10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to              

Commission file number 001-10898

The St. Paul Travelers Companies, Inc.

(Exact name of registrant as specified in its charter)

Minnesota	41-0518860
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

385 Washington Street, Saint Paul, MN 55102

(Address of principal executive offices)

(651) 310-7911

(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 ý   No o

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

The number of shares of the Registrant’s Common Stock, without par value, outstanding at August 4, 2005 was 675,475,347.

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page
Part I - Financial Information
Item 1.	Financial Statements:
	Consolidated Statement of Income (Loss) (Unaudited) - Three and Six Months Ended June 30, 2005 and 2004	3
	Consolidated Balance Sheet - June 30, 2005 (Unaudited) and December 31, 2004	4
	Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) - Six Months Ended June 30, 2005 and 2004	5
	Consolidated Statement of Cash Flows (Unaudited) -Six Months Ended June 30, 2005 and 2004	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	51
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	92
Item 4.	Controls and Procedures	92
Part II - Other Information
Item 1.	Legal Proceedings	93
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	99
Item 3.	Defaults Upon Senior Securities	99
Item 4.	Submission of Matters to a Vote of Security Holders	99
Item 5.	Other Information	99
Item 6.	Exhibits	99
SIGNATURES		100
EXHIBIT INDEX		101

2

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (LOSS) (Unaudited)

(in millions, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Revenues
Premiums	$	5,109		$	5,154		$	10,228		$	8,493
Net investment income	775			642			1,540			1,261
Fee income	165			171			336			343
Net realized investment gains (losses)	(55		)	55			(55		)	13
Other revenues	43			38			93			77
Total revenues	6,037			6,060			12,142			10,187
Claims and expenses
Claims and claim adjustment expenses	3,101			4,869			6,324			7,150
Amortization of deferred acquisition costs	783			805			1,593			1,331
General and administrative expenses	789			864			1,602			1,331
Interest expense	70			63			141			99
Total claims and expenses	4,743			6,601			9,660			9,911
Income (loss) from continuing operations before income taxes and minority interest	1,294			(541		)	2,482			276
Income tax expense (benefit)	363			(239		)	674			(12		)
Minority interest, net of tax	—			—			—			3
Income (loss) from continuing operations	931			(302		)	1,808			285
Discontinued operations:
Operating income (loss), net of taxes	—			27			(665		)	27
Gain on disposal, net of taxes	138			—			138			—
Income (loss) from discontinued operations	138			27			(527		)	27
Net income (loss)	$	1,069		$	(275	)	$	1,281		$	312
Basic earnings (loss) per common share
Income (loss) from continuing operations	$	1.39		$	(0.46	)	$	2.70		$	0.51
Income (loss) from discontinued operations	0.20			0.04			(0.79		)	0.05
Net income (loss)	$	1.59		$	(0.42	)	$	1.91		$	0.56
Diluted earnings (loss) per common share
Income (loss) from continuing operations	$	1.33		$	(0.46	)	$	2.58		$	0.51
Income (loss) from discontinued operations	0.19			0.04			(0.74		)	0.05
Net income (loss)	$	1.52		$	(0.42	)	$	1.84		$	0.56
Weighted average number of common shares outstanding
Basic	669.5			664.8			668.8			549.7
Diluted	710.3			664.8			709.7			562.9

See notes to consolidated financial statements.

3

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in millions)

	June 30, 2005			December 31, 2004
	(Unaudited)
Assets
Fixed maturities, available for sale at fair value (including $2,318 and $2,603 subject to securities lending and repurchase agreements) (amortized cost $56,219 and $53,017)	$	57,639		$	54,269
Equity securities, at fair value (cost $632 and $687)	693			759
Real estate	783			773
Mortgage loans	190			191
Short-term securities	4,819			4,944
Other investments	2,971			3,432
Total investments	67,095			64,368
Cash	738			262
Investment income accrued	744			671
Premiums receivable	6,296			6,201
Reinsurance recoverables	18,393			19,054
Ceded unearned premiums	1,599			1,565
Deferred acquisition costs	1,567			1,559
Deferred tax asset	1,467			2,198
Contractholder receivables	5,692			5,629
Goodwill	3,491			3,564
Intangible assets	993			1,062
Net assets of discontinued operations	784			2,041
Other assets	2,945			3,072
Total assets	$	111,804		$	111,246
Liabilities
Claims and claim adjustment expense reserves	$	58,114		$	59,070
Unearned premium reserves	11,121			11,310
Contractholder payables	5,692			5,629
Payables for reinsurance premiums	819			896
Debt	5,802			6,313
Other liabilities	7,887			6,827
Total liabilities	89,435			90,045
Shareholders’ equity
Preferred stock:
Stock Ownership Plan – convertible preferred stock (0.5 and 0.6 shares issued and outstanding)	173			193
Guaranteed obligation – Stock Ownership Plan	—			(5		)
Common stock (1,750.0 shares authorized; 675.3 and 670.7 shares issued; 674.6 and 670.3 shares outstanding)	17,586			17,414
Retained earnings	3,732			2,744
Accumulated other changes in equity from nonowner sources	1,024			952
Treasury stock, at cost (0.7 and 0.4 shares)	(28		)	(14		)
Unearned compensation	(118		)	(83		)
Total shareholders’ equity	22,369			21,201
Total liabilities and shareholders’ equity	$	111,804		$	111,246

See notes to consolidated financial statements.

