |  |   |         |         
|                                                                               |                            |      |         |          |  |   |          |         
|Balance, end of period                                                         |                            |      | 1,006.8 |          |  |   | 1,000.0  |         
|                                                                               |                            |      |         |          |  |   |          |         

See notes to condensed consolidated financial statements.

5



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##### 



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

|                                                                                  |                                                                   |      |          |          |   |   |          |          |  
|--------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ---- | -------- | -------- | - | - | -------- | -------- | -
|For the six months ended June 30,                                                 |                                                                   | 2003 |          | 2002    
|                                                                                  |                                                                   |      |          |         
|Cash flows from operating activities                                              |                                                                   |      |          |          |   |   |          |         
|Net income                                                                        |                                                                   | $    | 781.2    |          |   | $ | 434.1    |         
|Adjustments to reconcile net income to net cash provided by operating
activities: |                                                                   |      |          |          |   |   |          |         
|                                                                                  | Realized investment (gains) losses, net                           |      |          | (22.6    | ) |   |          | 7.2      |  
|                                                                                  | Cumulative effect of changes in accounting principles, net of tax |      |          |         |   |   |          | 242.6    |  
|                                                                                  | Depreciation and amortization                                     |      |          | 18.9     |   |   |          | 18.5     |  
|                                                                                  | Deferred federal income taxes (benefit)                           |      |          | 440.8    |   |   |          | (50.4    | )
|                                                                                  | Amortization of deferred policy acquisition costs                 |      |          | 946.1    |   |   |          | 872.5    |  
|                                                                                  | Premium balances receivable                                       |      |          | (233.9   | ) |   |          | (209.0   | )
|                                                                                  | Reinsurance recoverables                                          |      |          | (66.3    | ) |   |          | 56.3     |  
|                                                                                  | Deferred acquisition costs                                        |      |          | (996.1   | ) |   |          | (953.0   | )
|                                                                                  | Insurance reserves                                                |      |          | 273.8    |   |   |          | 474.6    |  
|                                                                                  | Trading account activities                                        |      |          | (3.1     | ) |   |          | 209.5    |  
|                                                                                  | Recoveries from former affiliate                                  |      |          | 360.7    |   |   |          |         |  
|                                                                                  | Other                                                             |      |          | 331.9    |   |   |          | 6.0      |  
|                                                                                  |                                                                   |      |          |          |   |   |          |         
|Net cash provided by operating activities                                         |                                                                   |      | 1,831.4  |          |   |   | 1,108.9  |         
|                                                                                  |                                                                   |      |          |          |   |   |          |         
|Cash flows from investing activities                                              |                                                                   |      |          |          |   |   |          |         
|Proceeds from maturities of investments                                           |                                                                   |      |          |          |   |   |          |         
|                                                                                  | Fixed maturities                                                  |      |          | 2,054.4  |   |   |          | 1,394.1  |  
|                                                                                  | Mortgage loans                                                    |      |          | 13.7     |   |   |          | 13.1     |  
|Proceeds from sales of investments                                                |                                                                   |      |          |          |   |   |          |         
|                                                                                  | Fixed maturities                                                  |      |          | 4,130.5  |   |   |          | 5,885.3  |  
|                                                                                  | Equity securities                                                 |      |          | 148.6    |   |   |          | 76.1     |  
|                                                                                  | Real estate held for sale                                         |      |          | 10.8     |   |   |          |         |  
|Purchases of investments                                                          |                                                                   |      |          |          |   |   |          |         
|                                                                                  | Fixed maturities                                                  |      |          | (7,199.1 | ) |   |          | (8,389.8 | )
|                                                                                  | Equity securities                                                 |      |          | (39.6    | ) |   |          | (78.7    | )
|                                                                                  | Mortgage loans                                                    |      |          | (7.7     | ) |   |          |         |  
|                                                                                  | Real estate held for sale                                         |      |          |         |   |   |          | (4.7     | )
|Short-term securities, (purchases) sales, net                                     |                                                                   |      | (223.0   | )        |   |   | (51.4    | )       
|Other investments, net                                                            |                                                                   |      | 218.8    |          |   |   | 671.5    |         
|Securities transactions in course of settlement                                   |                                                                   |      | (369.5   | )        |   |   | 37.3     |         
|                                                                                  |                                                                   |      |          |          |   |   |          |         
|Net cash used in investing activities                                             |                                                                   |      | (1,262.1 | )        |   |   | (447.2   | )       
|                                                                                  |                                                                   |      |          |          |   |   |          |         
|Cash flows from financing activities                                              |                                                                   |      |          |          |   |   |          |         
|Issuance of short-term debt                                                       |                                                                   |      | 549.5    |          |   |   |         |         
|Payment of short-term debt                                                        |                                                                   |      | (99.0    | )        |   |   |         |         
|Issuance of long-term debt                                                        |                                                                   |      | 1,381.9  |          |   |   |         |         
|Payment of long-term debt                                                         |                                                                   |      | (550.0   | )        |   |   |         |         
|Issuance of convertible notes, net                                                |                                                                   |      |         |          |   |   | 867.0    |         
|Payment of note payables to former affiliate                                      |                                                                   |      | (700.0   | )        |   |   | (5,299.0 | )       
|Redemption of mandatorily redeemable preferred stock                              |                                                                   |      | (900.0   | )        |   |   |         |         
|Initial public offering                                                           |                                                                   |      |         |          |   |   | 4,089.5  |         
|Issuance of common stock-employee stock options                                   |                                                                   |      | 17.5     |          |   |   |         |         
|Treasury stock acquired                                                           |                                                                   |      | (6.1     | )        |   |   |         |         
|Receipts from former affiliates                                                   |                                                                   |      |         |          |   |   | 157.5    |         
|Dividends to shareholders                                                         |                                                                   |      | (120.9   | )        |   |   |         |         
|Dividend to former affiliate                                                      |                                                                   |      |         |          |   |   | (157.5   | )       
|Payment of dividend on subsidiarys preferred stock                               |                                                                   |      | (2.6     | )        |   |   |         |         
|Purchase of real estate from former affiliate                                     |                                                                   |      |         |          |   |   | (68.2    | )       
|Transfer of employee benefit obligations to former affiliates                     |                                                                   |      | (22.7    | )        |   |   | (172.4   | )       
|Transfer of lease obligations to former affiliate                                 |                                                                   |      |         |          |   |   | (87.8    | )       
|                                                                                  |                                                                   |      |          |          |   |   |          |         
|Net cash used in financing activities                                             |                                                                   |      | (452.4   | )        |   |   | (670.9   | )       
|                                                                                  |                                                                   |      |          |          |   |   |          |         
|Net increase (decrease) in cash                                                   |                                                                   |      | 116.9    |          |   |   | (9.2     | )       
|Cash at beginning of period                                                       |                                                                   |      | 92.2     |          |   |   | 236.9    |         
|                                                                                  |                                                                   |      |          |          |   |   |          |         
|Cash at end of period                                                             |                                                                   | $    | 209.1    |          |   | $ | 227.7    |         
|                                                                                  |                                                                   |      |          |          |   |   |          |         
|Supplemental disclosure of cash flow information                                  |                                                                   |      |          |          |   |   |          |         
|Income taxes (received) paid                                                      |                                                                   | $    | (488.2   | )        |   | $ | 104.5    |         
|Interest paid                                                                     |                                                                   | $    | 68.3     |          |   | $ | 40.5     |         
|                                                                                  |                                                                   |      |          |          |   |   |          |         

See notes to condensed consolidated financial statements

6



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##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



|1. |  | GENERAL                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The interim condensed consolidated financial statements include the accounts
of Travelers Property Casualty Corp. (TPC) and its subsidiaries
(collectively, the Company). These financial statements are prepared in
conformity with accounting principles generally accepted in the United States
of America (GAAP) and are unaudited. In the opinion of the Companys
management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation have been reflected. The accompanying
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and related notes included in the
Companys Form 10-K for the year ended December 31, 2002.                                                                                                                                                                                                                                      
|  
|   |  | Certain financial information that is normally included in annual financial
statements prepared in accordance with GAAP, but that is not required for
interim reporting purposes, has been condensed or omitted. Certain
reclassifications have been made to the prior years financial statements to
conform to the current years presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|2. |  | CHANGES IN ACCOUNTING PRINCIPLES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | Stock-Based
Compensation
The Company has an employee stock incentive compensation plan (the plan) that
includes stock option programs and restricted stock programs, which are
described more fully in the notes to the consolidated financial statements
included in the Companys Form 10-K for the year ended December 31, 2002.
Prior to January 1, 2003, the Company accounted for the plan 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 their fair value at the date of issuance and charged to compensation
expense ratably over the vesting period. Options granted prior to January 1,
2003 were not reflected in compensation expense as all options granted had an
exercise price equal to the market value of the underlying common stock at
the date of grant.
|  
|   |  | Effective January 1, 2003, the Company elected to prospectively adopt the
fair value method of accounting for its employee stock-based compensation
plans as defined in the Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (FAS 123), for all employee awards granted, modified, or
settled after January 1, 2003. Under this method, compensation cost is
measured at the grant date based on the fair value of the award derived by
the application of an option pricing model and is recognized ratably over the
vesting period. The adoption of FAS 123 did not have a significant impact on
the Companys results of operations, financial condition or liquidity.                                                                                                                                                                                                            

7



---



##### 





|2. |  | CHANGES IN ACCOUNTING PRINCIPLES, Continued                                                                                                                                              
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The following table illustrates the effect on net income and earnings per
share as if the fair value based method had been applied to all outstanding
and unvested awards in each period:

|                                                                                                                           |  |                    |       |                  |  |      |       |      |  |   |       |   |  |   |       |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | ---------------- |  | ---- | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                                                                           |  | Three Months Ended |       | Six Months Ended
|                                                                                                                           |  | June 30,           |       | June 30,        
|(in millions)                                                                                                              |  | 2003               |       | 2002             |  | 2003 |       | 2002
|                                                                                                                           |  |                    |       |                  |  |      |       |     
|Net income, as reported                                                                                                    |  | $                  | 441.2 |                  |  | $    | 332.0 |      |  | $ | 781.2 |   |  | $ | 434.1 |  
|Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects                 |  |                    | 4.7   |                  |  |      | 4.0   |      |  |   | 9.1   |   |  |   | 8.7   |  
|Deduct: Stock-based employee compensation
expense determined under fair value based
method, net of related tax effects (1) |  |                    | (18.4 | )                |  |      | (21.5 | )    |  |   | (36.5 | ) |  |   | (36.3 | )
|                                                                                                                           |  |                    |       |                  |  |      |       |      |  |   |       |   |  |   |       |  
|Net income, pro forma                                                                                                      |  | $                  | 427.5 |                  |  | $    | 314.5 |      |  | $ | 753.8 |   |  | $ | 406.5 |  
|                                                                                                                           |  |                    |       |                  |  |      |       |      |  |   |       |   |  |   |       |  
|Earnings per share                                                                                                         |  |                    |       |                  |  |      |       |      |  |   |       |   |  |   |       |  
|Basic and diluted  as reported                                                                                            |  | $                  | 0.44  |                  |  | $    | 0.33  |      |  | $ | 0.78  |   |  | $ | 0.48  |  
|Basic  pro forma                                                                                                          |  |                    | 0.43  |                  |  |      | 0.31  |      |  |   | 0.75  |   |  |   | 0.45  |  
|Diluted  pro forma                                                                                                        |  |                    | 0.42  |                  |  |      | 0.31  |      |  |   | 0.75  |   |  |   | 0.45  |  
|                                                                                                                           |  |                    |       |                  |  |      |       |      |  |   |       |   |  |   |       |  



|(1) |  | 2002 includes the fair value of stock-based employee compensation in
Citigroups common stock. The awards in Citigroup shares were replaced with
the Companys class A common shares in August 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | 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.
|   
|    |  | 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 of goodwill
and $22.6 million of indefinite-lived intangible assets representing the
value of insurance operating licenses, all attributable to The Northland
Company and subsidiaries (Northland), as a cumulative catch-up 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 Company had customer-related intangible assets with a gross carrying
amount of $470.6 million as of both June 30, 2003 and December 31, 2002, and
with accumulated amortization of $108.5 million and $90.8 million as of June
30, 2003 and December 31, 2002, respectively, which are included in other
assets in the condensed consolidated balance sheet. Amortization expense was
$8.8 million for each of the three months ended June 30, 2003 and 2002 and
was $17.7 million for each of the six months ended June 30, 2003 and 2002.
Intangible assets amortization expense is estimated to be $17.7 million for
the remainder of 2003, $34.2 million in 2004, $31.3 million in 2005 and $29.6
million in each of 2006, 2007 and 2008.                                                                                                                                                                   

8



---



##### 





|3. |  | 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 for 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.
|  
|   |  | The Company does not hold any variable interest entities acquired subsequent
to January 31, 2003. For purposes of applying FIN 46, the Company is
evaluating the following investments which were acquired or created prior to
February 1, 2003 to determine whether such investments should be consolidated
or disclosed as variable interest entities in the Companys future financial
statements (amounts are as of June 30, 2003):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        



| |  |  | Real estate partnerships and joint ventures that are accounted
for under the equity method of accounting and have a total carrying
value of $261.0 million on the consolidated balance sheet; the
Companys unfunded commitments associated with real estate
partnerships and joint ventures were $125.8 million.                                            
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Investment partnerships that are accounted for under the equity
method of accounting and have a carrying value of $1.478 billion on
the consolidated balance sheet; the Companys unfunded commitments
associated with investment partnerships were $622.9 million.                                                                                          
|
| |  |  | Below investment grade asset-backed securities and commercial
mortgage-backed securities that are reported at fair value and have a
carrying value of $132.3 million on the consolidated balance sheet.                                                                                                                                                      
|
| |  |  | Equity investments that are reported at fair value and have a
carrying value of $33.6 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 $385.4 million on the balance
sheet. There were no unfunded commitments associated with these
equity investments.



| |  | The Company continues to assess the impact, if any, that the consolidation
and disclosure provisions of FIN 46 may have on the consolidated financial
statements.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

9



---



##### 





|3. |  | ACCOUNTING STANDARDS NOT YET ADOPTED, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150 (FAS 150), Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, which establishes standards
for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. FAS 150 requires an issuer to
classify the following instruments as liabilities (or assets in some
circumstances):



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



| |  | if, at inception, the monetary value of the obligation is based solely or
predominantly on any of the following: (a) a fixed monetary amount known at
inception; (b) variations in something other than the fair value of the
issuers equity shares; or (c) variations inversely related to changes in the
fair value of the issuers equity shares.                                                                                                                                                                                                                                                                                                                                                                              
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | FAS 150 applies to issuers classification and measurement of freestanding
financial instruments, including those that comprise more than one option or
forward contract.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | FAS 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. It is to be implemented by
reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the Statement and
still existing at the beginning of the interim period of adoption.
Restatement of financial statements for earlier years presented is not
permitted. The Company is currently assessing the impact, if any, that FAS
150 may have on its consolidated financial statements; however, the Company
does not expect its impact to be significant.

10



---



##### 





|4. |  | SEGMENT INFORMATION
|-- |  | -------------------

|                                                         |                          |       |            |         |          |          |            |         |  |   |          |         | 
|-------------------------------------------------------- | ------------------------ | ----- | ---------- | ------- | -------- | -------- | ---------- | ------- |  | - | -------- | ------- | 
|                                                         |                          |       |            |         |          |          |            |         |  |   | Total   
|                                                         |                          |       | Commercial |         | Personal |          | Reportable
|(at and for the three months ended June 30, in millions) |                          | Lines |            | Lines   |          | Segments
|                                                         |                          |       |            |         |          |         
|2003                                                     |                          |       |            |         |          |          |            |         |  |   |          |        
|Revenues                                                 |                          |       |            |         |          |          |            |         |  |   |          |        
|Premiums                                                 |                          | $     | 1,907.6    |         |          | $        | 1,192.8    |         |  | $ | 3,100.4  |        
|Net investment income                                    |                          |       | 365.0      |         |          |          | 90.9       |         |  |   | 455.9    |        
|Fee income                                               |                          |       | 133.7      |         |          |          |           |         |  |   | 133.7    |        
|Other revenues                                           |                          |       | 19.7       |         |          |          | 22.8       |         |  |   | 42.5     |        
|                                                         |                          |       |            |         |          |          |            |         |  |   |          |        
|                                                         | Total operating revenues |       | $          | 2,426.0 |          |          | $          | 1,306.5 |  |   | $        | 3,732.5 | 
|                                                         |                          |       |            |         |          |          |            |         |  |   |          |        
|Operating income(1)                                      |                          | $     | 352.0      |         |          | $        | 106.8      |         |  | $ | 458.8    |        
|Assets                                                   |                          |       | 56,120.3   |         |          |          | 9,463.8    |         |  |   | 65,584.1 |        
|                                                         |                          |       |            |         |          |          |            |         |  |   |          |        
|2002                                                     |                          |       |            |         |          |          |            |         |  |   |          |        
|Revenues                                                 |                          |       |            |         |          |          |            |         |  |   |          |        
|Premiums                                                 |                          | $     | 1,688.4    |         |          | $        | 1,068.3    |         |  | $ | 2,756.7  |        
|Net investment income                                    |                          |       | 369.7      |         |          |          | 95.3       |         |  |   | 465.0    |        
|Fee income                                               |                          |       | 108.8      |         |          |          |           |         |  |   | 108.8    |        
|Other revenues                                           |                          |       | 6.2        |         |          |          | 19.2       |         |  |   | 25.4     |        
|                                                         |                          |       |            |         |          |          |            |         |  |   |          |        
|                                                         | Total operating revenues |       | $          | 2,173.1 |          |          | $          | 1,182.8 |  |   | $        | 3,355.9 | 
|                                                         |                          |       |            |         |          |          |            |         |  |   |          |        
|Operating income(1)                                      |                          | $     | 310.5      |         |          | $        | 70.0       |         |  | $ | 380.5    |        
|Assets                                                   |                          |       | 50,101.2   |         |          |          | 8,956.2    |         |  |   | 59,057.4 |        
|                                                         |                          |       |            |         |          |          |            |         |  |   |          |        



|(1) |  | Operating income is reflected net of tax and excludes realized investment
gains (losses), net, restructuring charges and the cumulative effect of
changes in accounting principles. Operating income is the basis upon which
management evaluates segment results.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11