4

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(in millions)

For the six months ended June 30,	2005			2004
Convertible Preferred Stock - Stock Ownership Plan
Balance, beginning of period	$	193		$	—
Preferred stock assumed at merger	—			219
Redemptions during the period	(20		)	(5		)
Balance, end of period	173			214
Guaranteed obligation – Stock Ownership Plan:
Balance, beginning of period	(5		)	—
Obligation assumed at merger	—			(15		)
Principal payment	5			—
Balance, end of period	—			(15		)
Total preferred shareholders’ equity	173			199
Common stock and additional paid-in capital
Balance, beginning of period	17,414			8,715
Shares issued for merger	—			8,605
Adjustment for treasury stock cancelled and retired at merger	—			(91		)
Net shares issued under employee stock-based compensation plans	156			100
Other	16			14
Balance, end of period	17,586			17,343
Retained earnings
Balance, beginning of period	2,744			2,290
Net income	1,281			312
Dividends	(306		)	(231		)
Minority interest and other	13			8
Balance, end of period	3,732			2,379
Accumulated other changes in equity from nonowner sources
Balance, beginning of period	952			1,086
Change in net unrealized gain on investment securities	94			(919		)
Net change in other	(22		)	(40		)
Balance, end of period	1,024			127
Treasury stock (at cost)
Balance, beginning of period	(14		)	(74		)
Treasury stock cancelled and retired at merger	—			91
Net shares issued under employee stock-based compensation plans	(14		)	(23		)
Balance, end of period	(28		)	(6		)
Unearned compensation
Balance, beginning of period	(83		)	(30		)
Unvested equity-based awards assumed in merger	—			(43		)
Net issuance of restricted stock under employee stock-based compensation plans	(69		)	(64		)
Equity-based award amortization	34			25
Balance, end of period	(118		)	(112		)
Total common shareholders’ equity	22,196			19,731
Total shareholders’ equity	$	22,369		$	19,930
Common shares outstanding
Balance, beginning of period	670.3			435.8
Common stock assumed at merger	—			229.3
Net shares issued under employee stock-based compensation plans	4.3			3.4
Balance, end of period	674.6			668.5

See notes to consolidated financial statements.

5

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

(in millions)

For the six months ended June 30,	2005			2004
Cash flows from operating activities
Net income	$	1,281		$	312
Adjustments to reconcile net income to net cash provided by operating activities:
Loss (income) from discontinued operations, net of tax	527			(27		)
Net pretax realized investment (gains) losses	55			(13		)
Depreciation and amortization	386			96
Deferred federal income taxes (benefit) on continuing operations	735			(115		)
Amortization of deferred policy acquisition costs	1,593			1,331
Premiums receivable	(95		)	(102		)
Reinsurance recoverables	661			215
Deferred acquisition costs	(1,601		)	(1,368		)
Claim and claim adjustment expense reserves	(956		)	2,236
Unearned premium reserves	(189		)	147
Trading account activities	6			15
Other	(672		)	(514		)
Net cash provided by operating activities	1,731			2,213
Cash flows from investing activities
Proceeds from maturities of investments:
Fixed maturities	2,421			2,687
Mortgage loans	6			50
Proceeds from sales of investments:
Fixed maturities	2,711			4,013
Equity securities	112			107
Mortgage loans	—			41
Real estate	—			21
Purchases of investments:
Fixed maturities	(8,566		)	(6,656		)
Equity securities	(22		)	(48		)
Mortgage loans	(9		)	(55		)
Real estate	(22		)	(10		)
Short-term securities (purchased) sold, net	125			(1,252		)
Other investments, net	452			409
Securities transactions in course of settlement	463			(1,244		)
Net cash acquired in merger	—			151
Other	(48		)	11
Net cash used by investing activities	(2,377		)	(1,775		)
Cash flows from financing activities
Payment of debt	(481		)	(224		)
Dividends to shareholders	(307		)	(344		)
Issuance of common stock – employee stock options	61			68
Treasury stock acquired – net employee stock-based compensation	(14		)	(20		)
Repurchase of minority interest	—			(76		)
Other	—			(2		)
Net cash used by financing activities	(741		)	(598		)
Effect of exchange rate changes on cash	(4		)	—
Net proceeds from the sale of discontinued operations	1,867			—
Net increase (decrease) in cash	476			(160		)
Cash at beginning of period	262			352
Cash at end of period	$	738		$	192
Supplemental disclosure of cash flow information
Income taxes paid	$	370		$	543
Interest paid	$	173		$	119

See notes to consolidated financial statements.

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.BASIS OF PRESENTATION

The interim consolidated financial statements include the accounts of The St. Paul Travelers Companies, Inc. (together with its subsidiaries, the Company).  On April 1, 2004, Travelers Property Casualty Corp. (TPC) merged with a subsidiary of The St. Paul Companies, Inc. (SPC), as a result of which TPC became a wholly-owned subsidiary of SPC, and SPC changed its name to The St. Paul Travelers Companies, Inc.  For accounting purposes, this transaction was accounted for as a reverse acquisition with TPC treated as the accounting acquirer.  Accordingly, this transaction was accounted for as a purchase business combination, using TPC’s historical financial information and applying fair value estimates to the acquired assets, liabilities and commitments of SPC as of April 1, 2004.  Beginning on April 1, 2004, the results of operations and financial condition of SPC were consolidated with TPC’s results of operations and financial condition.  Accordingly, all financial information presented herein for the three and six months ended June 30, 2005 reflects the consolidated accounts of SPC and TPC.  The financial information presented herein for the six months ended June 30, 2004 reflects only the accounts of TPC for the three months ended March 31, 2004 and the consolidated accounts of SPC and TPC for the three months ended June 30, 2004.

In connection with the merger, each issued and outstanding share of TPC class A and class B common stock (including the associated preferred stock purchase rights) was exchanged for 0.4334 of a share of the Company’s common stock.  Share and per share amounts for the first quarter of 2004 reflect the exchange of TPC’s common stock, par value $0.01 per share, for the Company’s common stock without designated par value.  Cash was paid in lieu of fractional shares of the Company’s common stock. Immediately following consummation of the merger, historical TPC shareholders held approximately 66% of the Company’s common stock.

The accompanying interim consolidated financial statements and related notes should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s 2004 Annual Report on Form 10-K.

These financial statements are prepared in conformity with U.S. generally accepted accounting principles (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.