---



##### 





|4. |  | SEGMENT INFORMATION, Continued
|-- |  | ------------------------------

|                                                       |                          |       |            |         |          |          |            |         |  |   |          |         | 
|------------------------------------------------------ | ------------------------ | ----- | ---------- | ------- | -------- | -------- | ---------- | ------- |  | - | -------- | ------- | 
|                                                       |                          |       |            |         |          |          |            |         |  |   | Total   
|                                                       |                          |       | Commercial |         | Personal |          | Reportable
|(at and for the six months ended June 30, in millions) |                          | Lines |            | Lines   |          | Segments
|                                                       |                          |       |            |         |          |         
|2003                                                   |                          |       |            |         |          |          |            |         |  |   |          |        
|Revenues                                               |                          |       |            |         |          |          |            |         |  |   |          |        
|Premiums                                               |                          | $     | 3,747.9    |         |          | $        | 2,331.1    |         |  | $ | 6,079.0  |        
|Net investment income                                  |                          |       | 730.7      |         |          |          | 180.3      |         |  |   | 911.0    |        
|Fee income                                             |                          |       | 270.0      |         |          |          |           |         |  |   | 270.0    |        
|Other revenues                                         |                          |       | 23.0       |         |          |          | 44.4       |         |  |   | 67.4     |        
|                                                       |                          |       |            |         |          |          |            |         |  |   |          |        
|                                                       | Total operating revenues |       | $          | 4,771.6 |          |          | $          | 2,555.8 |  |   | $        | 7,327.4 | 
|                                                       |                          |       |            |         |          |          |            |         |  |   |          |        
|Operating income(1)                                    |                          | $     | 612.9      |         |          | $        | 219.3      |         |  | $ | 832.2    |        
|Assets                                                 |                          |       | 56,120.3   |         |          |          | 9,463.8    |         |  |   | 65,584.1 |        
|                                                       |                          |       |            |         |          |          |            |         |  |   |          |        
|2002                                                   |                          |       |            |         |          |          |            |         |  |   |          |        
|Revenues                                               |                          |       |            |         |          |          |            |         |  |   |          |        
|Premiums                                               |                          | $     | 3,243.0    |         |          | $        | 2,098.3    |         |  | $ | 5,341.3  |        
|Net investment income                                  |                          |       | 752.1      |         |          |          | 199.6      |         |  |   | 951.7    |        
|Fee income                                             |                          |       | 211.5      |         |          |          |           |         |  |   | 211.5    |        
|Other revenues                                         |                          |       | 13.9       |         |          |          | 40.3       |         |  |   | 54.2     |        
|                                                       |                          |       |            |         |          |          |            |         |  |   |          |        
|                                                       | Total operating revenues |       | $          | 4,220.5 |          |          | $          | 2,338.2 |  |   | $        | 6,558.7 | 
|                                                       |                          |       |            |         |          |          |            |         |  |   |          |        
|Operating income(1)                                    |                          | $     | 588.1      |         |          | $        | 141.2      |         |  | $ | 729.3    |        
|Assets                                                 |                          |       | 50,101.2   |         |          |          | 8,956.2    |         |  |   | 59,057.4 |        
|                                                       |                          |       |            |         |          |          |            |         |  |   |          |        



|(1) |  | Operating income is reflected net of tax and excludes realized
investment gains (losses), net, restructuring charges and the cumulative
effect of changes in accounting principles. Operating income is the basis
upon which management evaluates segment results.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12



---



##### 





|4. |  | SEGMENT INFORMATION, Continued  
|-- |  | --------------------------------
|  
|   |  | Business Segment Reconciliations

|                                                                                   |                               |      |                    |         |                  |      |         |         |  |   |         |         |  |   |         |         | 
|---------------------------------------------------------------------------------- | ----------------------------- | ---- | ------------------ | ------- | ---------------- | ---- | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                                                                   |                               |      | Three Months Ended |         | Six Months Ended
|                                                                                   |                               |      | June 30,           |         | June 30,        
|(in millions)                                                                      |                               | 2003 |                    | 2002    |                  | 2003 |         | 2002   
|                                                                                   |                               |      |                    |         |                  |      |         |        
|Revenue reconciliation                                                             |                               |      |                    |         |                  |      |         |         |  |   |         |         |  |   |         |        
|Total revenue for reportable segments                                              |                               | $    | 3,732.5            |         |                  | $    | 3,355.9 |         |  | $ | 7,327.4 |         |  | $ | 6,558.7 |        
|Interest expense and other                                                         |                               |      | .1                 |         |                  |      | (.1     | )       |  |   | 1.7     |         |  |   | 1.0     |        
|Realized investment gains (losses), net                                            |                               |      | 16.1               |         |                  |      | (36.0   | )       |  |   | 22.6    |         |  |   | (7.2    | )      
|                                                                                   |                               |      |                    |         |                  |      |         |         |  |   |         |         |  |   |         |        
|                                                                                   | Total consolidated revenues   |      | $                  | 3,748.7 |                  |      | $       | 3,319.8 |  |   | $       | 7,351.7 |  |   | $       | 6,552.5 | 
|                                                                                   |                               |      |                    |         |                  |      |         |         |  |   |         |         |  |   |         |        
|Income reconciliation, net of tax and
minority interest                            |                               |      |                    |         |                  |      |         |         |  |   |         |         |  |   |         |        
|Total operating income for reportable segments                                     |                               | $    | 458.8              |         |                  | $    | 380.5   |         |  | $ | 832.2   |         |  | $ | 729.3   |        
|Interest Expense and Other                                                         |                               |      | (28.0              | )       |                  |      | (23.7   | )       |  |   | (62.9   | )       |  |   | (45.9   | )      
|                                                                                   |                               |      |                    |         |                  |      |         |         |  |   |         |         |  |   |         |        
|                                                                                   | Total operating income        |      |                    | 430.8   |                  |      |         | 356.8   |  |   |         | 769.3   |  |   |         | 683.4   | 
|Realized investment gains (losses), net                                            |                               |      | 10.4               |         |                  |      | (24.0   | )       |  |   | 11.9    |         |  |   | (5.1    | )      
|Restructuring charge                                                               |                               |      |                   |         |                  |      | (.8     | )       |  |   |        |         |  |   | (1.6    | )      
|Cumulative effect of change in accounting for
goodwill and other intangible assets |                               |      |                   |         |                  |      |        |         |  |   |        |         |  |   | (242.6  | )      
|                                                                                   |                               |      |                    |         |                  |      |         |         |  |   |         |         |  |   |         |        
|                                                                                   | Total consolidated net income |      | $                  | 441.2   |                  |      | $       | 332.0   |  |   | $       | 781.2   |  |   | $       | 434.1   | 
|                                                                                   |                               |      |                    |         |                  |      |         |         |  |   |         |         |  |   |         |        

|                                     |             |      |          |          |  |   |          |          | 
|------------------------------------ | ----------- | ---- | -------- | -------- |  | - | -------- | -------- | 
|(at June 30, in millions)            |             | 2003 |          | 2002    
|                                     |             |      |          |         
|Asset reconciliation                 |             |      |          |          |  |   |          |         
|Total assets for reportable segments |             | $    | 65,584.1 |          |  | $ | 59,057.4 |         
|Other assets                         |             |      | 446.6    |          |  |   | 328.2    |         
|                                     |             |      |          |          |  |   |          |         
|                                     | Total asset |      | $        | 66,030.7 |  |   | $        | 59,385.6 | 
|                                     |             |      |          |          |  |   |          |         

13



---



##### 



|5. |  | INVESTMENTS
|-- |  | -----------

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

|                                                                                                    |       |      |           |          |  |        |                  |         |  |   |      |      |  |   |          |          | 
|--------------------------------------------------------------------------------------------------- | ----- | ---- | --------- | -------- |  | ------ | ---------------- | ------- |  | - | ---- | ---- |  | - | -------- | -------- | 
|                                                                                                    |       |      |           |          |  |        | Gross Unrealized |         |  |   |     
|                                                                                                    |       |      | Amortized |          |  |        | Fair            
|(at June 30, 2003, in millions)                                                                     |       | Cost |           | Gains    |  | Losses |                  | Value  
|                                                                                                    |       |      |           |          |  |        |                  |        
|Mortgage-backed
securities - CMOs and
pass-through securities                                       |       | $    | 7,934.3   |          |  | $      | 340.2            |         |  | $ | 2.3  |      |  | $ | 8,272.2  |         
|U.S. Treasury securities and obligations of
U.S. Government and government agencies and
authorities |       |      | 1,034.4   |          |  |        | 70.7             |         |  |   |     |      |  |   | 1,105.1  |         
|Obligations of states, municipalities and
political subdivisions                                    |       |      | 14,162.4  |          |  |        | 939.0            |         |  |   | 12.1 |      |  |   | 15,089.3 |         
|Debt securities issued by foreign
governments                                                       |       |      | 250.7     |          |  |        | 14.6             |         |  |   | 2.7  |      |  |   | 262.6    |         
|All other corporate bonds                                                                           |       |      | 6,216.3   |          |  |        | 501.8            |         |  |   | 37.1 |      |  |   | 6,681.0  |         
|Redeemable preferred stock                                                                          |       |      | 251.4     |          |  |        | 13.4             |         |  |   | 6.7  |      |  |   | 258.1    |         
|                                                                                                    |       |      |           |          |  |        |                  |         |  |   |      |      |  |   |          |         
|                                                                                                    | Total |      | $         | 29,849.5 |  |        | $                | 1,879.7 |  |   | $    | 60.9 |  |   | $        | 31,668.3 | 
|                                                                                                    |       |      |           |          |  |        |                  |         |  |   |      |      |  |   |          |         

|                                                                                                    |       |      |           |          |  |        |                  |         |  |   |       |       |  |   |          |          | 
|--------------------------------------------------------------------------------------------------- | ----- | ---- | --------- | -------- |  | ------ | ---------------- | ------- |  | - | ----- | ----- |  | - | -------- | -------- | 
|                                                                                                    |       |      |           |          |  |        | Gross Unrealized |         |  |   |      
|                                                                                                    |       |      | Amortized |          |  |        | Fair            
|(at December 31, 2002, in millions)                                                                 |       | Cost |           | Gains    |  | Losses |                  | Value  
|                                                                                                    |       |      |           |          |  |        |                  |        
|Mortgage-backed securities - CMOs and
pass-through securities                                       |       | $    | 8,595.4   |          |  | $      | 346.6            |         |  | $ | 1.5   |       |  | $ | 8,940.5  |         
|U.S. Treasury securities and obligations of
U.S. Government and government agencies and
authorities |       |      | 1,034.8   |          |  |        | 62.0             |         |  |   |      |       |  |   | 1,096.8  |         
|Obligations of states, municipalities and
political subdivisions                                    |       |      | 12,664.4  |          |  |        | 631.9            |         |  |   | 10.3  |       |  |   | 13,286.0 |         
|Debt securities issued by foreign
governments                                                       |       |      | 258.2     |          |  |        | 19.9             |         |  |   | 1.7   |       |  |   | 276.4    |         
|All other corporate bonds                                                                           |       |      | 6,093.9   |          |  |        | 342.8            |         |  |   | 245.8 |       |  |   | 6,190.9  |         
|Redeemable preferred stock                                                                          |       |      | 231.1     |          |  |        | 5.6              |         |  |   | 24.1  |       |  |   | 212.6    |         
|                                                                                                    |       |      |           |          |  |        |                  |         |  |   |       |       |  |   |          |         
|                                                                                                    | Total |      | $         | 28,877.8 |  |        | $                | 1,408.8 |  |   | $     | 283.4 |  |   | $        | 30,003.2 | 
|                                                                                                    |       |      |           |          |  |        |                  |         |  |   |       |       |  |   |          |         



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

|                                    |       |      |           |       |  |        |                  |       |  |   |      |      |  |   |       |       | 
|----------------------------------- | ----- | ---- | --------- | ----- |  | ------ | ---------------- | ----- |  | - | ---- | ---- |  | - | ----- | ----- | 
|                                    |       |      |           |       |  |        | Gross Unrealized |       |  |   |     
|                                    |       |      | Amortized |       |  |        | Fair            
|(at June 30, 2003, in millions)     |       | Cost |           | Gains |  | Losses |                  | Value
|                                    |       |      |           |       |  |        |                  |      
|Common stocks                       |       | $    | 71.5      |       |  | $      | 11.8             |       |  | $ | 4.6  |      |  | $ | 78.7  |      
|Nonredeemable preferred
stocks      |       |      | 683.8     |       |  |        | 65.8             |       |  |   | 17.0 |      |  |   | 732.6 |      
|                                    |       |      |           |       |  |        |                  |       |  |   |      |      |  |   |       |      
|                                    | Total |      | $         | 755.3 |  |        | $                | 77.6  |  |   | $    | 21.6 |  |   | $     | 811.3 | 
|                                    |       |      |           |       |  |        |                  |       |  |   |      |      |  |   |       |      
|(at December 31, 2002, in millions) |      
|                                    |      
|Common stocks                       |       | $    | 57.4      |       |  | $      | 4.0              |       |  | $ | 11.3 |      |  | $ | 50.1  |      
|Nonredeemable preferred
stocks      |       |      | 804.5     |       |  |        | 24.6             |       |  |   | 27.7 |      |  |   | 801.4 |      
|                                    |       |      |           |       |  |        |                  |       |  |   |      |      |  |   |       |      
|                                    | Total |      | $         | 861.9 |  |        | $                | 28.6  |  |   | $    | 39.0 |  |   | $     | 851.5 | 
|                                    |       |      |           |       |  |        |                  |       |  |   |      |      |  |   |       |      

14



---



##### 





|5. |  | INVESTMENTS, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Securities Lending and Dollar-Roll Repurchase Agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | The Company engages in securities lending activities from which it generates
net investment income from the lending of certain of its investments to other
institutions for short periods of time. The Company either receives cash or
marketable securities as collateral equal to at least the market value of the
loaned securities plus accrued interest. Collateral is marked to market and
adjusted daily. In those cases where cash collateral is received, the
Company reinvests the collateral in a short-term investment pool, the loaned
securities remain a recorded asset of the Company and a liability is recorded
to recognize the Companys obligation to return the collateral at the end of
the loan. At June 30, 2003, $405.4 million of securities were on loan for
which cash collateral was received. Where marketable securities have been
received as collateral, the collateral is held by a third party custodian
(tri-party lending agreement), and the Company has the right to access the
collateral only in the event that the institution borrowing the Companys
securities is in default under the lending agreement. The loaned securities
remain a recorded asset of the Company, and the Company does not recognize
the collateral or the obligation to return the collateral. At June 30, 2003,
$262.4 million of securities were on loan under tri-party lending agreements.
|  
|   |  | The Company also engages in dollar-roll repurchase activities from which it
generates net investment income from selling mortgage-backed securities and
simultaneously agreeing to repurchase from the same party substantially the
same securities. The Company invests the proceeds from the sale in a
short-term investment pool, the sold securities remain a recorded asset of
the Company and a liability is recorded to recognize the Companys obligation
to repurchase substantially the same securities at the end of a specified
period. At June 30, 2003, $2.911 billion of securities were subject to
dollar-roll repurchase agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | Derivative Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | The Company engages in U.S. Treasury note futures transactions to modify the
duration of the investment portfolio as part of the Companys management of
exposure to changes in interest rates. The Company enters into 90 day
futures contracts on 2 year, 5 year, 10 year and 30 year U.S. Treasury notes
which require a daily mark to market settlement with the broker. These
derivative instruments are not designated and do not qualify as hedges under
Financial Accounting Standards No. 133, Accounting for Derivatives
Instruments and Hedging Activities rules and as such the daily mark to
market settlement is reflected in realized investment gains (losses), net.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|6. |  | CHANGES IN EQUITY FROM NONOWNER SOURCES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                                  |                                               |      |                    |       |                  |      |       |       |  |   |       |         |  |   |       |       | 
|--------------------------------- | --------------------------------------------- | ---- | ------------------ | ----- | ---------------- | ---- | ----- | ----- |  | - | ----- | ------- |  | - | ----- | ----- | 
|                                  |                                               |      | Three Months Ended |       | Six Months Ended
|                                  |                                               |      | June 30,           |       | June 30,        
|(in millions)                     |                                               | 2003 |                    | 2002  |                  | 2003 |       | 2002 
|                                  |                                               |      |                    |       |                  |      |       |      
|Net income                        |                                               | $    | 441.2              |       |                  | $    | 332.0 |       |  | $ | 781.2 |         |  | $ | 434.1 |      
|Net unrealized gain on
securities |                                               |      | 355.3              |       |                  |      | 290.5 |       |  |   | 492.5 |         |  |   | 120.6 |      
|Other (1)                         |                                               |      | 7.9                |       |                  |      | 9.3   |       |  |   | 13.1  |         |  |   | 10.4  |      
|                                  |                                               |      |                    |       |                  |      |       |       |  |   |       |         |  |   |       |      
|                                  | Total changes in equity from
nonowner sources |      | $                  | 804.4 |                  |      | $     | 631.8 |  |   | $     | 1,286.8 |  |   | $     | 565.1 | 
|                                  |                                               |      |                    |       |                  |      |       |       |  |   |       |         |  |   |       |      



|(1) |  | Includes foreign currency translation adjustments.
|--- |  | --------------------------------------------------

15



---



##### 





|7. |  | EARNINGS PER SHARE (EPS)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | EPS has been computed in accordance with Financial Accounting Standards No.
128, Earnings per Share. Basic EPS is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding 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
Stock Incentive Plan. Excluded from the computation of diluted EPS were 38.6
million of potentially dilutive shares related to convertible junior
subordinated notes payable because the contingency conditions for their
issuance have not been satisfied (see note 8 of the Companys Form 10-K for
the year ended December 31, 2002). For the three and six months ended June
30, 2003 and 2002, there was no significant effect on EPS from potentially
dilutive securities. For the three and six months ended June 30, 2002,
shares have been adjusted to give effect to the recapitalization in March
2002, prior to the Companys March 2002 Initial Public Offering, 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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|                                                                                            |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |        |  
|------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ---------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------ | -
|                                                                                            |  | Three Months Ended |         | Six Months Ended
|                                                                                            |  | June 30,           |         | June 30,        
|(in millions, except per share amounts)                                                     |  | 2003               |         | 2002             |  | 2003 |         | 2002
|                                                                                            |  |                    |         |                  |  |      |         |     
|Income before cumulative effect of accounting
changes                                       |  | $                  | 441.2   |                  |  | $    | 332.0   |      |  | $ | 781.2   |  |  | $ | 676.7  |  
|Cumulative effect of change in accounting
principle                                         |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   | (242.6 | )
|                                                                                            |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |        |  
|Net income available to common shareholders
for basic EPS (numerator)                       |  |                    | 441.2   |                  |  |      | 332.0   |      |  |   | 781.2   |  |  |   | 434.1  |  
|Effect of dilutive securities                                                               |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |       |  
|                                                                                            |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |        |  
|Net income available to common shareholders
for
diluted EPS (numerator)                     |  | $                  | 441.2   |                  |  | $    | 332.0   |      |  | $ | 781.2   |  |  | $ | 434.1  |  
|                                                                                            |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |        |  
|Weighted average common shares outstanding
applicable to basic EPS (denominator)            |  |                    | 1,002.3 |                  |  |      | 1,000.0 |      |  |   | 1,002.4 |  |  |   | 897.9  |  
|Effect of dilutive shares                                                                   |  |                    | 5.4     |                  |  |      |        |      |  |   | 5.2     |  |  |   |       |  
|                                                                                            |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |        |  
|Adjusted weighted average common shares
outstanding applicable to diluted EPS
(denominator) |  |                    | 1,007.7 |                  |  |      | 1,000.0 |      |  |   | 1,007.6 |  |  |   | 897.9  |  
|                                                                                            |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |        |  
|Basic and diluted earnings per share                                                        |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |        |  
|Income before cumulative effect of change
in accounting principle                           |  | $                  | 0.44    |                  |  | $    | 0.33    |      |  | $ | 0.78    |  |  | $ | 0.75   |  
|Cumulative effect of change in accounting
principle                                         |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   | (0.27  | )
|                                                                                            |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |        |  
|Net income                                                                                  |  | $                  | 0.44    |                  |  | $    | 0.33    |      |  | $ | 0.78    |  |  | $ | 0.48   |  
|                                                                                            |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |        |  