In March 2005, the Company and Nuveen Investments, Inc. (Nuveen Investments), the Company’s asset management subsidiary, jointly announced that the Company would implement a program to divest its 78% equity interest in Nuveen Investments, which constituted the Company’s Asset Management segment and was acquired as part of the merger on April 1, 2004.  In the second quarter of 2005, the Company began implementing that program.  Beginning with the first quarter of 2005, the Company’s share of Nuveen Investments’ results were classified as discontinued operations on the consolidated statement of income, and results for prior periods were reclassified to be consistent with the 2005 presentation.  As a result of the second quarter 2005 transactions, the Company’s ownership interest in Nuveen Investments decreased from 78% to 31%; accordingly, the Company’s remaining investment in Nuveen Investments is accounted for using the equity method of accounting.  The Company’s ownership in Nuveen Investments’ assets and liabilities as of June 30, 2005 and December 31, 2004 were netted and reported as “Net assets of discontinued operations” on the Company’s consolidated balance sheet.  See note 5 to the consolidated financial statements.

7

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 omitted.  Certain reclassifications have been made to the 2004 financial statements to conform to the 2005 presentation.

2.NEW ACCOUNTING STANDARDS

Adoption of New Accounting Standards

Effect of Contingently Convertible Debt on Diluted Earnings per Share

In October 2004, the Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) issued EITF 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per Share, providing new guidance on the dilutive effect of contingently convertible debt instruments.  EITF 04-8 requires that contingently convertible debt instruments be included in diluted earnings per share, under the if-converted method, regardless of whether the market price trigger has been met.  Under FAS 128, Earnings Per Share, contingently convertible debt instruments which contain market price triggers were excluded from the computation of diluted earnings per share until the market trigger conditions were met.

The Company has $893 million of 4.50% convertible junior subordinated notes outstanding which are subject to the new EITF 04-8 guidance.  These convertible junior subordinated notes mature on April 15, 2032 unless earlier redeemed, repurchased or converted.  The notes are convertible into approximately 17 million shares of the Company’s common stock at the option of the holder after March 27, 2003 and prior to April 15, 2032 if at any time certain contingency conditions are met.  On or after April 18, 2007, the notes may be redeemed at the Company’s option.

EITF 04-8 was effective for fiscal years ended after December 15, 2004 and requires restatement of prior period earnings per share for comparative periods.  Accordingly, effective upon adoption, the Company restated diluted earnings per share for prior periods to include the impact of the convertible junior subordinated notes where the impact of including these securities was dilutive.  See note 9 to the consolidated financial statements for the impact on earnings per share.

Consolidation of Variable Interest Entities

In December 2003, the FASB issued Revised Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46R).  FIN 46R, along with its related interpretations, clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support.  FIN 46R separates entities into two groups: (1) those for which voting interests are used to determine consolidation and (2) those for which variable interests are used to determine consolidation.  FIN 46R clarifies how to identify a variable interest entity (VIE) and how to determine when a business enterprise should include the assets, liabilities, non-controlling interests and results of activities of a VIE in its consolidated financial statements.  A company that absorbs a majority of a VIE’s expected losses, receives a majority of a VIE’s expected residual returns, or both is the primary beneficiary and is required to consolidate the VIE into its financial statements.  FIN 46R also requires disclosure of certain information where the reporting company is the primary beneficiary or holds a significant variable interest in a VIE (but is not the primary beneficiary).

8

FIN 46R was effective for public companies that have interests in VIEs that are considered special-purpose entities for periods ending after December 15, 2003.  Application by public companies for all other types of entities was required for periods ending after March 15, 2004.  The Company adopted FIN 46R effective December 31, 2003.

The Company holds significant interests in hedge fund investments that are accounted for under the equity method of accounting and are included in other investments in the consolidated balance sheet.  Hedge funds are unregistered private investment partnerships, limited liability companies (LLCs), funds or pools that may invest and trade in many different markets, strategies and instruments (including securities, non-securities and derivatives).  As of June 30, 2005, two hedge funds were determined to be significant VIEs.  In the second quarter of 2005, the Company liquidated two of its hedge fund investments that were previously considered significant VIEs.  However, another hedge fund investment that was previously considered to be insignificant became significant in the second quarter of 2005.  The value for all investors combined of the two hedge funds that were determined to be significant VIEs was approximately $216 million at June 30, 2005.  The Company’s share of these funds had a carrying value of approximately $47 million at June 30, 2005.  The Company’s involvement with these funds began in the third quarter of 2003.  The Company does not have any unfunded commitments related to these funds.  The Company’s exposure to loss is limited to the investment carrying amounts reported in the consolidated balance sheet.

There are various purposes for the Company’s involvement in these funds, including but not limited to the following:

•to seek capital appreciation by investing and trading in securities including, without limitation, investments in common stock, bonds, notes, debentures, investment contracts, partnership interests, options and warrants;

•to buy and sell U.S. and non-U.S. assets with primary focus on a diversified pool of structured mortgage and asset-backed securities offering attractive and relative value; and

•to sell securities short primarily to exploit arbitrage opportunities in a broad range of equity and fixed income markets.

Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003

On December 8, 2003, President Bush signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (2003 Medicare Act) into law.  The 2003 Medicare Act introduces a prescription drug benefit under Medicare Part D as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D.  On January 12, 2004, FASB issued Staff Position FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP 106-1), which permits sponsors of retiree health care benefit plans that provide prescription drug benefits to make a one-time election to defer accounting for the effects of the 2003 Medicare Act.  FASB Staff Position FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP 106-2), was issued on May 19, 2004, supersedes FSP 106-1 and provides guidance on the accounting for the effects of the 2003 Medicare Act for sponsors of retiree health care benefit plans that provide prescription drug benefits.  FSP 106-2 also requires certain disclosures regarding the effect of the federal subsidy.