16



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##### 





|8. |  | CAPITAL AND DEBT                                                         
|-- |  | -------------------------------------------------------------------------
|  
|   |  | Long-term debt and convertible notes payable outstanding were as follows:

|                                                             |       |      |          |         |              |   |         |         | 
|------------------------------------------------------------ | ----- | ---- | -------- | ------- | ------------ | - | ------- | ------- | 
|                                                             |       |      | June 30, |         | December 31,
|(in millions)                                                |       | 2003 |          | 2002   
|                                                             |       |      |          |        
|Floating rate note due 2004, prepaid February 2003           |       | $    |         |         |              | $ | 550.0   |        
|6.75% Notes due 2006                                         |       |      | 150.0    |         |              |   | 150.0   |        
|3.75% Notes due 2008                                         |       |      | 400.0    |         |              |   |        |        
|7.81% Notes various due dates through 2011                   |       |      | 27.0     |         |              |   | 27.0    |        
|5.00% Notes due 2013                                         |       |      | 500.0    |         |              |   |        |        
|7.75% Notes due 2026                                         |       |      | 200.0    |         |              |   | 200.0   |        
|6.375% Notes due 2033                                        |       |      | 500.0    |         |              |   |        |        
|4.50% Convertible junior subordinated notes payable due
2032 |       |      | 892.5    |         |              |   | 892.5   |        
|6.00% Convertible notes payable due 2032                     |       |      | 49.7     |         |              |   | 49.7    |        
|                                                             |       |      |          |         |              |   |         |        
|                                                             |       |      | 2,719.2  |         |              |   | 1,869.2 |        
|Debt issuance costs                                          |       |      | (43.1    | )       |              |   | (25.5   | )      
|                                                             |       |      |          |         |              |   |         |        
|                                                             | Total |      | $        | 2,676.1 |              |   | $       | 1,843.7 | 
|                                                             |       |      |          |         |              |   |         |        



| |  | In December 2002, the Company entered into a loan agreement with an
unaffiliated lender and borrowed $550.0 million under a Promissory Note due
in January 2004. The Promissory Note carried a variable interest rate of
LIBOR plus 25 basis points per annum. On February 5, 2003, the Company
issued $550.0 million of Floating Rate Notes due in February 2004, which is
included in short-term debt in the condensed consolidated balance sheet. The
proceeds from these notes were used to prepay the $550.0 million due on the
Promissory Note. The Floating Rate Notes also carry a variable interest rate
of LIBOR plus 25 basis points per annum. On March 14, 2003 and June 17,
2003, the Company repurchased $75.0 million and $24.0 million, respectively,
of the Floating Rate Notes at par plus accrued interest. The remaining
$451.0 million are callable by the Company after August 5, 2003.                                                                                                                                                                                                                                                                                                                                              
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On March 11, 2003, TPC issued $1.4 billion of senior notes comprised of
$400.0 million of 3.75% senior notes due March 15, 2008, $500.0 million of
5.00% senior notes due March 15, 2013 and $500.0 million of 6.375% senior
notes due March 15, 2033. The notes pay interest semi-annually on March 15
and September 15 of each year, beginning September 15, 2003, are senior
unsecured obligations and rank equally with all of TPCs other senior
unsecured indebtedness. TPC may redeem some or all of the notes prior to
maturity by paying a make-whole premium based on U.S. Treasury rates. The
net proceeds from the sale of these notes were contributed to its primary
subsidiary, Travelers Insurance Group Holdings, Inc. (TIGHI), so that TIGHI
could repay $500.0 million of indebtedness to Citigroup and to redeem $900.0
million aggregate principal amount of TIGHIs junior subordinated debt
securities held by subsidiary trusts. These trusts, in turn, used these
funds to redeem $900.0 million of preferred capital securities on April 9,
2003.                                                                                                                                                                               
|
| |  | These senior notes were sold to qualified institutional buyers as defined
under Rule 144A under the Securities Act of 1933 (the Securities Act) and
outside the United States in reliance on Regulation S under the Securities
Act. Accordingly, the notes (the restricted notes) were not registered under
the Securities Act or any state securities laws and could not be transferred
or resold except pursuant to certain exemptions. As part of this offering,
TPC agreed to file a registration statement under the Securities Act to
permit the exchange of the notes for registered notes (the Exchange Notes)
having terms identical to those of the senior notes described above (Exchange
Offer). On April 14, 2003, TPC initiated the Exchange Offer pursuant to a
Form S-4 that was filed with the Securities and Exchange Commission.
Accordingly, each series of Exchange Notes has been registered under the
Securities Act, and the transfer restrictions and registration rights
relating to the restricted notes do not apply to the Exchange Notes. As of
May 13, 2003 (the Expiration Date of the Exchange Offer), 99.8%, 99.4% and
100% of TPCs 5, 10, and 30 year restricted notes, respectively, were
exchanged for Exchange Notes.

17



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##### 





|8. |  | CAPITAL AND DEBT, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |  | Effective April 17, 2003, TPC
entered into the following line of credit agreements with Citibank, a
subsidiary of Citigroup, TPCs former parent: (i) a
$250.0 million 45-month revolving line of credit (the
45 Month Line of Credit), and (ii) a $250.0 million
364-day revolving line of credit (the 364 Day Line of Credit and,
together with the 45 Month Line of Credit, the Lines of Credit). TPC
may, with Citibanks consent, extend the commitment of the
364-Day Line of Credit for additional 364-day periods under the same
terms and conditions. TPC has the option, provided there is no
default or event of default, to convert outstanding advances under
the 364 Day Line of Credit at the commitment termination date to a
term loan maturing no later than one year from the commitment
termination date. Borrowings under the Lines of Credit may be made,
at TPCs option, at a variable interest rate equal to either
the lenders base rate plus an applicable margin or at LIBOR
plus an applicable margin. Each Line of Credit includes a commitment
fee and, for any date on which advances exceed 50% of the total
commitment, a utilization fee. The applicable margin and the rates on
which the commitment fee and the utilization fee are based vary based
upon TPCs long-term senior unsecured non-credit-enhanced debt
ratings. Each Line of Credit requires TPC to comply with various
covenants, including the maintenance of specified minimum statutory
capital and surplus and compliance with a ratio of total consolidated
debt to total capital. In addition, an event of default will occur if
there is a change in control (as defined in the Lines of Credit
agreements) of TPC.



| |  | There were no amounts outstanding
under the Lines of Credit at June 30, 2003. Previous lines of credit between TIGHI and Citigroup have been terminated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On March 20, 2002, the Board of Directors designated 3 million of the 50
million shares of preferred stock authorized as Series A Junior Participating
Preferred Stock (the Series A Preferred Stock). Under the Companys
shareholder rights plan, each outstanding share of the Companys class A and
class B common stock carries with it the right to acquire one-thousandth of a
share of the Series A Preferred Stock. These Rights trade with the Companys
common stock and will expire on March 20, 2012, unless the Rights are earlier
redeemed. Such Rights are not presently exercisable and have no voting
rights. At June 30, 2003 and December 31, 2002, there were no shares of
preferred stock, including the Series A Preferred Stock, issued or
outstanding.                                                                          
|
| |  | 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
value per share of the class A common stock was $16.18. The restricted stock
generally vests 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. The unamortized unearned compensation expense associated
with these awards is included as unearned compensation as a separate
component of equity in the condensed consolidated balance sheet. Unearned
compensation expense is recognized as a charge to income ratably over the
vesting period.
|
| |  | During September 2002, the Board of Directors approved a $500.0 million share
repurchase program. Purchases of class A and class B stock may be made from
time to time in the open market, and it is expected that funding for the
program will principally come from operating cash flow. Shares repurchased
will be reported as treasury stock in the consolidated balance sheet. There
were no shares repurchased under this program as of June 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                             

18



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##### 





|8.  |  | CAPITAL AND DEBT, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | 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, 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.
TPCs insurance subsidiaries paid dividends of $320.0 million to TIGHI during
the first six months of 2003.                                                                                                                                          
|   
|9.  |  | FEDERAL INCOME TAXES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | At December 31, 2002, the Company had a net operating loss carryforward of
$1.390 billion. Under terms of the tax sharing agreement with Citigroup, the
Company is entitled to carry operating losses back to prior years upon
receiving Citigroups consent. During the first quarter of 2003, the Company
received Citigroups consent and, as a result, the Companys deferred tax
asset was reduced by $486.5 million with a corresponding reduction to the
current federal income tax payable (included in other cash flows from
operating activities in the condensed consolidated statement of cash flows.)
On June 9, 2003, the Company received a federal income tax refund of $530.9
million representing the full utilization of the net operating loss
carryforward.                      
|   
|10. |  | CITIGROUP INDEMNIFICATION AGREEMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | During March 2002, the Company entered into an agreement with Citigroup 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 an 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. At December 31, 2002, other assets included a $360.7
million receivable from Citigroup under this agreement, which was received
during the first quarter of 2003.
|   
|11. |  | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | 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). The outcome of the restructuring of Lloyds continues to be
uncertain and the impact, if any, on collectibility of amounts recoverable by
the Company from Equitas cannot be quantified at this time. It is possible
that an unfavorable impact on collectibility could have a material adverse
effect on the Companys results of operations in a future period. However,
in the opinion of the Companys management, it is not likely that the outcome
could have a material adverse effect on the Companys financial condition or
liquidity.                                                                                  
|   
|    |  | The Company carries an allowance for uncollectible reinsurance recoverables
which is not allocated to any specific proceedings or disputes, whether for
financial impairments or coverage defenses. Including this allowance, in the
opinion of the Companys management, the net receivable from reinsurance
contracts is fairly stated.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | Asbestos and
Environmental-Related Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    |  | In the ordinary course of its insurance business, the Company receives claims
for insurance arising under policies issued by the Company asserting alleged
injuries and damages from asbestos and other hazardous waste and toxic
substances which are the subject of related coverage litigation, including,
among others, the litigation described below. The Company is increasingly becoming subject to more aggressive
asbestos-related litigation, and the Company expects this trend to continue. The conditions surrounding the
final resolution of these claims and the related litigation continue to change.                                                                                                                                                                               

19



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##### 





|11. |  | COMMITMENTS AND CONTINGENCIES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In May 2002, the Company agreed with approximately three dozen other insurers
and PPG Industries, Inc. (PPG) on key terms to settle asbestos-related
coverage litigation under insurance policies issued to PPG. While there
remain a number of contingencies, including the final execution of documents,
court approval and possible appeals, the Company believes that the completion
of the settlement pursuant to the terms announced in May 2002 is likely. The
Companys single payment contribution to the proposed settlement, expected in
June 2004, is approximately $388.8 million after reinsurance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | 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 bodily injury 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 purported settlements as well as for any future claims brought against
it, and that insurance policy aggregate limits do not apply. 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.
|   
|    |  | An insurance coverage arbitration commenced in January 2001 to determine what
percentage of ACandS financial obligations for bodily injury asbestos claims
are subject to insurance policy aggregate limits. On July 31, 2003, the
arbitration panel ruled in Travelers favor that asbestos bodily injury claims
paid by ACandS on or after July 31, 2003, the decision date, are subject to
the Companys aggregate policy limits, which have been exhausted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | The Company anticipates that ACandS will claim that the Company is obligated
to fund 45% of ACandS unpaid but purportedly settled asbestos bodily injury
claims that predate the arbitration decision date. In its bankruptcy
filings, ACandS has estimated that the total value of these unpaid but
purportedly settled claims is approximately $2.8 billion. The Company
believes that it has meritorious defenses to this potential ACandS
claim, which could eliminate or substantially reduce any obligation to ACandS
with respect to the purportedly settled claims. The Company will continue to
challenge, among other things, the amount and validity of these purported
settlements in the ACandS bankruptcy. Among other defenses, the Company
believes the purported settlements are not final, are unreasonable in amount,
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 to deprive the
Company of its right to litigate the claims against ACandS.                                                 
|   
|    |  | In addition to the bankruptcy and the recently concluded 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). This litigation primarily involves the
extent to which the
claims against ACandS are subject to occurrence limits under the insurance
policies. The matter is scheduled to appear on the May 14, 2004 trial
calendar. The Company is vigorously defending this case, and Company
management believes the Company has meritorious defenses. The Company has
asserted or will assert numerous defenses in this case, including that the
occurrence limits in the policies substantially reduce or eliminate the
Companys obligations, if any, with respect to the purportedly settled claims                                                                                                                                                                                                                                                                                                                            

20



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##### 





|11. |  | COMMITMENTS AND CONTINGENCIES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | 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 Wise
have been filed in Massachusetts (2002) and Hawaii (2002, served in May
2003). 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. Similar complaints were filed in various Ohio state
courts during the second quarter of 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | 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. During January and June 2003, the
same bankruptcy court extended the existing injunction to apply to an
additional set of cases filed in various state courts in Texas and Ohio as
well as to the attorneys who are prosecuting these cases. The order also
enjoins these attorneys and their respective law firms from commencing any
further lawsuits against the Company based upon these allegations without the
prior approval of the court. The parties have met with the mediator
several times since August 2002, and Travelers anticipates additional
meetings. The results of the mediation, if any, are uncertain at this
time. If the mediation is not successful, the bankruptcy court could
hold a hearing as soon as late 2003 to consider the Companys
motion for a permanent injunction. If the Company is not successful,
including on appeal, the temporary restraining order currently in
effect will be lifted and the Company will again be subject to the
pending litigation and could be subject to additional litigation
based on similar theories of liability. In some of the direct actions
in Texas that are currently subject to the temporary restraining
order as to the Company, trials could commence as early as December
2003.
|   
|    |  | The Company has numerous defenses
in all of the direct action cases. 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. Many of these defenses have been
raised in initial motions to dismiss by Travelers and other insurers.
Rulings on these motions filed by other insurers could come as early
as late 2003, including some of the class actions in West Virginia.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

21



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|11. |  | COMMITMENTS AND CONTINGENCIES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Because each policyholder presents different liability and coverage issues,
the Company generally evaluates the asbestos-related 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.
|   
|    |  | 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. 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 the first six months of 2003 and 2002, approximately 57% and 59%,
respectively, of total paid losses relate to policyholders with whom the
Company previously entered into settlement agreements that limit the
Companys liability. Net asbestos losses paid were $306.2 million and $174.1
million for the six months ended June 30, 2003 and 2002, respectively,
reflective of the items previously described.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | 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 regular 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. Net environmental losses paid were
$78.8 million and $72.1 million for the six months ended June 30, 2003 and
2002, respectively.                                                                                                                                                                         

22



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##### 





|11. |  | COMMITMENTS AND CONTINGENCIES, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | As a result of the processes and procedures described above, management
believes that the reserves carried for asbestos and environmental claims at
June 30, 2003 are appropriately established based upon known facts, current
law and managements judgment. However, the uncertainties surrounding the
final resolution of these claims continue, and it is presently not
possible to estimate the ultimate exposure for asbestos and
environmental claims and related litigation. As a result, the reserve
is subject to revision as new information becomes available or as
information is reevaluated in light of evolving circumstances. The
continuing uncertainties include, without limitation, the risks and
lack of predictability inherent in major litigation, any impact from
the bankruptcy protection sought by various
asbestos producers and other asbestos defendants, a further increase or
decrease in asbestos and environmental claims which cannot now be
anticipated, the role of any umbrella or excess policies the Company has
issued, the resolution or adjudication of some disputes pertaining to the
amount of available coverage for asbestos claims in a manner inconsistent
with the Companys previous assessment of these claims, the number and
outcome of direct actions against the Company, and future developments
pertaining to the Companys ability to recover reinsurance for asbestos and
environmental claims. It is also not possible to predict changes in the
legal and legislative environment and their impact on the future development
of asbestos and environmental claims. This development will be affected by
future court decisions and interpretations, as well as changes in applicable
legislation. It is also difficult to predict the ultimate outcome of large
coverage disputes until settlement negotiations near completion and
significant legal questions are resolved or, failing settlement, until the
dispute is adjudicated. This is particularly the case with policyholders in
bankruptcy where negotiations often involve a large number of claimants and
other parties and require court approval to be effective.
|   
|    |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | Other Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|    |  | Gulf Insurance Company (Gulf), a majority-owned subsidiary of TPC, brought an
action on May 22, 2003, as amended on July 29, 2003, in the Supreme Court of
New York, County of New York (Gulf Insurance Company v. Transatlantic
Reinsurance Company, et al), against Transatlantic Reinsurance Company
(Transatlantic), and three other reinsurance companies to recover amounts due
under reinsurance contracts issued to Gulf and related to Gulfs February
2003 settlement of a coverage dispute under a vehicle residual value
protection insurance policy. The action seeks a total of $98,500,000
currently due under the reinsurance contracts, a declaration that $12,710,179
will be payable under a second installment due in 2004, and consequential and
punitive damages. On May 22, 2003, Transatlantic brought an action against
Gulf regarding the same dispute that was consolidated with Gulfs action.
Transatlantic seeks rescission of its vehicle residual value reinsurance
contracts issued to Gulf and unspecified damages for breach of contract. XL
Reinsurance America, Inc., another of the defendant reinsurers, has indicated
that it may assert a similar position. Gulf denies these allegations,
believes that it has a strong legal basis to collect the amounts due under
the reinsurance contracts, and intends to vigorously pursue the action.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | In addition to the item described above, the Company is involved in numerous
lawsuits, not involving asbestos and environmental claims, arising mostly in
the ordinary course of business operations either as a liability insurer
defending third-party claims brought against 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

23



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##### 





|Item 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------

CONSOLIDATED OVERVIEW

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 condensed
consolidated financial statements of the Company and related notes included
elsewhere in this Form 10-Q and with Managements Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
2002 included in the Companys Form 10-K.

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

|                                                                  |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         |  
|----------------------------------------------------------------- |  | ------------------ | ------- | ---------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- | -
|                                                                  |  | Three Months Ended |         | Six Months Ended
|                                                                  |  | June 30,           |         | June 30,        
|                                                                  |  |                    |         |                 
|(in millions)                                                     |  | 2003               |         | 2002             |  | 2003 |         | 2002
|                                                                  |  |                    |         |                  |  |      |         |     
|Revenues                                                          |  | $                  | 3,748.7 |                  |  | $    | 3,319.8 |      |  | $ | 7,351.7 |  |  | $ | 6,552.5 |  
|                                                                  |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         |  
|Income before cumulative effect of
change in
accounting principle |  | $                  | 441.2   |                  |  | $    | 332.0   |      |  | $ | 781.2   |  |  | $ | 676.7   |  
|Cumulative effect of change in
accounting
principle, net of tax   |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   | (242.6  | )
|                                                                  |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         |  
|Net income                                                        |  | $                  | 441.2   |                  |  | $    | 332.0   |      |  | $ | 781.2   |  |  | $ | 434.1   |  
|                                                                  |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         |  

Pursuant to the Securities and Exchange Commissions final rule, Conditions for
the Use of Non-GAAP Financial Measures (SEC rule), the Company has identified
consolidated operating income as a non-GAAP financial measure. Operating
income is defined by the Company as net income excluding net realized
investment gains (losses) and cumulative effect of changes in accounting
principles. For 2002 and prior, operating income also excludes non-recurring
restructuring charges related to periods prior to the spin-off from Citigroup.
Operating income is considered a more appropriate indicator of underwriting and
operating results and is consistent with the way the Company internally
evaluates performance against historical results and established financial
targets on a consolidated basis. Net realized investment gains (losses) are
significantly impacted by both discretionary and economic factors and are not
necessarily indicative of operating trends. The Company has reviewed its use
of financial measures and terms in the Companys Form 10-K for the year ended
December 31, 2002 and the Form 10-Q for the quarterly period ended June 30,
2003 (reports) and concluded that, other than operating income, the measures
and terms in these reports are either defined in GAAP, are operating
statistics, or are otherwise excluded by the SEC rule as required disclosures
of GAAP or of a governmental regulatory body.

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

24



---



##### 



Revenues of $3.749 billion and $7.352 billion in the 2003 second quarter and
six months, respectively, increased $428.9 million and $799.2 million from the
comparable periods of 2002. The increase in the 2003 second quarter revenue
reflects a $343.7 million increase in earned premiums, a $24.9 million increase
in fee income and a $52.1 million increase in net realized investment gains,
offset by an $8.9 million decrease in net investment income. The increase in
the 2003 six months revenue reflects a $737.7 million increase in earned
premiums, a $58.5 million increase in fee income and a $29.8 increase in net
realized investment gains, offset by a $40.8 million decrease in net investment
income.

Net income was $441.2 million and $781.2 million in the 2003 second quarter and
six months, respectively, compared to $332.0 million $434.1 million in the
comparable periods of 2002. Net income for the 2003 second quarter reflects
strong underwriting performance due to the continuing favorable rate
environment, partially offset by higher weather-related catastrophe losses.
Net income included $10.4 million and $11.9 million of net realized investment
gains in the 2003 second quarter and six months, respectively, compared to
$24.0 million and $5.1 million of net realized investment losses in the
comparable periods of 2002. Net income for the six months of 2002 included a
charge for the cumulative effect of a change in accounting principle of $242.6
million due to the adoption of Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (FAS 142).

The major after tax components of operating income and a reconciliation of
operating income to net income are as follows:

|                                                                                       |           |      |                    |      |                  |      |       |       |   |   |        |        |   |   |        |       |  
|-------------------------------------------------------------------------------------- | --------- | ---- | ------------------ | ---- | ---------------- | ---- | ----- | ----- | - | - | ------ | ------ | - | - | ------ | ----- | -
|                                                                                       |           |      | Three Months Ended |      | Six Months Ended
|                                                                                       |           |      | June 30,           |      | June 30,        
|                                                                                       |           |      |                    |      |                 
|(in millions)                                                                          |           | 2003 |                    | 2002 |                  | 2003 |       | 2002 
|                                                                                       |           |      |                    |      |                  |      |       |      
|Consolidated underwriting gain, before
catastrophes and prior year reserve
development |           | $    | 180.2              |      |                  | $    | 93.8  |       |   | $ | 331.6  |        |   | $ | 139.4  |      
|Catastrophes                                                                           |           |      | (72.1              | )    |                  |      | (14.3 | )     |   |   | (115.8 | )      |   |   | (24.7  | )    
|Prior year reserve development:                                                        |           |      |                    |      |                  |      |       |       |   |   |        |        |   |   |        |      
|                                                                                       | Asbestos  |      |                    |     |                  |      |       | (33.3 | ) |   |        |       |   |   |        | (65.8 | )
|                                                                                       | All other |      |                    | (8.9 | )                |      |       | (21.5 | ) |   |        | (115.1 | ) |   |        | (47.3 | )
|Accretion of discount                                                                  |           |      | (10.4              | )    |                  |      | (7.2  | )     |   |   | (23.9  | )      |   |   | (14.4  | )    
|                                                                                       |           |      |                    |      |                  |      |       |       |   |   |        |        |   |   |        |      
|Underwriting gain (loss)                                                               |           |      | 88.8               |      |                  |      | 17.5  |       |   |   | 76.8   |        |   |   | (12.8  | )    
|Net investment income                                                                  |           |      | 345.3              |      |                  |      | 346.4 |       |   |   | 689.1  |        |   |   | 707.5  |      
|Other, including interest expense and
minority interest                                |           |      | (3.3               | )    |                  |      | (7.1  | )     |   |   | 3.4    |        |   |   | (11.3  | )    
|                                                                                       |           |      |                    |      |                  |      |       |       |   |   |        |        |   |   |        |      
|Consolidated operating income                                                          |           |      | 430.8              |      |                  |      | 356.8 |       |   |   | 769.3  |        |   |   | 683.4  |      
|Realized investment gains (losses), net                                                |           |      | 10.4               |      |                  |      | (24.0 | )     |   |   | 11.9   |        |   |   | (5.1   | )    
|Restructuring charge                                                                   |           |      |                   |      |                  |      | (0.8  | )     |   |   |       |        |   |   | (1.6   | )    
|Cumulative effect of change in
accounting
principle                                    |           |      |                   |      |                  |      |      |       |   |   |       |        |   |   | (242.6 | )    
|                                                                                       |           |      |                    |      |                  |      |       |       |   |   |        |        |   |   |        |      
|Consolidated net income                                                                |           | $    | 441.2              |      |                  | $    | 332.0 |       |   | $ | 781.2  |        |   | $ | 434.1  |      
|                                                                                       |           |      |                    |      |                  |      |       |       |   |   |        |        |   |   |        |      

25



---



##### 



The 2003 second quarter operating income of $430.8 million increased $74.0
million from $356.8 million for the 2002 comparable period. The
consolidated underwriting gain component of operating income, before
catastrophes and prior year reserve development increased $86.4 million to
$180.2 million in the second quarter of 2003. The second quarter 2003
underwriting results reflect the continuing favorable, but moderating, rate
environment. Operating income also benefited from a lower level of charges for
net unfavorable prior year reserve development in the 2003 second quarter of
$8.9 million after tax versus $54.8 million after tax of unfavorable prior year
reserve development in the prior year quarter ($13.7 million and $84.3 million
pretax, respectively). Commercial Lines charges resulting from prior year
reserve development in the 2003 second quarter primarily relate to a $19.5
million addition to the allowance for uncollectible reinsurance recoverables
($30.0 million pretax) and a $9.1 million increase in unallocated loss
adjustment expenses ($14.0 million pretax). Partially offsetting these charges
was a benefit of $24.4 million, related to favorable prior year reserve
development in Personal Lines homeowners and auto businesses compared to a net
charge of $2.6 million in the prior year quarter ($37.5 million and $4.0
million pretax, respectively). The 2003 second quarter prior year reserve
development contained no asbestos charges compared to $33.3 million ($51.2
million pretax) of unfavorable prior year reserve development related to
asbestos in the 2002 second quarter. The 2003 second quarter was also
unfavorably impacted by several severe storms which resulted in higher
weather-related catastrophe losses of $72.1 million, net of reinsurance and
after tax, compared to $14.3 million in the prior year quarter. Catastrophe
losses in the quarter resulted from hail and ice storms in New York, Texas and
several Midwestern states in April, followed in May by tornados and hailstorms
in a number of Southern and Midwestern states. After tax net investment income
of $345.3 million was comparable to $346.4 million in the prior year quarter.
Lower average yields on fixed income securities and lower returns in the
Companys private equity and real estate equity investments resulted in a 50
basis point reduction in the portfolios average after tax yield to 3.9%. The
lower average yield was partly offset by the benefit of higher average invested
assets from strong operating cash flows.

The 2003 six months operating income of $769.3 million increased $85.9 million
from $683.4 million for the 2002 comparable period. Underwriting gain,
before catastrophes and prior year reserve development increased $192.2 million
to $331.6 million in the six months of 2003. The six months of 2003
underwriting results reflect the continuing favorable, but moderating, rate
environment. Impacting operating income was net unfavorable prior year reserve
development in the 2003 six months of $115.1 million after tax versus $113.1
million after tax of unfavorable prior year reserve development in the prior
year period ($177.1 million and $173.9 million pretax, respectively). The most
significant component of the 2003 six months prior year reserve development was
a $174.9 million after tax charge ($269.1 million pretax) related to first
quarter 2003 reserve strengthening at Gulf Insurance Group (Gulf) (a
majority-owned subsidiary). The reserve strengthening primarily related to a
line of business that insured the residual values of leased vehicles and that
was placed in runoff in late 2001. The charge reflects the significant decline
in used vehicle prices experienced during the first quarter of 2003 and an
assumption of further reductions during the remainder of the year. Also
included in the charge were costs related to the resolution of a residual value
claims dispute in the amount of $82.6 million after tax. The effect of these
charges to TPC was $145.5 million after tax and minority interest. The Gulf
reserve strengthening was partially offset by a first quarter 2003 $68.7
million ($105.7 million pretax) benefit related to net favorable prior year
reserve development in Commercial Lines and Personal Lines, related primarily
to property business written in 2002. The 2003 six months prior year reserve
development contained no asbestos charges compared to $65.8 million ($101.2
million pretax) of unfavorable prior year reserve development related to
asbestos in the 2002 six months. The 2003 six months was also unfavorably
impacted by higher catastrophe losses. Despite strong cash flows from
operations, after tax net investment income of $689.1 million was $18.4 million
lower than the prior year period due to the lower interest rate environment
along with reduced returns in the Companys private equity and real estate
equity investments. Also included in the 2003 six months operating income is
an $18.1 million minority interest benefit related to losses incurred at Gulf,
compared to no minority interest in the comparable 2002 period.

26



---



##### 



Earned premiums increased $343.7 million and $737.7 million to $3.100 billion
and $6.079 billion in the 2003 second quarter and six months, respectively,
from $2.757 billion and $5.341 billion in the comparable periods of 2002. The
increase in earned premiums in the 2003 second quarter and six months was due
to rate increases on renewal business in both Commercial Lines and Personal
Lines. Commercial Lines earned premiums increased $219.2 million or 13% and
$504.9 million or 16% in the 2003 second quarter and six months, respectively.
Commercial Lines earned premiums include Northland and Associates which
decreased $53.7 million or 25% and $68.9 million or 17% to $161.8 million and
$339.8 million in the 2003 second quarter and six months, respectively, from
$215.5 million and $408.7 million in the comparable periods of 2002. Personal
Lines earned premiums increased $124.5 million or 12%, and $232.8 million or
11% in the 2003 second quarter and six months, respectively.

Net investment income was $455.9 million and $911.8 million in the 2003 second
quarter and six months, respectively, a decrease of $8.9 million and $40.8
million from the comparable periods of 2002. The decline resulted from a
reduction in pretax investment yields to 5.2% and 5.4% in the 2003 second
quarter and six months, respectively, from 5.9% and 6.1% in the 2002 comparable
periods. The decrease in yields reflected the lower interest rate environment,
a higher proportion of tax exempt investments and a reduction in average
duration, along with lower returns in the Companys private equity and real
estate equity investments. The lower average yield was partly offset by the
benefit of higher average invested assets that resulted from strong cash flows
from underwriting.

Fee income was $133.7 million and $270.0 million in the 2003 second quarter and
six months, respectively, a $24.9 million and $58.5 million increase from the
comparable periods of 2002. 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. Fees rose as both new business and pricing levels increased and more
workers compensation business was written by state residual market pools.
Expected annual claim volume under administration for business written in the
second quarter, for both new and renewal business, increased to $702.1 million
for the 2003 second quarter compared to $595.3 million for the comparable
period in 2002. Claim volume under administration represents a measure of
claim volume expected to be serviced, under contracts written in the period, on
fee for service arrangements or loss sensitive insurance products.

Claims and expenses of $3.148 billion and $6.344 billion in the 2003 second
quarter and six months, respectively, increased $263.4 million and $680.7
million from $2.885 billion and $5.663 billion in the comparable periods of
2002. The 2003 increases were primarily due to increased loss costs,
higher weather related catastrophe losses, increased contingent commission
expense as a result of profitable growth, higher interest expense and
shareholder services costs. Unfavorable prior year reserve development
amounted to $13.7 million and $177.1 million for the second quarter and six
months, respectively, of 2003 compared to 2002 unfavorable prior year reserve
development of $84.3 million and $173.9 million. The 2003 second quarter
unfavorable prior year reserve development included a $30.0 million addition to
the allowance for uncollectible reinsurance recoverables and a $14.0 million
increase in unallocated loss adjustment expenses for Commercial Lines.
Partially offsetting these charges was a benefit of $37.5 million related to
favorable prior year reserve development in Personal Lines homeowners and auto
business. The most significant component of prior year reserve development in
the 2003 six months was the first quarter Gulf Insurance reserve strengthening
that amounted to $269.1 million. This charge was partially offset by the first
quarter net favorable prior year reserve development of $105.7 million in both
Commercial Lines and Personal Lines primarily related to property coverages.
The 2003 prior year reserve development contained no charges related to
asbestos compared to $51.2 million and $101.2 million, respectively, of
unfavorable prior year reserve development related to asbestos in the 2002
second quarter and six months. Higher interest expense resulted from recent
financing activities while shareholder services costs increased subsequent to
the August 20, 2002 spin off from Citigroup. For additional information on the
Companys spin off from Citigroup, see the Companys Form 10-K for the year
ended December 31, 2002.

27



---



##### 



The Companys effective federal tax rate was 25.8% and 24.3% in the 2003 second
quarter and six months compared to 23.7% and 23.9% in the comparable periods of
2002. The increase in the effective federal tax rate reflects a higher level
of pretax income associated with improved underwriting results for the second
quarter and six months of 2003 compared to the second quarter and six months of
2002, partially offset by a higher level of non-taxable investment income.

Consolidated net written premiums were as follows:

|                           |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 
|-------------------------- |  | ------------------ | ------- | ---------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                           |  | Three Months Ended |         | Six Months Ended
|                           |  | June 30,           |         | June 30,        
|                           |  |                    |         |                 
|(in millions)              |  | 2003               |         | 2002             |  | 2003 |         | 2002
|                           |  |                    |         |                  |  |      |         |     
|Commercial Lines           |  | $                  | 1,958.0 |                  |  | $    | 1,921.5 |      |  | $ | 3,974.5 |  |  | $ | 3,609.2 | 
|Personal Lines             |  |                    | 1,311.3 |                  |  |      | 1,174.0 |      |  |   | 2,461.3 |  |  |   | 2,211.4 | 
|                           |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 
|Total net written
premiums |  | $                  | 3,269.3 |                  |  | $    | 3,095.5 |      |  | $ | 6,435.8 |  |  | $ | 5,820.6 | 
|                           |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 

Net written premiums increased $173.8 million and $615.2 million to $3.269
billion and $6.436 billion for the 2003 second quarter and six months,
respectively, from $3.096 billion and $5.821 billion in the 2002 second quarter
and six months. The increases in net written premiums in 2003 were primarily
due to higher but moderating rates, growth in targeted new business and strong
retention across all major lines of business, significantly offset by a
decrease in Northland and Associates net written premiums resulting from the
inclusion in the 2002 second quarter of an additional $115.0 million of net
written premiums due to the termination of certain reinsurance contracts by
Northland and also the 2002 decision to discontinue writing certain Northland
and Associates low margin specialty lines including excess and surplus lines
and certain transportation business.

Commercial Lines net written premiums, excluding business written in Northland
and Associates, increased $187.7 million or 12% and $565.7 million or 18% for
the 2003 second quarter and six months, respectively, due to higher but
moderating rates, growth in targeted new business and strong retention across
all major business lines. Net written premiums for Northland and Associates
decreased by $151.2 million or 50% and $200.4 million or 41% for the 2003
second quarter and six months, respectively, due to the factors described
above. Personal Lines net written premiums increased $137.3 million or 12% and
$249.9 million or 11% for the 2003 second quarter and six months, respectively,
due to higher but moderating rates as well as increased business volumes.

The GAAP combined ratios before policyholder dividends were as follows:

|                                                                                          |           |  |                    |      |                  |  |      |      |      |  |      |      |  |  |       |      | 
|----------------------------------------------------------------------------------------- | --------- |  | ------------------ | ---- | ---------------- |  | ---- | ---- | ---- |  | ---- | ---- |  |  | ----- | ---- | 
|                                                                                          |           |  | Three Months Ended |      | Six Months Ended
|                                                                                          |           |  | June 30,           |      | June 30,        
|                                                                                          |           |  |                    |      |                 
|                                                                                          |           |  | 2003               |      | 2002             |  | 2003 |      | 2002
|                                                                                          |           |  |                    |      |                  |  |      |      |     
|Consolidated GAAP combined ratio,
before catastrophes and prior year
reserve development: |           |  |                    |      |                  |  |      |      |      |  |      |      |  |  |       |     
|Loss and loss adjustment expense
(LAE) ratio                                              |           |  | 65.0               | %    |                  |  | 69.8 | %    |      |  | 65.7 | %    |  |  | 70.0  | %   
|Underwriting expense ratio                                                                |           |  | 26.0               |      |                  |  | 25.3 |      |      |  | 26.0 |      |  |  | 26.2  |     
|                                                                                          |           |  |                    |      |                  |  |      |      |      |  |      |      |  |  |       |     
|                                                                                          | Total     |  |                    | 91.0 |                  |  |      | 95.1 |      |  |      | 91.7 |  |  |       | 96.2 | 
|Catastrophes                                                                              |           |  | 3.6                |      |                  |  | 0.8  |      |      |  | 2.9  |      |  |  | 0.7   |     
|Prior year reserve development:                                                           |           |  |                    |      |                  |  |      |      |      |  |      |      |  |  |       |     
|                                                                                          | Asbestos  |  |                    |     |                  |  |      | 1.9  |      |  |      |     |  |  |       | 1.9  | 
|                                                                                          | All other |  |                    | 0.4  |                  |  |      | 1.2  |      |  |      | 2.9  |  |  |       | 1.3  | 
|Accretion of discount                                                                     |           |  | 0.5                |      |                  |  | 0.4  |      |      |  | 0.6  |      |  |  | 0.4   |     
|                                                                                          |           |  |                    |      |                  |  |      |      |      |  |      |      |  |  |       |     
|Consolidated GAAP combined ratio                                                          |           |  | 95.5               | %    |                  |  | 99.4 | %    |      |  | 98.1 | %    |  |  | 100.5 | %   
|                                                                                          |           |  |                    |      |                  |  |      |      |      |  |      |      |  |  |       |     

28



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##### 



The 3.9 point improvement in the 2003 second quarter and the 2.4 point
improvement in the 2003 six months GAAP combined ratio before policyholder
dividends as compared to the 2002 second quarter and six months resulted from
premium rate increases that exceeded loss costs and lower prior year
reserve development partially offset by higher catastrophe losses in the 2003
second quarter and six months compared to the 2002 second quarter and six
months. The 4.1 point improvement in the 2003 second quarter GAAP combined
ratio, before catastrophes and prior year reserve development, reflects an
improvement in the loss and LAE ratio, partially offset by an increase in the
underwriting expense ratio. The 4.5 point improvement in the 2003 six months
GAAP combined ratio, before catastrophes and prior year reserve development,
reflects an improvement in both the loss and LAE ratio and the underwriting
expense ratio. The slight improvement in the loss and LAE ratios was primarily
due to the favorable rate environment in both Commercial Lines and Personal
Lines. The increase in the 2003 second quarter underwriting expense ratio
included the impact of higher contingent commissions resulting from improved
underwriting results. The improvement in the 2003 six months underwriting
expense ratio is primarily attributed to premium rate increases and a higher
volume of business partly offset by the impact of higher contingent commissions
that resulted from improved underwriting results.

Net realized investment gains were $16.1 million and $22.6 million in the 2003
second quarter and six months, respectively, compared to $36.0 million and $7.2
million of net realized investment losses in the 2002 comparable periods. Net
realized investment gains include losses of $44.0 million and $49.9 million in
the 2003 second quarter and six months, respectively, related to U.S. Treasury
futures contracts which are settled daily. The notional value of the open U.S.
Treasury futures contracts was $1.537 billion at June 30, 2003. The Company
entered into these arrangements as part of its management of the duration of
the fixed maturity portfolio. In a changing interest rate environment the
change in the value of the futures contracts can be expected to partially
offset changes in the value of the fixed maturity portfolio. Net realized
investment gains also include $18.9 million and $77.1 million of impairment
charges in the 2003 second quarter and six months, respectively, compared to
$126.7 million and $188.9 million in the comparable periods of 2002. The 2003
second quarter impairment charges were largely related to corporate bonds in
the energy sector. The 2002 second quarter impairment charges were mostly
related to corporate bonds in the communications sector.