9

The Company has concluded that the prescription drug benefits available under the SPC postretirement benefit plan are actuarially equivalent to Medicare Part D and thus qualify for the federal subsidy under the 2003 Medicare Act.  The Company also expects that the federal subsidy will offset or reduce the Company’s share of the cost of the underlying postretirement prescription drug coverage on which the subsidy is based.  As a result, the estimated effect of the 2003 Medicare Act, a $29 million reduction (with no tax effect) in the accumulated postretirement benefit obligation, was recognized in the purchase accounting remeasurement of the SPC postretirement benefit plan on April 1, 2004.

American Jobs Creation Act – Repatriation of Foreign Earnings

On October 22, 2004, Congress enacted the “American Jobs Creation Act” (AJCA) with a temporary incentive for U.S. corporations to repatriate earnings previously reinvested in foreign subsidiaries to obtain an 85% dividends received deduction.  In December 2004, FASB Staff Position (FSP) No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” was issued.  This FSP provides guidance under Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (FAS 109), on how to report the potential impact of the repatriation provision on the company’s income tax expense and deferred tax liability.  Due to the lack of clarification of certain provisions within the Act and the timing of enactment, the FSP announced an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FAS 109.  The Company has not yet decided whether, and to what extent, it will repatriate foreign earnings.  A decision will be made prior to the close of the year ended December 31, 2005, and although no income tax effects are determinable at this time, the impact on the Company is not expected to be significant.

Accounting for Stock-Based Compensation

Effective January 1, 2003, the Company adopted the fair value method of accounting for its employee stock-based compensation plans as defined in FASB Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (FAS 123), using the prospective recognition transition alternative of FASB Statement of Financial Accounting Standards No. FAS 148, Accounting for Stock Based Compensation—Transition and Disclosure (FAS 148).  FAS 123 indicates that the fair value based method is the preferred method of accounting.  The Company has elected to use the prospective recognition transition alternative of FAS 148.  Under this alternative, only the awards granted, modified, or settled after January 1, 2003 will be accounted for in accordance with the fair value method.  The adoption of FAS 123 did not have a significant impact on the Company’s results of operations, financial condition or liquidity.

10

The effect of applying the fair value based method to all outstanding and unvested stock-based employee awards was as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
(in millions, except per share data)	2005			2004			2005			2004
Net income (loss), as reported	$	1,069		$	(275	)	$	1,281		$	312
Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects (1)	15			14			31			19
Deduct: Stock-based employee compensation expense determined under fair value based method, net of related tax effects (2)	(18		)	(20		)	(37		)	(32		)
Net income (loss), pro forma	$	1,066		$	(281	)	$	1,275		$	299
Earnings (loss) per share (3)
Basic – as reported	$	1.59		$	(0.42	)	$	1.91		$	0.56
Diluted – as reported	1.52			(0.42		)	1.84			0.56
Basic – pro forma	1.59			(0.43		)	1.90			0.54
Diluted – pro forma	1.52			(0.43		)	1.83			0.54

(1)Represents compensation expense on all restricted stock and stock option awards granted after January 1, 2003.  Data for the three months and six months ended June 30, 2004 includes SPC data beginning with the April 1, 2004 merger date when SPC conformed to TPC’s method.

(2)Includes the compensation expense added back in (1) above.

(3)As described in note 2 to the consolidated financial statements, the Company adopted the provisions of EITF 04-8, which affected the method by which EPS is calculated.  The impact of including the Company’s convertible junior subordinated notes in the EPS calculation as prescribed by EITF 04-8 for the three months and six months ended June 30, 2004 was anti-dilutive for both periods.

Accounting Standard Not Yet Adopted

Share-Based Payment

In December 2004, the FASB issued Revised Statement of Financial Standards No. 123, Share-Based Payment (FAS 123R), an amendment to FAS 123 and a replacement of APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance.  FAS 123R requires public entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, and to recognize that cost over the requisite service period.

As of the required effective date, FAS 123R requires entities that use the fair value method of either recognition or disclosure under FAS 123 to apply a modified version of the prospective application.  Under modified prospective application, compensation cost is recognized on or after the required effective date for all unvested awards, based on their grant-date fair value as calculated under FAS 123 for either recognition or pro forma disclosure purposes.  In April 2005, the Securities and Exchange Commission revised the effective date of FAS 123R to the fiscal year beginning after June 15, 2005.

11

FAS 123R also clarifies the accounting for certain grants of equity awards to individuals who are retirement eligible on the date of grant.  FAS 123R states that an employee’s share based award becomes vested at the date that the employee’s right to receive or retain equity shares is no longer contingent on the satisfaction of a market, performance or service condition.  If an award does not include a market, performance or service condition upon grant, the award shall be recognized at fair value on the date of grant.

The Company adopted the fair value method of accounting under FAS 123 on January 1, 2003.  The fair value effect of stock options is derived by the application of an option pricing model.The impact of FAS 123R will be the additional expense relating to unvested awards granted prior to January 1, 2003 and which remain outstanding on the date of adoption of FAS 123R.  The Company does not expect the impact of adopting FAS 123R to have a significant effect on operations, financial condition or liquidity.

3.MERGER

The merger of TPC and SPC was accounted for as a purchase business combination, using TPC’s historical financial information and applying fair value estimates to the acquired assets, liabilities and commitments of SPC as of April 1, 2004.

Determination of Purchase Price

The stock price used in determining the purchase price was based on an average of the closing prices of SPC common stock for the two trading days before through the two trading days after SPC and TPC announced their merger agreement on November 17, 2003.  The purchase price also includes the fair value of the SPC stock options, the fair value adjustment to SPC’s preferred stock and other costs of the transaction.  The purchase price was approximately $8.76 billion and was calculated as follows:

(in millions, except stock price per share)
Number of shares of SPC common stock outstanding as of April 1, 2004	229.3
SPC’s average stock price for the two trading days before through the two trading days after November 17, 2003, the day SPC and TPC announced their merger	$	36.86
Fair value of SPC’s common stock	$	8,452
Fair value of approximately 23 million SPC stock options	186
Excess of fair value over book value of SPC’s convertible preferred stock outstanding, net of the excess of the fair value over the book value of the related guaranteed obligation	100
Transaction costs of TPC	18
Purchase price	$	8,756

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Allocation of the Purchase Price

The purchase price was allocated based on an estimate of the fair value of the assets acquired and liabilities assumed as of April 1, 2004, as follows:

(in millions)
Net tangible assets(1)	$	5,351
Total investments(2)	423
Deferred policy acquisition costs(3)	(100		)
Deferred federal income taxes(4)	81
Goodwill (5) (8)	1,079
Other intangible assets, including the fair value adjustment of claim and claim adjustment expense reserves and reinsurance recoverables of $191 (6) (7) (8)	726
Net assets of discontinued operations(8)	2,143
Other assets(2)	(103		)
Claims and claim adjustment expense reserves(3)	(26		)
Debt(2)	(333		)
Other liabilities(2)	(485		)
Allocated purchase price	$	8,756

(1)Reflects SPC’s shareholders’ equity of $6,439 million, less SPC’s historical goodwill of $950 million and intangible assets of $138 million.

(2)Represents adjustments for fair value.

(3)Represents certain adjustments to conform SPC’s accounting policies to those of TPC’s that affected the purchase price allocation.

(4)Represents a deferred tax liability associated with adjustments to fair value of all assets and liabilities included herein excluding goodwill, as this transaction is not treated as a purchase for tax purposes.

(5)Represents the excess of the purchase price (cost) over the amounts assigned to the assets acquired and liabilities assumed.  None of the goodwill is deductible for tax purposes.

(6)Represents identified finite and indefinite life intangible assets, primarily customer-related insurance intangibles.  See note 4 to the consolidated financial statements.

(7)An adjustment has been applied to SPC’s claims and claim adjustment expense reserves and reinsurance recoverables at the acquisition date to estimate their fair value.  The fair value adjustment of $191 million was based on management’s estimate of nominal claim and claim expense reserves and reinsurance recoverables (after adjusting for conformity with the acquirer’s accounting policy on discounting of workers’ compensation reserves), expected payment patterns, the April 1, 2004 U.S. Treasury spot rate yield curve, a leverage ratio assumption (reserves to statutory surplus), and a cost of capital expressed as a spread over risk-free rates.  The method used calculates a risk adjustment to a risk-free discounted reserve that will, if reserves run off as expected, produce results that yield the assumed cost-of-capital on the capital supporting the loss reserves.  The fair value adjustment is reported as an intangible asset on the consolidated balance sheet, and the amounts measured in accordance with the acquirer’s accounting policies for insurance contracts are reported as part of the claims and claim adjustment expense reserves and reinsurance recoverables.  The intangible asset will be recognized into income over the expected payment pattern.  Because the time value of money and the risk adjustment (cost of capital) components of the intangible asset run off at different rates, the amount recognized in income may be a net benefit in some periods and a net expense in other periods.

(8)The merger-related assets and liabilities of Nuveen Investments that were included in the allocation of the purchase price have been removed from the respective lines of the Company’s consolidated balance sheet and are reported on a net basis under the above caption “Net assets of discontinued operations.”  Included in “Net assets of discontinued operations” are goodwill of $1.70 billion and intangible assets of $651 million related to Nuveen Investments.  See note 5 to the consolidated financial statements.

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Identification and Valuation of Intangible Assets

Intangible assets subject to amortization (excluding the Nuveen Investments’ intangible assets noted in item 8 of the allocation of the purchase price previously presented) are as follows:

(in millions)	Amount assigned as of April 1, 2004		Weighted- average amortization period
Major intangible asset class
Customer-related (a)	$	495	7.8 years
Marketing-related	20		2.0 years
Fair value adjustment on claims and claim adjustment expense reserves and reinsurance recoverables (b)	191		30.0 years
Total	$	706

(a)Primarily includes customer-related insurance intangibles based on rates derived from expected business retention and profitability levels.

(b)See item 7 of the allocation of the purchase price previously presented.

Intangible assets not subject to amortization are as follows:

(in millions)	Amount assigned as of April 1, 2004
Major intangible asset class
Contract-based	$	20

Pro Forma Results

The following unaudited pro forma information presents the combined results of operations of TPC and SPC for the six months ended June 30, 2004 with pro forma purchase accounting adjustments as if the acquisition had been consummated as of the beginning of the period presented.  The pro forma information includes the results of Nuveen Investments, the Company’s asset management subsidiary.  In the second quarter of 2005, the Company began implementing a program to divest the Company’s equity ownership in Nuveen Investments (see note 5 to the consolidated financial statements for further discussion).  This pro forma information is not necessarily indicative of what would have occurred had the acquisition and related transactions been made on the date indicated, or of future results of the Company.

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	Six months ended June 30,
(in millions, except per share data)	2004
Revenue	$	12,564
Net income	$	437
Net income per share – basic	$	0.65
Net income per share – diluted	$	0.64

4.INTANGIBLE ASSETS AND GOODWILL

Intangible Assets

The Company’s intangible assets by major asset class as of June 30, 2005 and December 31, 2004 (excluding Nuveen Investments as described below) were as follows:

At June 30, 2005 (in millions)	Gross Carrying Amount		Accumulated Amortization			Net
Intangibles subject to amortization
Customer-related	$	1,034	$	329		$	705
Marketing-related	20		12			8
Fair value adjustment on claims and claim adjustment expense reserves and reinsurance recoverables	191		(69		)(1)	260
Total intangibles assets subject to amortization	1,245		272			973
Intangible assets not subject to amortization
Contract-based	20		—			20
Total intangible assets not subject to amortization	20		—			20
Total intangible assets	$	1,265	$	272		$	993

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At December 31, 2004 (in millions)	Gross Carrying Amount		Accumulated Amortization			Net
Intangibles subject to amortization
Customer-related	$	1,032	$	252		$	780
Marketing-related	20		7			13
Fair value adjustment on claims and claim adjustment expense reserves and reinsurance recoverables	191		(58		)(1)	249
Total intangibles assets subject to amortization	1,243		201			1,042
Intangible assets not subject to amortization
Contract-based	20		—			20
Total intangible assets not subject to amortization	20		—			20
Total intangible assets	$	1,263	$	201		$	1,062

(1)The time value of money and the risk margin (cost of capital) components of the intangible asset run off at different rates, and, as such, the amount recognized in income may be a net benefit in some periods and a net expense in other periods.  See note 3 to the consolidated financial statements for further information on the fair value adjustment on claims and claim adjustment expense reserves and reinsurance recoverables.