RESULTS OF OPERATIONS BY SEGMENT

Commercial Lines

Commercial Lines revenues and the major after tax components of Commercial
Lines operating income are as follows:

|                                                                                            |           |      |                    |       |                  |      |         |       |   |   |         |        |   |   |         |       |   |  |  |  | 
|------------------------------------------------------------------------------------------- | --------- | ---- | ------------------ | ----- | ---------------- | ---- | ------- | ----- | - | - | ------- | ------ | - | - | ------- | ----- | - |  |  |  | 
|                                                                                            |           |      | Three Months Ended |       | Six Months Ended
|                                                                                            |           |      | June 30,           |       | June 30,        
|                                                                                            |           |      |                    |       |                  |      |         |       |  
|(in millions)                                                                               |           | 2003 |                    | 2002  |                  | 2003 |         | 2002  |   |   |         |       
|                                                                                            |           |      |                    |       |                  |      |         |       |   |   |         |       
|Revenues                                                                                    |           | $    | 2,426.0            |       |                  | $    | 2,173.1 |       |   | $ | 4,771.6 |        |   | $ | 4,220.5 |      
|                                                                                            |           |      |                    |       |                  |      |         |       |   |   |         |        |   |   |         |      
|Commercial Lines underwriting gain,
before catastrophes and prior year
reserve development: |           | $    | 134.2              |       |                  | $    | 88.5    |       |   | $ | 250.5   |        |   | $ | 137.8   |      
|Catastrophes                                                                                |           |      | (27.3              | )     |                  |      |        |       |   |   | (46.8   | )      |   |   |        |      
|Prior year reserve development:                                                             |           |      |                    |       |                  |      |         |       |   |   |         |        |   |   |         |      
|                                                                                            | Asbestos  |      |                    |      |                  |      |         | (33.3 | ) |   |         |       |   |   |         | (65.8 | )
|                                                                                            | All other |      |                    | (33.3 | )                |      |         | (18.9 | ) |   |         | (162.2 | ) |   |         | (41.4 | )
|Accretion of discount                                                                       |           |      | (10.4              | )     |                  |      | (7.2    | )     |   |   | (23.9   | )      |   |   | (14.4   | )    
|                                                                                            |           |      |                    |       |                  |      |         |       |   |   |         |        |   |   |         |      
|Underwriting gain                                                                           |           |      | 63.2               |       |                  |      | 29.1    |       |   |   | 17.6    |        |   |   | 16.2    |      
|Net investment income                                                                       |           |      | 279.3              |       |                  |      | 277.5   |       |   |   | 557.8   |        |   |   | 562.9   |      
|Other, including minority interest                                                          |           |      | 9.5                |       |                  |      | 3.9     |       |   |   | 37.5    |        |   |   | 9.0     |      
|                                                                                            |           |      |                    |       |                  |      |         |       |   |   |         |        |   |   |         |      
|Commercial Lines operating income                                                           |           | $    | 352.0              |       |                  | $    | 310.5   |       |   | $ | 612.9   |        |   | $ | 588.1   |      
|                                                                                            |           |      |                    |       |                  |      |         |       |   |   |         |        |   |   |         |      

29



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##### 



Revenues of $2.426 billion and $4.772 billion in the 2003 second quarter and
six months increased $252.9 million and $551.1 million from $2.173 billion and
$4.221 billion in the comparable periods of 2002. These increases were
primarily attributable to increases in earned premiums due to premium rate
increases and increases in fee income as both new business and pricing levels
increased. The increases in revenue for the 2003 second quarter and six months
were slightly offset by lower net investment income in the 2003 second quarter
and six months compared to the 2002 second quarter and six months.

Operating income of $352.0 million in the 2003 second quarter increased $41.5
million from $310.5 in the 2002 comparable quarter. Underwriting gain,
before catastrophes and prior year reserve development increased $45.7 million
to $134.2 million in the second quarter of 2003. The second quarter 2003
underwriting results reflect the continuing favorable but moderating rate
environment. Impacting operating income was net unfavorable prior year reserve
development in the 2003 second quarter of $33.3 million after tax versus $52.2
million after tax of unfavorable prior year reserve development in the prior
year quarter ($51.2 million and $80.3 million pretax, respectively). The 2003
second quarter net unfavorable prior year reserve development relates primarily
to a $19.5 million addition to the allowance for uncollectible reinsurance
recoverables ($30.0 million pretax) and a $9.1 million increase in unallocated
loss adjustment expenses ($14.0 million pretax). The 2003 second quarter
reflects no charge related to asbestos versus a charge of $33.3 million ($51.2
million pretax) in the prior period quarter. The 2003 second quarter was also
unfavorably impacted by $27.3 million of catastrophe losses compared to no
catastrophe losses in the comparable period of 2002. The 2003 second quarter
operating income also includes $4.4 million of Gulf minority interest compared
to no minority interest in the 2002 second quarter.

Operating income of $612.9 million in the 2003 six months increased $24.8
million from $588.1 million in the 2002 comparable period. Underwriting
gain, before catastrophes and prior year reserve development increased $112.7
million to $250.5 million in the six months of 2003. The six months 2003
underwriting results reflect the continuing favorable but moderating rate
environment. Impacting operating income was net unfavorable prior year reserve
development in the 2003 six months of $162.2 million after tax versus $107.2
million after tax of unfavorable prior year reserve development in the prior
year period ($249.6 million and $164.9 million pretax, respectively). The most
significant component of the 2003 six months prior year reserve development was
a $174.9 million after tax charge ($269.1 million pretax) related to first
quarter reserve strengthening at Gulf. The reserve strengthening primarily
related to a line of business that insured the residual values of leased
vehicles and that was placed in runoff in late 2001. The charge reflects the
significant decline in used vehicle prices experienced during the first quarter
of 2003 and an assumption of further reductions during the remainder of the
year. Also included in the charge were costs related to the resolution of a
residual value claims dispute in the amount of $82.6 million after tax. The
total effect of this reserve strengthening charge to TPC was $145.5 million
after tax and minority interest. The Gulf reserve strengthening was partially
offset by a first quarter $46.0 million ($70.7 million pretax) benefit related
to net favorable prior year reserve development primarily related to property
business written in 2002. The 2003 six months reflects no charge related to
asbestos versus a charge of $65.8 million ($101.2 million pretax) in the prior
year period. The 2003 six months was also unfavorably impacted by $46.8
million of catastrophe losses compared to no catastrophe losses in the
comparable period of 2002. Despite strong cash flows from operations, after
tax net investment income of $557.8 million was $5.1 million lower than the
prior year quarter due to the lower interest rate environment and a reduction
in average duration, along with reduced returns in the Companys private equity
and real estate equity investments. Significantly offsetting the above was the
benefit of the favorable rate environment and higher production levels. Also
included in the 2003 six months operating income is an $18.1 million minority
interest benefit related to losses incurred at Gulf, compared to no minority
interest in the comparable 2002 period.

Earned premiums increased $219.2 million and $504.9 million to $1.908 billion
and $3.748 billion in the 2003 second quarter and six months, respectively,
from $1.688 billion and $3.243 billion in the comparable periods of 2002. The
increases in earned premiums in the 2003 second quarter and six months were
primarily due to premium rate increases. Earned premiums include Northland and
Associates which decreased $53.7 million or 25% and $68.9 million or 17% to
$161.8 million and $339.8 million in the 2003 second quarter and six months,
respectively, from $215.5 million and $408.7 million in the comparable periods
of 2002.

30



---



##### 



Net investment income was $365.0 million and $730.7 million in the 2003 second
quarter and six months, respectively, a decrease of $4.7 million and $21.4
million from the comparable periods of 2002. The declines resulted from a
pretax reduction in investment yields in the 2003 second quarter and six months
from the 2002 comparable periods. The decrease in yields reflected the lower
interest rate environment, a higher proportion of tax exempt investments and a
reduction in average duration, along with lower returns in the Companys
private equity and real estate equity investments. The lower average yield was
partly offset by the benefit of higher average invested assets that resulted
from strong cash flow from underwriting.

Fee income was $133.7 million and $270.0 million in the 2003 second quarter and
six months, respectively, a $24.9 million and $58.5 million increase from the
comparable periods of 2002. National Accounts is the primary source of fee
income due to its service businesses, which include claim and loss prevention
services to large companies that choose to self insure a portion of their
insurance risks, and claims and policy management services to workers
compensation and automobile assigned risk plans and to self-insurance pools.
Fees rose as both new business and pricing levels increased and more workers
compensation business was written by state residual market pools. Claim volume
under administration, including new and renewal business, increased to $702.1
million and $1.799 billion for the 2003 second quarter and six months,
respectively, compared to $595.3 million and $1.467 billion for the comparable
periods in 2002.

Commercial Lines net written premiums by market were as follows:

|                           |                     |                 |         |                    |         |                  |         |       |         |   |         |         |         |   |         |         |         | 
|-------------------------- | ------------------- | --------------- | ------- | ------------------ | ------- | ---------------- | ------- | ----- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                           |                     |                 |         | Three Months Ended |         | Six Months Ended
|                           |                     |                 |         | June 30,           |         | June 30,        
|                           |                     |                 |         |                    |         |                 
|(in millions)              |                     | 2003            |         | 2002               |         | 2003             |         | 2002 
|                           |                     |                 |         |                    |         |                  |         |      
|Core                       |                     |                 |         |                    |         |                  |         |       |         |   |         |         |         |   |         |        
|                           | National Accounts   |                 | $       | 192.8              |         |                  | $       | 196.8 |         |   | $       | 419.7   |         |   | $       | 293.6   |        
|                           | Commercial Accounts |                 |         | 877.6              |         |                  |         | 912.1 |         |   |         | 1,827.0 |         |   |         | 1,771.4 |        
|                           | Select Accounts     |                 |         | 517.4              |         |                  |         | 472.9 |         |   |         | 1,026.7 |         |   |         | 927.9   |        
|                           |                     |                 |         |                    |         |                  |         |       |         |   |         |         |         |   |         |        
|                           |                     | Total Core      |         |                    | 1,587.8 |                  |         |       | 1,581.8 |   |         |         | 3,273.4 |   |         |         | 2,992.9 | 
|                           |                     |                 |         |                    |         |                  |         |       |         |   |         |         |         |   |         |        
|Specialty                  |                     |                 |         |                    |         |                  |         |       |         |   |         |         |         |   |         |        
|                           | Bond                |                 |         | 205.9              |         |                  |         | 159.5 |         |   |         | 368.9   |         |   |         | 291.1   |        
|                           | Gulf                |                 |         | 164.3              |         |                  |         | 180.2 |         |   |         | 332.2   |         |   |         | 325.2   |        
|                           |                     |                 |         |                    |         |                  |         |       |         |   |         |         |         |   |         |        
|                           |                     | Total Specialty |         |                    | 370.2   |                  |         |       | 339.7   |   |         |         | 701.1   |   |         |         | 616.3   | 
|                           |                     |                 |         |                    |         |                  |         |       |         |   |         |         |         |   |         |        
|Total net written
premiums |                     | $               | 1,958.0 |                    |         | $                | 1,921.5 |       |         | $ | 3,974.5 |         |         | $ | 3,609.2 |        
|                           |                     |                 |         |                    |         |                  |         |       |         |   |         |         |         |   |         |        

Net written premiums increased $36.5 million and $365.3 million to $1.958
billion and $3.975 billion for the 2003 second quarter and six months,
respectively. The strong but moderating rate environment, growth in targeted
new business, and higher customer retention levels all combined to drive
premium growth.

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 state
mandated residual market workers compensation and automobile assigned risk
plans. National Accounts net written premiums were $192.8 million and $419.7
million in the 2003 second quarter and six months, respectively, compared to
$196.8 million and $293.6 million in the comparable periods of 2002. The
decrease in the 2003 second quarter net written premiums was due to the second
quarter 2002 renewal of certain assumed reinsurance contracts previously
written by Gulf which was partly offset by rate increases, higher new business
levels and higher business volume in residual market pools. The increase in
the 2003 six months net written premiums was due to the continued benefit from
rate increases, higher new business levels and higher business volume in
residual market pools. The six months of 2002 also included a single, large
premium reduction of $41.0 million related to loss-sensitive business. For fee
based products see discussion of fee income above.

31



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##### 



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, excluding Northland and Associates, increased 19% to $729.3 million
and 20% to $1.544 billion in the 2003 second quarter and six months,
respectively, primarily driven by renewal price change increases averaging 11%
and 13% for the 2003 second quarter and six months, respectively, down from 24%
in both the second quarter and six months of 2002 and strong growth in new
business. The lower level of renewal price changes resulted mostly from
moderation in rates for property coverages. Renewal price change represents
the estimated average change in premium on policies that renew, including rate
and exposure changes, versus the average premium on those same policies for
their prior term. New business premiums in Commercial Accounts for the 2003
second quarter and six months were $189.9 million and $394.7 million,
respectively, compared to $168.2 million and $355.5 million in the comparable
periods of 2002. The business retention ratio for the 2003 second quarter and
six months was 81% and 80%, respectively, up from 74% for both of the
comparable periods of 2002. 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 the Companys Northland and Associates subsidiaries. Net
written premiums associated with Northland and Associates subsidiaries were
$148.3 million and $282.6 million in the 2003 second quarter and six months,
respectively, compared to $299.5 million and $483.0 million in the comparable
prior year periods due to the 2002 decision to discontinue certain low margin
specialty lines including excess and surplus lines and certain transportation
business. Northland and Associates 2002 second quarter and six months net
written premiums include an increase of approximately $115.0 million related to
the termination of certain reinsurance contracts.

Select Accounts serves small businesses through a network of independent
agents. Select Accounts net written premiums increased 9% to $517.4 million
and 11% to $1.027 billion in the 2003 second quarter and six months,
respectively. The increase in Select Accounts net written premiums primarily
reflected renewal price change increases averaging 14% for both the 2003 second
quarter and six months, compared to 18% and 17% in the second quarter and six
months, respectively, of 2002. New business premiums in Select Accounts for
the 2003 second quarter and six months were $93.4 million and $190.3 million,
respectively, compared to $72.5 million and $139.3 million in the comparable
periods of 2002. New business growth was especially strong in property,
general liability and commercial multi-peril. The business retention ratio for
both the 2003 second quarter and six months increased to 83% compared to 79%
for the comparable periods of 2002. Selects retention remains strongest for
small commercial business handled through the Companys Service Centers, while
premium growth has been greatest in the commercial multi-peril and property
lines of business.

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 $205.9 million and $368.9 million in the 2003 second
quarter and six months, respectively, were $46.4 million and $77.8 million
higher than the comparable periods of 2002. The 2002 first quarter included a
$17.5 million reduction due to a change in the Bond Executive Liability excess
of loss reinsurance treaty that was effective January 1, 2002. The six month
increase of $60.3 million, before the reinsurance adjustment, reflects a
favorable premium rate environment and strong new business principally in
executive liability product lines, which target middle and small market private
accounts, partially offset by higher reinsurance costs. In addition, the
surety product lines benefited from higher premium rates in 2003.

Gulf markets products to national, mid-sized and small customers and
distributes them through both wholesale brokers and retail agents and brokers
throughout the United States with particular emphasis on management and
professional liability coverages and excess and surplus lines of insurance.
Gulf net written premiums of $164.3 million in the 2003 second quarter
decreased $15.9 million compared to $180.2 million in the comparable period of
2002 as significant rate increases, especially for directors and officers
liability insurance and other professional liability products, were more than
offset by Gulfs decision in 2002 to exit non-core businesses, including
assumed reinsurance, transportation, residual value and property. Net written
premiums of $332.2 million in the 2003 six months was comparable to $325.2
million in the 2002 six months.

32



---



##### 



Commercial Lines claims and expenses of $1.952 billion and $4.005 billion in
the 2003 second quarter and six months, respectively, increased $190.6 million
and $558.9 million from $1.761 billion and $3.446 billion in the comparable
periods of 2002. The 2003 increases were primarily due to increased
loss costs, higher weather related catastrophe losses and, additionally for the
2003 six months, higher unfavorable prior year reserve development.
Unfavorable prior year reserve development included in claims and expenses was
$51.2 million and $249.6 million for the 2003 second quarter and six months,
respectively, compared to 2002 second quarter and six months unfavorable prior
year reserve development of $80.3 million and $164.9 million. The 2003 second
quarter unfavorable prior year reserve development included a $30.0 million
addition to the allowance for uncollectible reinsurance recoverables and a
$14.0 million increase in unallocated loss adjustment expenses. The most
significant component in the 2003 six months prior year reserve development was
$269.1 million related to Gulf Insurance reserve strengthening for a line of
business that insured residual values of leased vehicles and that was placed in
runoff in late 2001. This increase was partially offset by a $70.7 million
benefit of other net favorable prior year reserve development primarily related
to property coverages. Catastrophe losses, net of reinsurance, were $41.9
million and $71.9 million in the 2003 second quarter and six months,
respectively, ($27.3 million and $46.8 million, respectively, net of tax and
reinsurance) compared to no catastrophe losses in 2002. Catastrophe losses in
2003 resulted from severe storms in May principally in a number of Southern and
Midwestern states and a severe winter storm in Colorado in the first quarter.

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

|                                                                                              |           |  |                    |      |                  |  |      |      |      |  |      |      |  |  |      |      | 
|--------------------------------------------------------------------------------------------- | --------- |  | ------------------ | ---- | ---------------- |  | ---- | ---- | ---- |  | ---- | ---- |  |  | ---- | ---- | 
|                                                                                              |           |  | Three Months Ended |      | Six Months Ended
|                                                                                              |           |  | June 30,           |      | June 30,        
|                                                                                              |           |  |                    |      |                 
|                                                                                              |           |  | 2003               |      | 2002             |  | 2003 |      | 2002
|                                                                                              |           |  |                    |      |                  |  |      |      |     
|Commercial Lines GAAP combined
ratio,
before catastrophes and prior year
reserve development: |           |  |                    |      |                  |  |      |      |      |  |      |      |  |  |      |     
|Loss and LAE ratio                                                                            |           |  | 62.3               | %    |                  |  | 67.2 | %    |      |  | 63.0 | %    |  |  | 67.3 | %   
|Underwriting expense ratio                                                                    |           |  | 26.8               |      |                  |  | 25.3 |      |      |  | 26.7 |      |  |  | 26.5 |     
|                                                                                              |           |  |                    |      |                  |  |      |      |      |  |      |      |  |  |      |     
|                                                                                              | Total     |  |                    | 89.1 |                  |  |      | 92.5 |      |  |      | 89.7 |  |  |      | 93.8 | 
|Catastrophes                                                                                  |           |  | 2.2                |      |                  |  |     |      |      |  | 1.9  |      |  |  |     |     
|Prior year reserve development:                                                               |           |  |                    |      |                  |  |      |      |      |  |      |      |  |  |      |     
|                                                                                              | Asbestos  |  |                    |     |                  |  |      | 3.0  |      |  |      |     |  |  |      | 3.1  | 
|                                                                                              | All other |  |                    | 2.7  |                  |  |      | 1.7  |      |  |      | 6.7  |  |  |      | 1.9  | 
|Accretion of discount                                                                         |           |  | 0.8                |      |                  |  | 0.7  |      |      |  | 1.0  |      |  |  | 0.7  |     
|                                                                                              |           |  |                    |      |                  |  |      |      |      |  |      |      |  |  |      |     
|Commercial Lines GAAP combined ratio                                                          |           |  | 94.8               | %    |                  |  | 97.9 | %    |      |  | 99.3 | %    |  |  | 99.5 | %   
|                                                                                              |           |  |                    |      |                  |  |      |      |      |  |      |      |  |  |      |     

The 3.1 point improvement in the 2003 second quarter GAAP combined ratio before
policyholder dividends resulted from premium rate increases that exceeded loss
costs and lower prior year reserve development partially offset by higher
catastrophe losses in the 2003 second quarter compared to the 2002 second
quarter. The 0.2 point improvement in the 2003 six months GAAP combined ratio
before policyholder dividends resulted from premium rate increases that
exceeded loss cost trends partially offset by higher prior year reserve
development and higher catastrophe losses in the 2003 six months compared to
the prior year period. The improvement in the 2003 second quarter and six
months GAAP combined ratio, before catastrophes and prior year reserve
development, from the 2002 second quarter and six months, reflects improvement
in the loss and LAE ratio partially offset by an increase in the underwriting
expense ratio. The improvement in the loss and LAE ratio resulted from the
favorable rate environment. The increase in the underwriting expense ratio is
primarily due to higher contingent commissions that result from improved
underwriting results.