Net intangible assets totaling $638 million related to Nuveen Investments were aggregated with Nuveen Investments’ other assets and reported under the caption “Net assets of discontinued operations” as of December 31, 2004.

The following presents a summary of the Company’s amortization expense for intangible assets by major asset class, for the three months and six months ended June 30, 2005 and 2004:

	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2005			2004			2005			2004
Customer-related	$	37		$	40		$	77		$	52
Marketing-related	2			3			5			3
Fair value adjustment on claims and claim adjustment expense reserves and reinsurance recoverables	(4		)	(36		)	(11		)	(36		)
Total amortization expense	$	35		$	7		$	71		$	19

Intangible asset amortization expense is estimated to be $78 million for the remainder of 2005, $153 million in 2006, $145 million in 2007, $125 million in 2008, $100 million in 2009 and $86 million in 2010.

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Goodwill

The carrying amount of the Company’s goodwill at June 30, 2005 and December 31, 2004 was $3.49 billion and $3.56 billion (excluding Nuveen Investments as described below), respectively, included in the Company’s business segments as follows:

(in millions)	June 30, 2005		December 31, 2004
Commercial	$	1,878	$	1,893
Specialty	885		900
Personal	613		613
Other	115		158
Total	$	3,491	$	3,564

Goodwill totaling $1.72 billion related to Nuveen Investments was aggregated with Nuveen Investments’ other assets and reported under the caption “Net assets of discontinued operations” as of December 31, 2004.  The decrease in goodwill from December 31, 2004 was primarily due to additional purchase accounting adjustments and certain tax adjustments.

5.DISCONTINUED OPERATIONS

In March 2005, the Company and Nuveen Investments jointly announced that the Company would implement a program to divest its 78% equity interest in Nuveen Investments, which constituted the Company’s Asset Management segment and was acquired as part of the merger on April 1, 2004.  In the second quarter of 2005, the Company began implementing that program.

The following transactions occurred in the second quarter of 2005, resulting in net pretax cash proceeds of approximately $1.87 billion:

•The Company sold 39.9 million shares of Nuveen Investments through a public secondary offering (including 0.5 million shares sold through the underwriters’ partial exercise of an over-allotment provision);

•Nuveen Investments repurchased 6.1 million shares of its common stock from the Company; and

•The Company entered into forward sales agreements, settling no later than March 31, 2006, with respect to 11.9 million shares of Nuveen Investments’ common stock.

In conjunction with the first two of these transactions, the Company recorded a pretax gain on disposal of $212 million ($138 million after-tax) in the second quarter of 2005.  Additionally, the Company recorded a net operating loss from discontinued operations of $665 million in the first six months of 2005, primarily consisting of a $710 million tax expense due to the difference between the tax basis and the GAAP carrying value of the Company’s investment in Nuveen Investments, partially offset by the Company’s share of Nuveen Investments’ net income for the six months ended June 30, 2005.  The current and deferred tax liabilities generated by the difference between the Company’s tax basis and the GAAP basis of its investment in Nuveen Investments are reported on the Company’s consolidated balance sheet as part of the Company’s current and deferred tax liabilities and are not included in the “Net assets of discontinued operations” line item of the consolidated balance sheet.

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Upon closing of the sale of the 39.9 million shares in the secondary offering and the repurchase of the 6.1 million shares by Nuveen Investments in the second quarter, the Company’s ownership interest in Nuveen Investments declined from approximately 78% to 31%; accordingly, the Company’s remaining investment in Nuveen Investments was accounted for using the equity method of accounting.  The assets and liabilities related to Nuveen Investments have been removed from the respective lines of the Company’s consolidated balance sheet and are reported under the caption “Net assets of discontinued operations” in the consolidated balance sheet at June 30, 2005 and December 31, 2004.

In addition to the transactions described above, the Company entered into an agreement in April 2005 whereby Nuveen Investments would repurchase, upon approval of the change in control by the shareholders of its funds, approximately 12.1 million additional shares of its common stock from the Company for total consideration of approximately $400 million.  In July 2005, all necessary approvals were received and Nuveen Investments settled its agreement to purchase the 12.1 million additional common shares from the Company for $402 million.  The sale of 11.9 million shares of Nuveen Investments’ common stock related to the forward sales agreements discussed above is scheduled to close on August 10, 2005.  Also in August 2005, the Company’s remaining holdings of approximately 3.5 million shares of Nuveen Investments’ common stock were sold for approximately $132 million.

Total net pretax proceeds to the Company from the second and third quarter transactions described above were approximately $2.40 billion.

6.SEGMENT INFORMATION

The Company is organized into three reportable business segments: Commercial, Specialty and Personal.  These segments reflect how the Company manages its property and casualty insurance products and insurance-related services and represent an aggregation of these products and services based on type of customer, how the business is marketed, and the manner in which the business is underwritten.  The results for Nuveen Investments for the three months and six months ended June 30, 2005 and 2004 are not included in the following segment data.

For periods prior to the April 1, 2004 merger completion date, segments were restated from the historical presentation of TPC to conform to the new segment presentation of the Company, where practicable.  As a result, prior period Bond and Construction results were reclassified from the historical TPC Commercial Lines segment to the Specialty segment.  Beginning in the second quarter of 2005, the National Accounts underwriting group includes the Company’s Discover Re operation.  Discover Re’s results were reclassified to the Commercial segment from the Specialty segment to more closely align the segment reporting structure with the manner in which the Company’s business is managed after recent changes in the Company’s management structure.  Prior period amounts and year-to-date 2005 amounts were restated to reflect the reclassification of Discover Re.

Invested and other assets and net investment income (NII) of historical TPC had been specifically identified by reporting segment prior to the merger.  Beginning in the second quarter of 2004, the Company developed a methodology to allocate NII and invested assets to the identified segments.  This methodology allocates pretax NII based upon an investable funds concept, which takes into account liabilities (net of non-invested assets) and appropriate capital considerations for each segment.  The investment yield for investable funds reflects the duration of the loss reserves’ future cash flows, the interest rate environment at the time the losses were incurred and A+ rated corporate debt instruments.  This duration yield is compared to the average portfolio yield and a new average yield is determined.  It is this average yield that is used in the calculation of NII on investable funds.  Yields are updated annually.  Invested assets are allocated to segments in proportion to the pretax allocation of NII.It is not practicable to apply this methodology to historical businesses and, as such, actual (versus allocated) NII is included in revenues and operating income of the restated segments for periods prior to the merger.  The Company believes that the differences are not significant to a comparison with the new segment presentation.

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The specific business segment attributes are as follows:

Commercial

The Commercial segment offers a broad array of property and casualty insurance and insurance-related services to its clients. Commercial is organized into three marketing and underwriting groups, each of which focuses on a particular client base and which collectively comprise Commercial’s core operations. The marketing and underwriting groups include the following:

•Commercial Accounts serves primarily mid-sized businesses for casualty products and large and mid-sized businesses for property products.

•Select Accounts serves small businesses and offers property, liability, commercial auto and workers’ compensation insurance.

•National Accounts is comprised of three distinct business units.  The largest provides casualty products and services to large companies, with particular emphasis on workers’ compensation, general liability and automobile liability.  National Accounts also includes the commercial residual market business, which primarily offers workers’ compensation products and services to the involuntary market.  Beginning in the second quarter of 2005, National Accounts also includes the Company’s Discover Re operation, which provides property and casualty insurance products to insureds who utilize programs such as self-insurance, collateralized deductibles and captives.

Commercial also includes the Special Liability Group (which manages the Company’s asbestos and environmental liabilities); the reinsurance, health care, and certain international runoff operations; and policies written by the Company’s Gulf operation (Gulf), which was placed into runoff during the second quarter of 2004. These operations are collectively referred to as Commercial Other.

Specialty

The Specialty segment was created upon the merger of TPC and SPC. It combined SPC’s specialty operations with TPC’s Bond and Construction operations, which were included in TPC’s Commercial segment prior to the merger. The Specialty segment provides a full range of standard and specialized insurance coverages and services through dedicated underwriting, claims handling and risk management groups. The segment comprises two primary groups: Domestic Specialty and International Specialty.

•Domestic Specialty includes several marketing and underwriting groups, each of which possesses customer expertise and offers products and services to address its respective customers’ specific needs. These groups include Financial and Professional Services, Bond, Construction, Technology, Ocean Marine, Oil and Gas, Public Sector, Underwriting Facilities, Umbrella/Excess & Surplus Group and Personal Catastrophe Risk.   As discussed in more detail above, the Company’s Discover Re operation was reclassified to the Commercial segment effective in the second quarter of 2005.  In August 2005, the Company announced that it had reached a definitive agreement to sell its Personal Catastrophe Risk operation.

•International Specialty includes coverages marketed and underwritten to several specialty customer groups within the United Kingdom, Canada and the Republic of Ireland and the Company’s participation in Lloyd’s.

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Personal

Personal writes virtually all types of property and casualty insurance covering personal risks. The primary coverages in Personal are automobile and homeowners insurance sold to individuals. These products are distributed through independent agents, sponsoring organizations such as employee and affinity groups, and joint marketing arrangements with other insurers.

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

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

The following tables summarize the components of the Company’s revenues from continuing operations, operating income (loss) from continuing operations and total assets by reportable business segments.

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(at and for the three months ended June 30, in millions)	Commercial		Specialty			Personal		Total Reportable Segments
2005 Revenues
Premiums	$	2,164	$	1,449		$	1,496	$	5,109
Net investment income	498		173			116		787
Fee income	156		9			—		165
Other revenues	13		8			23		44
Total operating revenues(1)	$	2,831	$	1,639		$	1,635	$	6,105
Operating income (1)	$	530	$	221		$	266	$	1,017
Assets	$	74,961	$	23,070		$	11,348	$	109,379
2004 Revenues
Premiums	$	2,411	$	1,375		$	1,368	$	5,154
Net investment income	419		129			93		641
Fee income	164		7			—		171
Other revenues	12		3			21		36
Total operating revenues(1)	$	3,006	$	1,514		$	1,482	$	6,002
Operating income (loss)(1)	$	316	$	(790	)	$	197	$	(277	)
Assets	$	68,286	$	22,171		$	10,848	$	101,305

(at and for the six months ended June 30, in millions)	Commercial		Specialty			Personal		Total Reportable Segments
2005 Revenues
Premiums	$	4,368	$	2,905		$	2,955	$	10,228
Net investment income	978		343			225		1,546
Fee income	319		17			—		336
Other revenues	28		20			47		95
Total operating revenues(1)	$	5,693	$	3,285		$	3,227	$	12,205
Operating income (1)	$	978	$	394		$	551	$	1,923
Assets	$	74,961	$	23,070		$	11,348	$	109,379
2004 Revenues
Premiums	$	4,142	$	1,686		$	2,665	$	8,493
Net investment income	842		180			238		1,260
Fee income	332		11			—		343
Other revenues	26		5			44		75
Total operating revenues(1)	$	5,342	$	1,882		$	2,947	$	10,171
Operating income (loss)(1)	$	746	$	(818	)	$	434	$	362
Assets	$	68,286	$	22,171		$	10,848	$	101,305

(1)Operating revenues exclude net realized investment gains (losses) and revenues from discontinued operations, and operating income equals net income excluding the after-tax impact of net realized investment gains (losses) and the after-tax impact of discontinued operations.