33



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##### 



Personal Lines

Personal Lines revenues and the major after tax components of Personal Lines
operating income are as follows:

|                                                                                         |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------ | ------- | ---------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                         |  | Three Months Ended |         | Six Months Ended
|                                                                                         |  | June 30,           |         | June 30,        
|                                                                                         |  |                    |         |                 
|(in millions)                                                                            |  | 2003               |         | 2002             |  | 2003 |         | 2002
|                                                                                         |  |                    |         |                  |  |      |         |     
|Revenues                                                                                 |  | $                  | 1,306.5 |                  |  | $    | 1,182.8 |      |  | $ | 2,555.8 |   |  | $ | 2,338.2 |  
|                                                                                         |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         |  
|Personal Lines underwriting gain,
before
catastrophes and prior year reserve
development |  | $                  | 46.0    |                  |  | $    | 5.3     |      |  | $ | 81.1    |   |  | $ | 1.6     |  
|Catastrophes                                                                             |  |                    | (44.8   | )                |  |      | (14.3   | )    |  |   | (69.0   | ) |  |   | (24.7   | )
|Prior year reserve development                                                           |  |                    | 24.4    |                  |  |      | (2.6    | )    |  |   | 47.1    |   |  |   | (5.9    | )
|                                                                                         |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         |  
|Underwriting gain (loss)                                                                 |  |                    | 25.6    |                  |  |      | (11.6   | )    |  |   | 59.2    |   |  |   | (29.0   | )
|Net investment income                                                                    |  |                    | 66.0    |                  |  |      | 69.0    |      |  |   | 130.8   |   |  |   | 144.0   |  
|Other                                                                                    |  |                    | 15.2    |                  |  |      | 12.6    |      |  |   | 29.3    |   |  |   | 26.2    |  
|                                                                                         |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         |  
|Personal Lines operating income                                                          |  | $                  | 106.8   |                  |  | $    | 70.0    |      |  | $ | 219.3   |   |  | $ | 141.2   |  
|                                                                                         |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         |  

Revenues during the 2003 second quarter and six months of $1.307 billion and
$2.556 billion, respectively, increased $123.7 million and $217.6 million from
the comparable periods of 2002. The increase in revenues resulted from growth
in earned premiums due to premium rate increases as reflected in renewal price
increases, partly offset by a decrease in net investment income. 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.

Operating income of $106.8 million for the 2003 second quarter was $36.8
million higher than $70.0 million for the 2002 comparable period. Underwriting
gain, before catastrophes and prior year reserve development increased $40.7
million to $46.0 million in the second quarter of 2003 due to the favorable but
moderating rate environment in both auto and property and a moderation in the
increase in loss costs. Operating income in the 2003 second quarter was
unfavorably impacted by catastrophe losses of $44.8 million compared to $14.3
million in the prior year quarter. Also impacting operating income was
favorable prior year reserve development in the 2003 second quarter of $24.4
million after tax versus $2.6 million after tax of unfavorable prior year
reserve development in the prior year quarter ($37.5 million and $4.0 million
pretax, respectively). In addition, after tax net investment income of $66.0
million was $3.0 million lower than the 2002 second quarter.

Operating income of $219.3 million for the 2003 six months was $78.1 million
higher than $141.2 million for the 2002 comparable period. Underwriting gain,
before catastrophes and prior year reserve development increased $79.5 million
to $81.1 million in the six months of 2003 due to the favorable but moderating
rate environment in both auto and property and a moderation in the increase in
loss costs. Operating income in the 2003 six months was unfavorably
impacted by catastrophe losses of $69.0 million compared to $24.7 million in
the prior year period. Also impacting operating income was favorable prior
year reserve development in the 2003 six months of $47.1 million after tax
versus $5.9 million after tax of unfavorable prior year reserve development in
the prior year period ($72.5 million and $9.0 million, pretax, respectively).
In addition, after tax net investment income of $130.8 million was $13.2
million lower than the 2002 six months.

34



---



##### 



Earned premiums increased $124.5 million and $232.8 million to $1.193 billion
and $2.331 billion in the 2003 second quarter and six months, respectively,
from $1.068 billion and $2.098 billion in the comparable periods of 2002. The
increase in earned premiums in the 2003 second quarter and six months was
primarily due to renewal price increases in all product lines.

Net investment income was $90.9 million and $180.3 million in the 2003 second
quarter and six months, respectively, a decrease of $4.4 million and $19.3
million from the comparable periods of 2002. The declines resulted from a
reduction in investment yields in the 2003 second quarter and six months from
the 2002 comparable periods. The decrease in yields resulted from the lower
interest rate environment, a higher proportion of tax exempt investments and a
reduction in average duration, along with reduced returns in the Companys
private equity and real estate equity investments. The lower average yield was
partly offset by the benefit of higher average invested assets resulting from
strong cash flows from operations.

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

|                           |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 
|-------------------------- |  | ------------------ | ------- | ---------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                           |  | Three Months Ended |         | Six Months Ended
|                           |  | June 30,           |         | June 30,        
|                           |  |                    |         |                 
|(in millions)              |  | 2003               |         | 2002             |  | 2003 |         | 2002
|                           |  |                    |         |                  |  |      |         |     
|Automobile                 |  | $                  | 777.7   |                  |  | $    | 714.6   |      |  | $ | 1,514.3 |  |  | $ | 1,401.7 | 
|Homeowners and Other       |  |                    | 533.6   |                  |  |      | 459.4   |      |  |   | 947.0   |  |  |   | 809.7   | 
|                           |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 
|Total net written
premiums |  | $                  | 1,311.3 |                  |  | $    | 1,174.0 |      |  | $ | 2,461.3 |  |  | $ | 2,211.4 | 
|                           |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 

The increase in net written premiums of $137.3 million and $249.9 million in
the 2003 second quarter and six months, respectively, was principally a result
of renewal price increases and higher business volumes in both the Automobile
and Homeowners and Other lines of business.

Automobile net written premiums increased 9% to $777.7 million and 8% to $1.514
billion in the 2003 second quarter and six months, respectively. Renewal price
change increases for standard voluntary business averaged 6% for both the 2003
second quarter and six months, two percentage points below the second quarter
and six months of 2002. Policy retention levels for standard voluntary
business remained favorable and averaged 81%, up one percentage point from the
prior year quarter and six months. Retention for Personal Lines products
represents the estimated percentage of policies from the prior period renewed
in the current period.

Homeowners and Other net written premiums increased 16% to $533.6 million and
17% to $947.0 million in the 2003 second quarter and six months, respectively.
Renewal price change increases averaged 10% and 11% for the 2003 second quarter
and six months, respectively, compared to 16% and 14% in the second quarter and
six months of 2002. The higher level of renewal price change increases in the
prior periods is mostly attributable to rate increases in Texas. Retention
levels also remained favorable and averaged 81%, up one percentage point from
the prior year quarter and six months.

Production through the Companys independent agents in Personal Lines, which
represents over 82% of Personal Lines total net written premiums, was up 12% to
$1.075 billion and 11% to $2.020 billion in the 2003 second quarter and six
months, respectively. Net written premiums through other channels, which
include affinity and joint marketing arrangements, were up 11% to $236.2
million and 10% to $441.2 million for the 2003 second quarter and six months,
respectively.

35



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##### 



Personal Lines claims and expenses of $1.153 billion and $2.240 billion in the
2003 second quarter and six months, respectively, increased $65.9 million and
$94.6 million from $1.087 billion and $2.145 billion in the second quarter and
six months of 2002. The 2003 increase was primarily attributed to the effect
of increased loss costs, higher contingent commissions resulting from
improved underwriting results, and higher catastrophe losses partially offset
by favorable prior year reserve development. The 2003 second quarter and six
months includes $37.5 million and $72.5 million, respectively, of favorable
prior year reserve development versus unfavorable prior year reserve
development of $4.0 million and $9.0 million in the 2002 second quarter and six
months. The 2003 favorable prior year reserve development primarily related to
property business written in 2002 and to a lesser degree automobile business
written in prior years. Catastrophe losses, net of tax and reinsurance, were
$44.8 million and $69.0 million in the 2003 second quarter and six months
compared to $14.3 million and $24.7 million in the comparable periods of 2002.
Catastrophe losses in 2003 were primarily due to winter storms in the
Mid-Atlantic states, the Northeast and Colorado in the first quarter and hail
and ice storms in April, followed in May, by tornados and hailstorms.
Catastrophe losses in 2002 were primarily due to winter storms in the Midwest
and New York in the first quarter and a wind and hailstorm in Maryland and
Virginia in the second quarter.

GAAP combined ratios for Personal Lines were as follows:

|                                                                                            |       |  |                    |      |                  |  |       |      |      |  |      |      |  |  |       |       | 
|------------------------------------------------------------------------------------------- | ----- |  | ------------------ | ---- | ---------------- |  | ----- | ---- | ---- |  | ---- | ---- |  |  | ----- | ----- | 
|                                                                                            |       |  | Three Months Ended |      | Six Months Ended
|                                                                                            |       |  | June 30,           |      | June 30,        
|                                                                                            |       |  |                    |      |                 
|                                                                                            |       |  | 2003               |      | 2002             |  | 2003  |      | 2002
|                                                                                            |       |  |                    |      |                  |  |       |      |     
|Personal Lines GAAP combined ratio,
before catastrophes and prior year
reserve development: |       |  |                    |      |                  |  |       |      |      |  |      |      |  |  |       |      
|Loss and LAE ratio                                                                          |       |  | 69.2               | %    |                  |  | 74.1  | %    |      |  | 69.7 | %    |  |  | 74.2  | %    
|Underwriting expense ratio                                                                  |       |  | 24.7               |      |                  |  | 25.2  |      |      |  | 24.9 |      |  |  | 25.8  |      
|                                                                                            |       |  |                    |      |                  |  |       |      |      |  |      |      |  |  |       |      
|                                                                                            | Total |  |                    | 93.9 |                  |  |       | 99.3 |      |  |      | 94.6 |  |  |       | 100.0 | 
|Catastrophes                                                                                |       |  | 5.8                |      |                  |  | 2.1   |      |      |  | 4.6  |      |  |  | 1.8   |      
|Prior year reserve development                                                              |       |  | (3.1               | )    |                  |  | 0.4   |      |      |  | (3.1 | )    |  |  | 0.4   |      
|                                                                                            |       |  |                    |      |                  |  |       |      |      |  |      |      |  |  |       |      
|Personal Lines GAAP combined ratio                                                          |       |  | 96.6               | %    |                  |  | 101.8 | %    |      |  | 96.1 | %    |  |  | 102.2 | %    
|                                                                                            |       |  |                    |      |                  |  |       |      |      |  |      |      |  |  |       |      

The 5.2 point improvement in the 2003 second quarter and the 6.1 point
improvement in the 2003 six months GAAP combined ratio resulted from premium
rate increases that exceeded loss costs and favorable prior year reserve
development compared to unfavorable prior year reserve development in the
corresponding prior year periods, partially offset by higher catastrophes. The
improvement in the 2003 second quarter and six months GAAP combined ratio,
before catastrophes and prior year reserve development, compared to the 2002
second quarter and six months, reflects an improvement in both the loss and LAE
ratio and in the underwriting expense ratio. The improvement in the loss and
LAE ratio was due to the favorable rate environment and continuing reductions
in non-catastrophe property claim frequency. The improvement in the
underwriting expense ratio is primarily attributed to the benefit of premium
rate increases.

36



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Interest Expense and Other

|                                          |  |                    |       |                  |  |      |       |      |  |   |       |   |  |   |       |  
|----------------------------------------- |  | ------------------ | ----- | ---------------- |  | ---- | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                          |  | Three Months Ended |       | Six Months Ended
|                                          |  | June 30,           |       | June 30,        
|                                          |  |                    |       |                 
|(in millions)                             |  | 2003               |       | 2002             |  | 2003 |       | 2002
|                                          |  |                    |       |                  |  |      |       |     
|Revenues                                  |  | $                  | 0.1   |                  |  | $    | (0.1  | )    |  | $ | 1.7   |   |  | $ | 1.0   |  
|Interest Expense and Other operating
loss |  | $                  | (28.0 | )                |  | $    | (23.7 | )    |  | $ | (62.9 | ) |  | $ | (45.9 | )
|                                          |  |                    |       |                  |  |      |       |      |  |   |       |   |  |   |       |  

The operating loss of $28.0 million and $62.9 million for the 2003 second
quarter and six months, respectively, for Interest Expense and Other increased
from $23.7 million and $45.9 million in the comparable prior year periods,
primarily due to higher interest costs and higher shareholder services costs as
a result of being an independent company following the spin off from Citigroup.
The primary component of operating loss was after-tax interest expense of
$25.4 million and $58.2 million in the 2003 second quarter and six months,
respectively, compared to $25.5 million and $48.4 million in the 2002
comparable periods. The increase in interest expense in the 2003 six months
was primarily due to the impact in the first quarter of 2003 of recent
refinancing activities, which included temporary financing of $550.0 million
first obtained in December 2002 in connection with the fourth quarter 2002
asbestos reserve strengthening and $1.400 billion of senior notes issued on
March 11, 2003. The proceeds from this note issuance were used to prepay, in
full, a $500.0 million note to Citigroup on March 11, 2003, and to redeem
$900.0 million of trust preferred securities on April 9, 2003. For additional
information see Liquidity and Capital Resources.

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. During 2002 and continuing
into 2003, the trends described above have accelerated. Accordingly, there is
a high degree of uncertainty with respect to future exposure from asbestos
claims. See Uncertainty Regarding Adequacy of Asbestos and Environmental
Reserves.

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.

37



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Many coverage disputes with policyholders are only resolved through settlement
agreements. Because many policyholders make exaggerated demands, it is
difficult to predict the outcome of settlement negotiations. Settlements
involving bankrupt policyholders may include extensive releases which are
favorable to the Company but could result in settlements for larger amounts
than originally anticipated. As in the past, the Company will continue to
pursue settlement opportunities. For a discussion of settlement activities
with PPG Industries, Inc. see note 11 to the condensed consolidated financial
statements.

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.

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. 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 the 2003 six months, approximately 57% of
total paid losses relate to policyholders with whom the Company previously
entered into settlement agreements that limit the Companys liability compared
to 59% for the 2002 six months. Net asbestos losses paid were $306.2 million
for the six months of 2003 compared to $174.1 million for the six months of
2002 reflective of the items described above and consistent with Company
expectations based upon the Companys fourth quarter 2002 asbestos study.

38



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##### 



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

|                                                       |        |      |   |         |   |  |   |         |  
|------------------------------------------------------ | ------ | ---- | - | ------- | - |  | - | ------- | -
|(at and for the six months ended June 30, in millions) |        | 2003 |   | 2002   
|                                                       |        |      |   |        
|Beginning reserves:                                    |        |      |   |         |   |  |   |        
|                                                       | Direct |      | $ | 4,287.1 |   |  | $ | 1,046.0 |  
|                                                       | Ceded  |      |   | (882.8  | ) |  |   | (225.6  | )
|                                                       |        |      |   |         |   |  |   |        
|                                                       | Net    |      |   | 3,404.3 |   |  |   | 820.4   |  
|Incurred losses and loss expenses:                     |        |      |   |         |   |  |   |        
|                                                       | Direct |      |   |        |   |  |   | 101.0   |  
|                                                       | Ceded  |      |   |        |   |  |   | 0.2     |  
|Accretion of discount:                                 |        |      |   |         |   |  |   |        
|                                                       | Direct |      |   | 13.2    |   |  |   |        |  
|                                                       | Ceded  |      |   | (0.2    | ) |  |   |        |  
|Losses paid:                                           |        |      |   |         |   |  |   |        
|                                                       | Direct |      |   | 342.6   |   |  |   | 199.9   |  
|                                                       | Ceded  |      |   | (36.4   | ) |  |   | (25.8   | )
|                                                       |        |      |   |         |   |  |   |        
|Ending reserves:                                       |        |      |   |         |   |  |   |        
|                                                       | Direct |      |   | 3,957.7 |   |  |   | 947.1   |  
|                                                       | Ceded  |      |   | (846.6  | ) |  |   | (199.6  | )
|                                                       |        |      |   |         |   |  |   |        
|                                                       | Net    |      | $ | 3,111.1 |   |  | $ | 747.5   |  
|                                                       |        |      |   |         |   |  |   |        

There are currently state and federal proposals to reform the current system
for handling asbestos claims and related litigation. One prominent proposal is
the creation of a federal asbestos claims trust to compensate asbestos
claimants. At this time it is not possible to predict the likelihood or timing
of such proposals being enacted or the effect on the Company if they are
enacted.

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.

39



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##### 



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 June 30, 2003, approximately 79% of
the net environmental reserve (approximately $241.3 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 21% of the net environmental reserve
(approximately $65.4 million), consists of case reserves for resolved claims.
Net environmental losses paid were $78.8 million and $72.1 million for the six
months ended June 30, 2003 and 2002, respectively. The amount of environmental
losses paid tends to fluctuate by quarter and is impacted by the timing and
terms of settlement agreements reached with policyholders.

The Companys reserving methodology is preferable to one based on identified
claims because the resolution of environmental exposures by the Company
generally occurs by settlement on a policyholder-by-policyholder basis as
opposed to a claim-by-claim basis. Generally, the settlement between the
Company and the policyholder extinguishes any obligation the Company may have
under any policy issued to the policyholder for past, present and future
environmental liabilities 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 regular 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.

40



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

|                                                       |        |      |   |       |   |  |   |       |  
|------------------------------------------------------ | ------ | ---- | - | ----- | - |  | - | ----- | -
|(at and for the six months ended June 30, in millions) |        | 2003 |   | 2002 
|                                                       |        |      |   |      
|Beginning reserves:                                    |        |      |   |       |   |  |   |      
|                                                       | Direct |      | $ | 447.8 |   |  | $ | 478.8 |  
|                                                       | Ceded  |      |   | (62.3 | ) |  |   | (82.8 | )
|                                                       |        |      |   |       |   |  |   |      
|                                                       | Net    |      |   | 385.5 |   |  |   | 396.0 |  
|Incurred losses and loss expenses:                     |        |      |   |       |   |  |   |      
|                                                       | Direct |      |   |      |   |  |   | 27.5  |  
|                                                       | Ceded  |      |   |      |   |  |   |      |  
|Losses paid:                                           |        |      |   |       |   |  |   |      
|                                                       | Direct |      |   | 110.2 |   |  |   | 88.8  |  
|                                                       | Ceded  |      |   | (31.4 | ) |  |   | (16.7 | )
|                                                       |        |      |   |       |   |  |   |      
|Ending reserves:                                       |        |      |   |       |   |  |   |      
|                                                       | Direct |      |   | 337.6 |   |  |   | 417.5 |  
|                                                       | Ceded  |      |   | (30.9 | ) |  |   | (66.1 | )
|                                                       |        |      |   |       |   |  |   |      
|                                                       | Net    |      | $ | 306.7 |   |  | $ | 351.4 |  
|                                                       |        |      |   |       |   |  |   |      

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
June 30, 2003 are appropriately established based upon known facts, current law
and managements judgment. However, the uncertainties surrounding the final
resolution of these claims continue, and it is presently not possible to
estimate the ultimate exposure for asbestos and environmental claims and
related litigation. As a result, the reserve is subject to revision as new
information becomes available or as information is reevaluated in
light of evolving circumstances. The continuing uncertainties include, without
limitation, the risks and lack of predictability inherent in major litigation,
any impact from the bankruptcy protection sought by various asbestos producers
and other asbestos defendants, a further increase or decrease in asbestos and
environmental claims which cannot now be anticipated, the role of any umbrella
or excess policies the Company has issued, the resolution or adjudication of
some disputes pertaining to the amount of available coverage for asbestos
claims in a manner inconsistent with the Companys previous assessment of these
claims, the number and outcome of direct actions against the Company, and
future developments pertaining to the Companys ability to recover reinsurance
for asbestos and environmental claims. It is also not possible to predict
changes in the legal and legislative environment and their impact on the future
development of asbestos and environmental claims. This development will be
affected by future court decisions and interpretations, as well as changes in
applicable legislation. It is also difficult to predict the ultimate outcome
of large coverage disputes until settlement negotiations near completion and
significant legal questions are resolved or, failing settlement, until the
dispute is adjudicated. This is particularly the case with policyholders in
bankruptcy where negotiations often involve a large number of claimants and
other parties and require court approval to be effective. 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.

41



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##### 



LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measure of a companys ability to generate sufficient cash flows
to meet the short and long term cash requirements of its business operations.
The liquidity requirements of the Companys business have been met primarily by
funds generated from operations, asset maturities and income received on
investments. Cash provided from these sources is used primarily for claims and
claim adjustment expense payments and operating expenses. Catastrophe claims,
the timing and amount of which are inherently unpredictable, may create
increased liquidity requirements. The timing and amount of reinsurance
recoveries may be affected by reinsurer solvency and increasing reinsurance
coverage disputes. Additionally, recent increases in asbestos-related claim
payments, as well as potential judgments and settlements arising out of
litigation, may also result in increased liquidity requirements. It is the
opinion of the Companys management that the Companys future liquidity needs
will be adequately met from all of the above sources.

Net cash flows provided by operating activities totaled $1.831 billion and
$1.109 billion in the six months of 2003 and 2002, respectively. The 2003 net
cash flows provided by operating activities benefited from premium rate
increases and the receipt of $360.7 million from Citigroup related to
recoveries under the asbestos indemnification agreement in the first quarter of
2003 and $530.9 million of federal income taxes refunded from the Companys net
operating loss carryback in the second quarter of 2003.

Net cash flows used in investing activities totaled $1.262 billion in the 2003
six months and $447.2 million in the 2002 six months. The 2003 net cash flows
used in investing activities primarily reflects the investing of net cash from
operating activities of $1.831 billion partly offset by sales of securities to
fund net payment activity related to debt and TIGHIs junior subordinated debt
securities held by subsidiary trusts of $317.6 million and cash used to pay
quarterly dividends to shareholders of $120.9 million. The 2002 six months net
cash flows used in investing activities principally reflects investing of net
cash from operating activities of $1.109 billion and the receipt of $4.090
billion from the first quarter 2002 initial public offering and the concurrent
issuance of $867.0 million of convertible notes payable, partly offset by the
repayment of $5.299 billion of notes to a former affiliate.

Net cash flows are generally invested in marketable securities. The Company
closely monitors the duration of these investments, and investment purchases
and sales are executed with the objective of having adequate funds available to
satisfy the Companys maturing liabilities. As the Companys investment
strategy focuses on asset and liability durations, and not specific cash flows,
asset sales may be required to satisfy obligations and/or rebalance asset
portfolios. The Companys invested assets at June 30, 2003 totaled $40.229
billion, of which 92% was invested in fixed maturity and short-term
investments, 2% in common stocks and other equity securities, and 6% in other
investments. The average duration of fixed maturities and short-term
securities, net of securities lending activities and net receivables and
payables on investment sales and purchases was 4.2 as of June 30, 2003, a 0.8
decrease from 5.0 as of December 31, 2002. The reduction in average duration
resulted from the investment of underwriting cash flows and investment
maturities and sales proceeds in shorter-term investments along with the
purchase of certain treasury futures contracts.

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.

42



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The Companys process for reviewing invested assets for impairments during any
quarter includes the following:



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

Impairment charges of $18.9 million and $126.7 million were recognized in net
income during the second quarter of 2003 and 2002, respectively.

The amortized cost and fair value of fixed maturities and equity securities
were as follows:

|                                |       |      |           |          |                  |        |         |         |  |   |      |      |  |   |          |          | 
|------------------------------- | ----- | ---- | --------- | -------- | ---------------- | ------ | ------- | ------- |  | - | ---- | ---- |  | - | -------- | -------- | 
|                                |       |      |           |          | Gross Unrealized |        |        
|                                |       |      | Amortized |          |                  |        | Fair   
|(at June 30, 2003, in millions) |       | Cost |           | Gains    |                  | Losses |         | Value  
|                                |       |      |           |          |                  |        |         |        
|Fixed maturities                |       | $    | 29,849.5  |          |                  | $      | 1,879.7 |         |  | $ | 60.9 |      |  | $ | 31,668.3 |         
|Equity securities               |       |      | 755.3     |          |                  |        | 77.6    |         |  |   | 21.6 |      |  |   | 811.3    |         
|                                |       |      |           |          |                  |        |         |         |  |   |      |      |  |   |          |         
|                                | Total |      | $         | 30,604.8 |                  |        | $       | 1,957.3 |  |   | $    | 82.5 |  |   | $        | 32,479.6 | 
|                                |       |      |           |          |                  |        |         |         |  |   |      |      |  |   |          |         

|                                    |       |      |           |          |                  |        |         |         |  |   |       |       |  |   |          |          | 
|----------------------------------- | ----- | ---- | --------- | -------- | ---------------- | ------ | ------- | ------- |  | - | ----- | ----- |  | - | -------- | -------- | 
|                                    |       |      |           |          | Gross Unrealized |        |        
|                                    |       |      | Amortized |          |                  |        | Fair   
|(at December 31, 2002, in millions) |       | Cost |           | Gains    |                  | Losses |         | Value  
|                                    |       |      |           |          |                  |        |         |        
|Fixed maturities                    |       | $    | 28,877.8  |          |                  | $      | 1,408.8 |         |  | $ | 283.4 |       |  | $ | 30,003.2 |         
|Equity securities                   |       |      | 861.9     |          |                  |        | 28.6    |         |  |   | 39.0  |       |  |   | 851.5    |         
|                                    |       |      |           |          |                  |        |         |         |  |   |       |       |  |   |          |         
|                                    | Total |      | $         | 29,739.7 |                  |        | $       | 1,437.4 |  |   | $     | 322.4 |  |   | $        | 30,854.7 | 
|                                    |       |      |           |          |                  |        |         |         |  |   |       |       |  |   |          |         

As a result of recent movements in
market interest rates and credit spreads, the net
unrealized gain on fixed maturities and equity securities decreased by
approximately $1.2 billion from June 30, 2003 to July 31, 2003.

At June 30, 2003, the gross unrealized investment loss for fixed maturities and
equity securities where fair value is less than 80% of amortized cost were as
follows:

|                  |  |                                                                |      |           |  |           |     |           |  |         |     |  |  |   |   |  |  |   |      | 
|----------------- |  | -------------------------------------------------------------- | ---- | --------- |  | --------- | --- | --------- |  | ------- | --- |  |  | - | - |  |  | - | ---- | 
|                  |  | Period For Which Fair Value Is Less Than 80% of Amortized Cost
|                  |  |                                                               
|                  |  |                                                                |      |           |  | Greater   |     | Greater   |  |         |     |  |  |   |   | 
|                  |  |                                                                |      |           |  | Than      |     | Than      |  |         |     |  |  |   |   | 
|                  |  |                                                                |      |           |  | 3 Months  |     | 6 Months  |  | Greater |     |  |  |  
|                  |  | Less than                                                      |      | Less Than |  | Less Than |     | Than      |  |         |     | 
|(in millions)     |  | 3 Months                                                       |      | 6 Months  |  | 12 Months |     | 12 Months |  | Total  
|                  |  |                                                                |      |           |  |           |     |           |  |        
|Fixed maturities  |  | $                                                              | 10.7 |           |  | $         | 6.2 |           |  | $       | 2.8 |  |  | $ |  |  |  | $ | 19.7 | 
|Equity
securities |  |                                                                | 1.2  |           |  |           | 1.6 |           |  |         |    |  |  |   |  |  |  |   | 2.8  | 
|                  |  |                                                                |      |           |  |           |     |           |  |         |     |  |  |   |   |  |  |   |      | 
|                  |  | $                                                              | 11.9 |           |  | $         | 7.8 |           |  | $       | 2.8 |  |  | $ |  |  |  | $ | 22.5 | 
|                  |  |                                                                |      |           |  |           |     |           |  |         |     |  |  |   |   |  |  |   |      | 

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Impairment charges included in net realized investment gains by quarter were as
follows:

|                  |  |      |      |      |  |   |      | 
|----------------- |  | ---- | ---- | ---- |  | - | ---- | 
|                  |  | 2003
|                  |  |     
|(in millions)     |  | 1Q03 |      | 2Q03
|                  |  |      |      |     
|Fixed maturities  |  | $    | 46.6 |      |  | $ | 14.8 | 
|Equity
securities |  |      | 0.1  |      |  |   | 4.1  | 
|Real estate       |  |      | 11.5 |      |  |   |     | 
|                  |  |      |      |      |  |   |      | 
|                  |  | $    | 58.2 |      |  | $ | 18.9 | 
|                  |  |      |      |      |  |   |      | 

|                  |  |      |      |      |  |      |       |      |  |   |      |  |  |   |      | 
|----------------- |  | ---- | ---- | ---- |  | ---- | ----- | ---- |  | - | ---- |  |  | - | ---- | 
|                  |  | 2002
|                  |  |     
|(in millions)     |  | 1Q02 |      | 2Q02 |  | 3Q02 |       | 4Q02
|                  |  |      |      |      |  |      |       |     
|Fixed maturities  |  | $    | 59.0 |      |  | $    | 117.8 |      |  | $ | 33.3 |  |  | $ | 50.3 | 
|Equity
securities |  |      | 3.2  |      |  |      | 2.4   |      |  |   | 1.4  |  |  |   | 1.1  | 
|Real estate       |  |      |     |      |  |      | 6.5   |      |  |   |     |  |  |   | 9.1  | 
|                  |  |      |      |      |  |      |       |      |  |   |      |  |  |   |      | 
|                  |  | $    | 62.2 |      |  | $    | 126.7 |      |  | $ | 34.7 |  |  | $ | 60.5 | 
|                  |  |      |      |      |  |      |       |      |  |   |      |  |  |   |      | 

TPC is a holding company whose principal asset is the capital stock of
Travelers Insurance Group Holdings Inc. (TIGHI) and its insurance operating
subsidiaries. At June 30, 2003, total cash and short-term invested assets
aggregating $313.9 million were held at TPC and TIGHI. These liquid assets
were primarily funded by dividends received from the Companys operating
subsidiaries. These liquid assets, combined with other sources of funds
available to TPC, primarily additional dividends from the Companys operating
subsidiaries, are considered sufficient to meet the liquidity requirements of
TPC and TIGHI. These liquidity requirements include primarily shareholder
dividends and debt service.

Net cash flows used in financing activities totaled $452.4 million and $670.9
million in the six months of 2003 and 2002, respectively. Cash flows used in
financing activities in the 2003 six months are primarily attributable to the
redemption of $900.0 million aggregate principal amount of TIGHIs junior
subordinated debt securities held by subsidiary trusts and the repayment of
$700.0 million of notes payable to a former affiliate. Funds used in these
repayments were primarily provided by TPCs issuance of $1.4 billion of senior
notes on March 11, 2003. These refinancing activities were initiated with the
objective of lowering the average interest rate on the Companys total
outstanding debt. The 2003 six months also reflect the issuance of $549.5
million of short-term Floating Rate Notes which were used to repay the $550.0
million Promissory Note due in January 2004. Net cash flows used in financing
activities in the six months of 2003 also included dividends paid to
shareholders of $120.9 million. The 2002 six months cash flows used in
financing activities reflects the repayment of $5.299 billion of notes payable
to a former affiliate. These payments were partially offset by the receipt of
$4.090 billion from the first quarter 2002 initial public offering and the
concurrent issuance of $867.0 million of convertible notes payable.

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

44



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The Companys insurance operations could be negatively impacted by a downgrade
in one or more of the Companys financial strength ratings. If this were to
occur, there could be a reduced demand for certain products in certain markets.
Additionally, the Companys ability to access the capital markets could be
impacted and higher borrowing costs may be incurred. In June 2003, A.M. Best
Co. lowered the claims-paying rating of the Companys Gulf Insurance Pool to A
from A+. The Company does not expect this rating change to have any
significant impact on the operations of Gulf or the Company. The Companys
other ratings remained unchanged during the second quarter of 2003.

In December 2002, the Company entered into a loan agreement with an
unaffiliated lender and borrowed $550.0 million under a Promissory Note due in
January 2004. The Promissory Note carried a variable interest rate of LIBOR
plus 25 basis points per annum. On February 5, 2003, the Company issued $550.0
million of Floating Rate Notes due in February 2004, which is included in
short-term debt in the condensed consolidated balance sheet. The proceeds from
these notes were used to prepay the $550.0 million due on the Promissory Note.
The Floating Rate Notes also carry a variable interest rate of LIBOR plus 25
basis points per annum. On March 14, 2003 and June 17, 2003, the Company
repurchased $75.0 million and $24.0 million, respectively, of the Floating Rate
Notes at par plus accrued interest. The remaining $451.0 million are callable
by the Company after August 5, 2003.

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

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

Effective April 17, 2003, TPC
entered into the following line of credit agreements with Citibank, a
subsidiary of Citigroup, TPCs former parent: (i) a
$250.0 million 45-month revolving line of credit (the
45 Month Line of Credit), and (ii) a $250.0 million
364-day revolving line of credit (the 364 Day Line of Credit
and, together with the 45 Month Line of Credit, the Lines of
Credit). TPC may, with Citibanks consent, extend the commitment
of the 364-Day Line of Credit for additional 364-day periods under
the same terms and conditions. TPC has the option, provided there is
no default or event of default, to convert outstanding advances under
the 364 Day Line of Credit at the commitment termination date to
a term loan maturing no later than one year from the commitment
termination date. Borrowings under the Lines of Credit may be made,
at TPCs option, at a variable interest rate equal to either the
lenders base rate plus an applicable margin or at LIBOR plus an
applicable margin. Each Line of Credit includes a commitment fee and,
for any date on which advances exceed 50% of the total commitment, a
utilization fee. The applicable margin and the rates on which the
commitment fee and the utilization fee are based vary based upon
TPCs long-term senior unsecured non-credit-enhanced debt
ratings. Each Line of Credit requires TPC to comply with various
covenants, including the maintenance of specified minimum statutory
capital and surplus and compliance with a ratio of total consolidated
debt to total capital. In addition, an event of default will occur if
there is a change in control (as defined in the Lines of Credit
agreements) of TPC.

45



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There were no amounts outstanding
under the Lines of Credit at June 30, 2003. Previous lines of credit between TIGHI and Citigroup have been terminated.

Contractual obligations at June 30, 2003 included the following:

|                                              |  |       |         |      |  |        |       |       |  |       |       |         |  |   |       |  |  |   |         | 
|--------------------------------------------- |  | ----- | ------- | ---- |  | ------ | ----- | ----- |  | ----- | ----- | ------- |  | - | ----- |  |  | - | ------- | 
|                                              |  |       |         |      |  | Less   |       |       |  |       |       |         |  |   |       |  |  |  
|Payments Due by Period                        |  |       |         |      |  | than 1 |       | 1-3   |  | 4-5   |       | After 5
|(in millions)                                 |  | Total |         | Year |  | Years  |       | Years |  | Years
|                                              |  |       |         |      |  |        |       |       |  |      
|Short-term debt                               |  | $     | 451.0   |      |  | $      | 451.0 |       |  | $     |      |         |  | $ |      |  |  | $ |        | 
|Long-term debt                                |  |       | 1,777.4 |      |  |        | 3.0   |       |  |       | 162.1 |         |  |   | 406.1 |  |  |   | 1,206.2 | 
|Convertible junior subordinated notes
payable |  |       | 892.5   |      |  |        |      |       |  |       |      |         |  |   |      |  |  |   | 892.5   | 
|Convertible notes payable                     |  |       | 49.7    |      |  |        |      |       |  |       |      |         |  |   |      |  |  |   | 49.7    | 
|Operating leases                              |  |       | 298.1   |      |  |        | 82.0  |       |  |       | 155.5 |         |  |   | 38.4  |  |  |   | 22.2    | 
|                                              |  |       |         |      |  |        |       |       |  |       |       |         |  |   |       |  |  |   |         | 
|                                              |  | $     | 3,468.7 |      |  | $      | 536.0 |       |  | $     | 317.6 |         |  | $ | 444.5 |  |  | $ | 2,170.6 | 
|                                              |  |       |         |      |  |        |       |       |  |       |       |         |  |   |       |  |  |   |         | 

In the normal course of business, the Company has unfunded commitments to
partnerships in which it invests. These commitments were $748.7 million and
$864.3 million at June 30, 2003 and December 31, 2002, respectively.

On April 24, 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 May
30, 2003, to shareholders of record on May 6, 2003. Also, on July 23, 2003,
the Companys Board of Directors declared a quarterly dividend of $0.08 per
share on class A and class B common stock, payable August 29, 2003, to
shareholders of record on August 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.

On September 25, 2002, the Board of Directors approved a $500.0 million share
repurchase program. Purchases of class A and class B stock may be made from
time to time in the open market, and it is expected that funding for the
program will principally come from operating cash flow. When shares are
repurchased, such shares will be reported as treasury stock in the consolidated
balance sheet. There were no shares repurchased under this program as of June
30, 2003. During the 2003 six months, 931 thousand shares of common stock were
acquired from employees as treasury stock to cover payroll withholding taxes in
connection with the vesting of CAP awards and exercises of stock options.

TPCs insurance subsidiaries are subject to various regulatory restrictions
that limit the maximum amount of dividends that can 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, 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. On April 1,
2003, TPCs insurance subsidiaries paid $320.0 million of dividends to TIGHI.

46



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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.

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. Further explanation of how management applies its
judgment is included throughout this Managements Discussion and Analysis and
in the notes to the consolidated financial statements for the year ended
December 31, 2002 included in the Companys Form 10-K.

Total claims and claim adjustment expense reserves were $33.651 billion at June
30, 2003. The Company maintains property and casualty loss reserves to cover
estimated ultimate unpaid liability for losses and loss adjustment expenses
with respect to reported and unreported claims incurred as of the end of each
accounting period. Reserves do not represent an exact calculation of
liability, but instead represent estimates, generally utilizing actuarial
projection techniques at a given accounting date. Management considers
actuarial estimates, current conditions and trends, as well as past company and
certain industry experience in establishing reserve estimates. 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, 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 environmental and asbestos 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 it is possible that
the outcome of the continued uncertainties regarding asbestos-related claims
could result in liability in future periods that differs from current reserves
by an amount that could be material to the Companys future operating results
and financial condition. See the preceding discussion of Asbestos Claims and
Litigation and Environmental Claims and Litigation.

Total reinsurance recoverables were $11.044 billion at June 30, 2003 and
included $1.960 billion from servicing carrier arrangements with various
involuntary assigned risk pools. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability associated with the
reinsured business.

47



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The Company evaluates and monitors the financial condition of its reinsurers
under voluntary reinsurance arrangements to minimize its exposure to
significant losses from reinsurer insolvencies. In addition, in the ordinary
course of business, the Company may become involved in coverage disputes with
its reinsurers. In recent quarters, the Company has experienced an increase in
the frequency of these reinsurance coverage disputes. Some of these disputes
could result in lawsuits and arbitrations brought by or against the reinsurers
to determine the Companys rights and obligations under various reinsurance
agreements. The Company employs dedicated specialists and aggressive
strategies to manage reinsurance collections and disputes.

The Company reports its reinsurance recoverables net of an allowance for
estimated uncollectible reinsurance recoverables. The allowance is based upon
the Companys ongoing review of amounts outstanding, length of collection
periods, changes in reinsurer credit standing, applicable coverage defenses and
other relevant factors. Accordingly, the establishment of reinsurance
recoverables and the related allowance for uncollectible reinsurance
recoverables is also an inherently uncertain process involving estimates.
During the second quarter of 2003, the Company increased the allowance by $30.0
million in connection with the Companys ongoing review process. The allowance
for estimated uncollectible reinsurance recoverables was $359.5 million at June
30, 2003. Changes in these estimates could result in additional income
statement charges.

FUTURE APPLICATION OF ACCOUNTING STANDARDS

See notes 2 and 3 to the condensed consolidated financial statements for a
discussion of recently issued or adopted 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 Managements Discussion and
Analysis of Financial Condition and Results of Operations 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.

48



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##### 



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; the impact of legislative actions,
including federal and state legislation related to asbestos liability reform;
larger than expected assessments for guaranty funds and mandatory pooling
arrangements; a downgrade in the Companys claims-paying and financial strength
ratings; the loss or significant restriction on the Companys ability to use
credit scoring in the pricing and underwriting of Personal Lines policies; and
amendments 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.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following quantitative and qualitative disclosures about market risk of
Travelers Property Casualty Corp. (TPC) and subsidiaries (collectively, the
Company) should be read in conjunction with the quantitative and qualitative
disclosures about market risk as of December 31, 2002 included in the Companys
Form 10-K.

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. Changes in the Companys short-term and long-term debt and
notes payable to affiliates have occurred since December 31, 2002. The primary
market risk for these market sensitive instruments is interest rate risk at the
time of refinancing. For information regarding the Companys long-term debt
and notes payable to former affiliates, see note 8 to the condensed
consolidated financial statements. In addition, the average duration of the
Companys fixed maturities portfolio decreased from December 31, 2002,
primarily as a result of the impact of the investment of underwriting cash
flows and investment maturities and sales proceeds in shorter-term investments
along with the purchase of certain treasury futures contracts. See the
Liquidity and Capital Resources section of Item 2, Managements Discussion and
Analysis of Financial Condition and Results of Operations.

The Company analyzes quantitative information about market risk based on a
sensitivity analysis model. This model produces a loss in fair value of market
sensitive instruments of approximately $1.3 billion and $1.5 billion based on a
100 basis point increase in interest rates as of June 30, 2003 and December 31,
2002, respectively.

The Companys sensitivity model also calculates a potential loss in fair value
with the inclusion of certain non-financial instruments, including premium
balances receivable, reinsurance
recoverables, claims and claim adjustment expense reserves and unearned premium
reserves. Based on this model, 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 June 30, 2003 and December 31,
2002 is not material.

49



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##### 



Item 4. CONTROLS AND PROCEDURES

The Company maintains disclosure
controls and procedures (as that term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934 (the Exchange Act)) that are designed to ensure that information
required to be disclosed in the Companys reports under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms, and that such
information is accumulated and communicated to the Companys management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosures. Any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives. The
Companys management, with the participation of the Companys Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
design and operation of the Companys disclosure controls and procedures as of
June 30, 2003. Based upon that evaluation and subject to the foregoing, the
Companys Chief Executive Officer and Chief Financial Officer concluded that
the design and operation of the Companys disclosure controls and procedures
provided reasonable assurance that the disclosure controls and procedures are
effective to accomplish their objectives.

In addition, there was no change in the Companys internal control over
financial reporting (as that term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that occurred during the quarter ended June
30, 2003 that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.

50



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PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

Asbestos and Environmental

In the ordinary course of its insurance business, the Company receives claims
for insurance arising under policies issued by the Company asserting alleged
injuries and damages from asbestos and other hazardous waste and toxic
substances which are the subject of related coverage litigation, including,
among others, the litigation described below. The Company is increasingly becoming subject to more aggressive
asbestos-related litigation, and the Company expects this trend to continue. 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 bodily injury 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 purported
settlements as well as for any future claims brought against it, and that
insurance policy aggregate limits do not apply. 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.

An insurance coverage arbitration commenced in January 2001 to determine what
percentage of ACandS financial obligations for bodily injury asbestos claims
are subject to insurance policy aggregate limits. On July 31, 2003, the
arbitration panel ruled in Travelers favor that asbestos bodily injury claims
paid by ACandS on or after July 31, 2003, the decision date, are subject to the
Companys aggregate policy limits, which have been exhausted.

The Company anticipates that ACandS will claim that the Company is obligated to
fund 45% of ACandS unpaid but purportedly settled asbestos bodily injury
claims that predate the arbitration decision date. In its bankruptcy filings,
ACandS has estimated that the total value of these unpaid but purportedly
settled claims is approximately $2.8 billion. The Company believes that it has meritorious defenses to this potential ACandS claim,
which could
eliminate or substantially reduce any obligation to ACandS with respect to the
purportedly settled claims. The Company will continue to challenge, among
other things, the amount and validity of these purported settlements in the
ACandS bankruptcy. Among other defenses, the Company believes the purported
settlements are not final, are unreasonable in amount, 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 to deprive the Company of its right to litigate
the claims against ACandS.

In addition to the bankruptcy and the recently concluded 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). This litigation primarily involves the
extent to which the
claims against ACandS are subject to occurrence limits under the insurance
policies. The matter is scheduled to appear on the May 14, 2004 trial calendar.
The Company is vigorously defending this case, and Company management believes
the Company has meritorious defenses. The Company has asserted or will assert
numerous defenses in this case, including that the occurrence limits in the
policies substantially reduce or eliminate the Companys obligations, if any,
with respect to the purportedly settled claims.

51



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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, served in May 2003). 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. Similar
complaints were filed in various Ohio state courts during the second quarter of
2003.

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. During
January and June 2003, the same bankruptcy court extended the existing
injunction to apply to an additional set of cases filed in various state courts
in Texas and Ohio as well as to the attorneys who are prosecuting these cases.
The order also enjoins these attorneys and their respective law firms from
commencing any further lawsuits against the Company based upon these
allegations without the prior approval of the court. The parties have met with the
 mediator several times since August 2002, and Travelers anticipates additional meetings. The results of the mediation, if any, are uncertain
 at this time. If the mediation is not successful, the bankruptcy court could hold a hearing as soon as late 2003 to
consider the Companys motion for a permanent injunction. If the Company is not successful, including on appeal, the temporary
 restraining order currently in effect will be lifted and the Company will again be subject to the pending litigation and could
 be subject to additional litigation based on similar theories of liability. In some of the direct actions in Texas that are currently subject
 to the temporary restraining order as to the Company, trials could commence as early as December 2003.

The Company has numerous defenses in all of the direct action cases. 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. Many of these defenses have been raised in initial motions to dismiss by Travelers and other insurers. Rulings
 on these motions filed by other insurers could come as early as late 2003, including some of the class actions in West Virginia.

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.

52



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Other

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. The New Jersey appellate court denied plaintiffs request
to appeal. After the rulings described above, the plaintiffs withdrew the New
York and Michigan cases. Although the trial court in Texas granted class
certification, the appellate court reversed that ruling in January 2003,
holding that class certification should not have been granted. In May 2003,
the plaintiff in the Texas case filed a petition asking the United States
Supreme Court to review that appellate ruling, and in August 2003, the
defendants filed a brief opposing the petition. The Company is vigorously
defending all of the pending cases and the Companys management believes the
Company has meritorious defenses; however the outcome of these disputes is
uncertain.

Gulf Insurance Company (Gulf), a majority-owned subsidiary of TPC, brought an
action on May 22, 2003, as amended on July 29, 2003, in the Supreme Court of
New York, County of New York (Gulf Insurance Company v. Transatlantic
Reinsurance Company, et al), against Transatlantic Reinsurance Company
(Transatlantic), and three other reinsurance companies to recover amounts due
under reinsurance contracts issued to Gulf and related to Gulfs February 2003
settlement of a coverage dispute under a vehicle residual value protection
insurance policy. The action seeks a total of $98,500,000 currently due under
the reinsurance contracts, a declaration that $12,710,179 will be payable under
a second installment due in 2004, and consequential and punitive damages. On
May 22, 2003, Transatlantic brought an action against Gulf regarding the same
dispute that was consolidated with Gulfs action. Transatlantic seeks
rescission of its vehicle residual value reinsurance contracts issued to Gulf
and unspecified damages for breach of contract. XL Reinsurance America, Inc.,
another of the defendant reinsurers, has indicated that it may assert a similar
position. Gulf denies these allegations, believes that it has a strong legal
basis to collect the amounts due under the reinsurance contracts, and intends
to vigorously pursue the action.

53



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##### 



In addition to those described above, the Company is involved in numerous
lawsuits, not involving asbestos and environmental claims, arising mostly in
the ordinary course of business operations either as a liability insurer
defending third-party claims brought against 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.

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

The annual meeting of shareholders of
TPC was held on April 24, 2003. At the meeting:



|(1) |  | 4 persons were elected to serve as
Class I directors of TPC for a three-year term expiring in 2006, and the Class
II and Class III directors named below continued in office;
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | TPCs 2002 Stock Incentive Plan was approved;                                                                                                                                
|   
|(3) |  | TPCs Executive Performance Compensation Plan was approved;                                                                                                                  
|   
|(4) |  | certain amendments to TPCs certificate of incorporation were approved;
and                                                                                                  
|   
|(5) |  | the selection of KPMG LLP to serve as the independent auditors of TPC for
2003 was ratified.                                                                                 

The number of votes cast for, against or withheld, and the number of
abstentions with respect to each such matter is set forth below, as are the
number of broker non-votes, where applicable.



|(1) |  | Election of Directors:
|--- |  | ----------------------

|                   |  |                    |  |                    |               |           |               |                |             |  |             | 
|------------------ |  | ------------------ |  | ------------------ | ------------- | --------- | ------------- | -------------- | ----------- |  | ----------- | 
|                   |  |                    |  |                    |               | Votes For |               | Votes Withheld
|                   |  |                    |  |                    |               |           |               |               
|Class A Stock      |  | Kenneth J. Bialkin |  |                    | 415,877,728   |           |               |                | 10,004,775  | 
|                   |  |                    |  | Clarence Otis, Jr. |               |           | 420,761,115   |                |             |  | 5,121,388   | 
|                   |  |                    |  | Jeffrey M. Peek    |               |           | 413,075,401   |                |             |  | 12,807,102  | 
|                   |  |                    |  | Laurie J. Thomsen  |               |           | 420,765,299   |                |             |  | 5,117,204   | 
|Class B Stock      |  | Kenneth J. Bialkin |  |                    | 2,868,753,377 |           |               |                | 128,829,243 | 
|                   |  |                    |  | Clarence Otis, Jr. |               |           | 2,889,362,333 |                |             |  | 108,220,287 | 
|                   |  |                    |  | Jeffrey M. Peek    |               |           | 2,722,111,278 |                |             |  | 275,471,342 | 
|                   |  |                    |  | Laurie J. Thomsen  |               |           | 2,889,608,280 |                |             |  | 107,974,340 | 
|Total Voting Power |  | Kenneth J. Bialkin |  |                    | 3,284,631,105 |           |               |                | 138,834,018 | 
|                   |  |                    |  | Clarence Otis, Jr. |               |           | 3,310,123,448 |                |             |  | 113,341,675 | 
|                   |  |                    |  | Jeffrey M. Peek    |               |           | 3,135,186,679 |                |             |  | 288,278,444 | 
|                   |  |                    |  | Laurie J. Thomsen  |               |           | 3,310,373,579 |                |             |  | 113,091,544 | 



|(2) |  | Approval of 2002 Stock Incentive Plan:
|--- |  | --------------------------------------

|                   |  |           |               |               |  |                 |             |  |  |  |            | 
|------------------ |  | --------- | ------------- | ------------- |  | --------------- | ----------- |  |  |  | ---------- | 
|                   |  | Votes For |               | Votes Against |  | Votes Abstained
|                   |  |           |               |               |  |                
|Class A Stock      |  |           | 340,445,875   |               |  |                 | 84,582,893  |  |  |  | 853,616    | 
|Class B Stock      |  |           | 2,390,183,594 |               |  |                 | 565,603,017 |  |  |  | 41,794,280 | 
|                   |  |           |               |               |  |                 |             |  |  |  |            | 
|Total Voting Power |  |           | 2,730,629,469 |               |  |                 | 650,185,910 |  |  |  | 42,647,896 | 
|                   |  |           |               |               |  |                 |             |  |  |  |            | 

54



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##### 





|(3) |  | Approval of Executive Performance Compensation Plan:
|--- |  | ----------------------------------------------------

|                   |  |           |               |               |  |                 |             |  |  |  |            | 
|------------------ |  | --------- | ------------- | ------------- |  | --------------- | ----------- |  |  |  | ---------- | 
|                   |  | Votes For |               | Votes Against |  | Votes Abstained
|                   |  |           |               |               |  |                
|Class A Stock      |  |           | 382,802,558   |               |  |                 | 42,072,704  |  |  |  | 1,007,125  | 
|Class B Stock      |  |           | 2,624,075,992 |               |  |                 | 330,625,169 |  |  |  | 42,879,471 | 
|                   |  |           |               |               |  |                 |             |  |  |  |            | 
|Total Voting Power |  |           | 3,006,878,550 |               |  |                 | 372,697,873 |  |  |  | 43,886,596 | 
|                   |  |           |               |               |  |                 |             |  |  |  |            | 



|(4) |  | Approval of certain amendments to the Companys certificate of
incorporation:
|--- |  | -----------------------------------------------------------------------------

|                   |  |           |               |               |  |                 |            |  |  |  |            | 
|------------------ |  | --------- | ------------- | ------------- |  | --------------- | ---------- |  |  |  | ---------- | 
|                   |  | Votes For |               | Votes Against |  | Votes Abstained
|                   |  |           |               |               |  |                
|Class A Stock      |  |           | 423,170,028   |               |  |                 | 1,571,626  |  |  |  | 1,140,796  | 
|Class B Stock      |  |           | 2,939,324,490 |               |  |                 | 14,621,392 |  |  |  | 43,635,492 | 
|                   |  |           |               |               |  |                 |            |  |  |  |            | 
|Total Voting Power |  |           | 3,362,494,518 |               |  |                 | 16,193,018 |  |  |  | 44,776,288 | 
|                   |  |           |               |               |  |                 |            |  |  |  |            | 



|(5) |  | Ratification of auditors:
|--- |  | -------------------------

|                   |  |           |               |               |  |                 |             |  |  |  |            | 
|------------------ |  | --------- | ------------- | ------------- |  | --------------- | ----------- |  |  |  | ---------- | 
|                   |  | Votes For |               | Votes Against |  | Votes Abstained
|                   |  |           |               |               |  |                
|Class A Stock      |  |           | 421,976,223   |               |  |                 | 3,236,505   |  |  |  | 669,771    | 
|Class B Stock      |  |           | 2,843,585,969 |               |  |                 | 114,685,689 |  |  |  | 39,310,535 | 
|                   |  |           |               |               |  |                 |             |  |  |  |            | 
|Total Voting Power |  |           | 3,265,562,192 |               |  |                 | 117,922,194 |  |  |  | 39,980,306 | 
|                   |  |           |               |               |  |                 |             |  |  |  |            | 

In addition to the Class I directors elected at the annual meeting, the Class
II and Class III directors named below continued in office:

|                                          |  |                                           
|----------------------------------------- |  | ------------------------------------------
|Class II Directors (term expires in 2004) |  | Class III Directors (term expires in 2005)
|                                          |  |                                           
|Howard P. Berkowitz                       |  | Meryl D. Hartzband                        
|Charles J. Clarke                         |  | Robert I. Lipp                            
|Leslie B. Disharoon                       |  | Charles W. Scharf                         
|Nancy A. Roseman                          |  | Frank J. Tasco                            

55



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##### 



Item 5. OTHER INFORMATION

On July 23, 2003, the Board of Directors of TPC elected Blythe J. McGarvie to
the board as a Class II director and to serve as a member of the Audit
Committee. Ms. McGarvie, a Certified Public Accountant, is President of
Leadership for International Finance, a private business consulting firm.
Prior to founding Leadership for International Finance, Ms. McGarvie was the
Executive Vice President and Chief Financial Officer at BIC Group from 1999
through the end of 2002. Prior to joining BIC in July 1999, Ms. McGarvie
served as Senior Vice President and Chief Financial Officer of Hannaford Bros.
Co., a food retailer, from 1994-1999. She also has held senior financial
positions at Sara Lee Corporation and Kraft General Foods, Inc.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K



|(a) |  | Exhibits:           
|--- |  | --------------------
|   
|    |  | See Exhibit Index.  
|   
|(b) |  | Reports on Form 8-K:

On April 1, 2003, the Company filed a Current Report on Form 8-K dated April 1,
2003, (a) reporting under Items 5 and 12 (but provided under
Items 9 pursuant to
SEC interim filing guidance for Item 12) thereof that the Company strengthened
certain reserves of its majority-owned subsidiary, Gulf Insurance, and (b)
filing under Item 7 thereof the related press release.

On April 17, 2003, the Company filed a Current Report on Form 8-K dated April
17, 2003, (a) reporting under Item 12 thereof (but provided under Item 9
pursuant to SEC interim filing guidance for Item 12) the results of the
Companys operations for the quarter ended March 31, 2003, and (b) filing under
Item 7 thereof the related press release and a first quarter financial
supplement.

On May 22, 2003, the Company filed a Current Report on Form 8-K dated May 22,
2003, (a) reporting under Item 5 thereof a preliminary estimate for catastrophe
losses from severe storms during the second quarter through
May 21, 2003, and (b) filing under Item 7 thereof the
related press release.

No other reports on Form 8-K were filed during the 2003 second quarter;
however,

On July 17, 2003, the Company filed a Current Report on Form 8-K, dated July
17, 2003, (a) reporting under Item 12 thereof (but provided under Item 9
pursuant to SEC interim filing guidance for Item 12) the results of the
Companys operations for the quarter ended June 30, 2003, and (b) filing under
Item 7 thereof the related press release and a second quarter financial
supplement.

On August 4, 2003, the Company filed a Current Report on Form 8-K, dated August
4, 2003, (a) reporting under Item 5 thereof that an
arbitration panel decision
had been rendered in the ACandS asbestos litigation matter, and (b) filing
under Item 7 thereof the related press release.

56



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##### 



SIGNATURES

Pursuant to the requirements 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.

|                      |  |                                   |                        |                               
|--------------------- |  | --------------------------------- | ---------------------- | ------------------------------
|                      |  | Travelers Property Casualty Corp.
|                      |  |                                   |                        |                               
|Date: August 13, 2003 |  | By                                | /s/ Jay S. Benet      
|                      |  |                                   |                       
|                      |  |                                   |                        | Jay S. Benet                  
|                      |  |                                   |                        | Chief Financial Officer       
|                      |  |                                   |                        | (Principal Financial Officer) 
|                      |  |                                   |                        |                               
|Date: August 13, 2003 |  | By                                | /s/ Douglas K. Russell
|                      |  |                                   |                       
|                      |  |                                   |                        | Douglas K. Russell            
|                      |  |                                   |                        | Chief Accounting Officer      
|                      |  |                                   |                        | (Principal Accounting Officer)

57



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##### 



EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                   
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                   
|Number  |  | Description of Exhibit                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                   
|3.1.1  |  | Restated Certificate of Incorporation of the Company, effective July
18, 2003, consolidating all prior amendments.                                                                                                                
|        |  |                                                                                                                                                                                                                                   
|3.2     |  | Amended and Restated Bylaws of the Company, effective January 23, 2003,
was filed as Exhibit 3.2 to the Companys annual report on Form 10-K for
the fiscal year ended December 31, 2002, and is incorporated herein by
reference.
|        |  |                                                                                                                                                                                                                                   
|31.1   |  | Certification of Robert I. Lipp, Chief Executive Officer of the
Company, as required by Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                            
|        |  |                                                                                                                                                                                                                                   
|31.2   |  | Certification of Jay S. Benet, Chief Financial Officer of the Company,
as required by Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                              
|        |  |                                                                                                                                                                                                                                   
|32.1   |  | Certification of Robert I. Lipp, Chief Executive Officer of the
Company, as required by Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                            
|        |  |                                                                                                                                                                                                                                   
|32.2   |  | Certification of Jay S. Benet, Chief Financial Officer of the Company,
as required by Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                              

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



---

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

58