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	Three Months Ended June 30,					Six Months Ended June 30,
(in millions)	2005			2004		2005			2004
Revenue reconciliation
Earned premiums
Commercial:
Commercial multi-peril	$	690		$	618	$	1,360		$	1,173
Workers’ compensation	411			400		830			704
Commercial automobile	437			476		874			809
Property	358			488		730			773
General liability	253			380		540			605
Other	15			49		34			78
Total Commercial	2,164			2,411		4,368			4,142
Specialty:
General liability	503			463		948			544
Fidelity and surety	248			191		556			325
Workers’ compensation	116			132		236			159
Commercial automobile	107			106		226			132
Property	123			138		217			142
Commercial multi-peril	56			38		121			77
International	296			307		601			307
Total Specialty	1,449			1,375		2,905			1,686
Personal:
Automobile	851			825		1,691			1,607
Homeowners and other	645			543		1,264			1,058
Total Personal	1,496			1,368		2,955			2,665
Total earned premiums	5,109			5,154		10,228			8,493
Net investment income	787			641		1,546			1,260
Fee income	165			171		336			343
Other revenues	44			36		95			75
Total operating revenues for reportable segments	6,105			6,002		12,205			10,171
Interest expense and other	(13		)	3		(8		)	3
Net realized investment gains (losses)	(55		)	55		(55		)	13
Total revenues from continuing operations	$	6,037		$	6,060	$	12,142		$	10,187

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	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2005			2004			2005			2004
Income reconciliation, net of tax and minority interest
Total operating income (loss) for reportable segments	$	1,017		$	(277	)	$	1,923		$	362
Interest expense and other	(51		)	(60		)	(98		)	(85		)
Total operating income (loss) from continuing operations	966			(337		)	1,825			277
Net realized investment gains (losses)	(35		)	35			(17		)	8
Total income (loss) from continuing operations	931			(302		)	1,808			285
Discontinued operations	138			27			(527		)	27
Total net income (loss)	$	1,069		$	(275	)	$	1,281		$	312
Asset reconciliation
Total assets for reportable segments	$	109,379		$	101,305		$	109,379		$	101,305
Net assets of discontinued operations	784			1,962			784			1,962
Other assets(1)	1,641			2,573			1,641			2,573
Total consolidated assets	$	111,804		$	105,840		$	111,804		$	105,840

(1)The primary components of other assets were invested assets at June 30, 2005, and deferred taxes and invested assets at June 30, 2004.

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7.INVESTMENTS

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

	Amortized		Gross Unrealized				Fair
(at June 30, 2005, in millions)	Cost		Gains		Losses		Value
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	$	7,468	$	127	$	33	$	7,562
U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities	3,527		44		14		3,557
Obligations of states, municipalities and political subdivisions	28,871		997		29		29,839
Debt securities issued by foreign governments	1,664		21		1		1,684
All other corporate bonds	14,551		389		101		14,839
Redeemable preferred stock	138		20		—		158
Total	$	56,219	$	1,598	$	178	$	57,639

(at December 31, 2004, in millions)
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	$	8,543	$	169	$	34	$	8,678
U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities	3,015		40		22		3,033
Obligations of states, municipalities and political subdivisions	26,034		857		50		26,841
Debt securities issued by foreign governments	1,846		19		4		1,861
All other corporate bonds	13,383		361		99		13,645
Redeemable preferred stock	196		16		1		211
Total	$	53,017	$	1,462	$	210	$	54,269

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

			Gross Unrealized				Fair
(at June 30, 2005, in millions)	Cost		Gains		Losses		Value
Common stock	$	148	$	23	$	2	$	169
Non-redeemable preferred stock	484		42		2		524
Total	$	632	$	65	$	4	$	693

(at December 31, 2004, in millions)
Common stock	$	148	$	31	$	2	$	177
Non-redeemable preferred stock	539		46		3		582
Total	$	687	$	77	$	5	$	759

The cost and fair value of investments in venture capital, which were acquired in the merger and are reported as part of other investments in the Company’s consolidated balance sheet, were as follows:

			Gross Unrealized
(at June 30, 2005, in millions)	Cost		Gains		Losses		Fair Value
Venture capital	$	445	$	45	$	29	$	461

(at December 31, 2004, in millions)
Venture capital	$	480	$	29	$	18	$	491

The Company’s investment portfolio includes the fixed maturities, equity securities, and other investments acquired in the merger at their fair values as of the merger date of April 1, 2004.  The fair value at acquisition became the new cost basis for these investments.

Impairments

Fixed Maturities and Equity Securities

An investment in a fixed maturity or equity security which is available for sale is impaired if its fair value falls below its book value and the decline is considered to be other-than-temporary.  Factors considered in determining whether a decline is other-than-temporary include the length of time and the extent to which fair value has been below cost, the financial condition and near-term prospects of the issuer, and the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery.  Additionally, for certain securitized financial assets with contractual cash flows (including asset-backed securities), EITF 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets, requires the Company to periodically update its best estimate of cash flows over the life of the security.  If management determines that the fair value of its securitized financial asset is less than its carrying amount and there has been a decrease in the present value of the estimated cash flows since the last revised estimate, considering both timing and amount, then an other-than-temporary impairment is recognized.

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A fixed maturity 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 securities are impaired when it becomes apparent that the Company will not recover its cost over the expected holding period.  Further, for securities expected to be sold, an other-than-temporary impairment charge is recognized if the Company does not expect the fair value of a security to recover prior to the expected date of sale.

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 portfolio manager(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;

•consideration 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; and

•determination of the status of each analyzed investment as other than temporary or not, with documentation of the rationale for the decision.

Real Estate Investments

The carrying values of real estate properties are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. The review for impairment includes an estimate of the undiscounted cash flows expected to result from the use and eventual disposition of the real estate property. An impairment loss is recognized if the expected future undiscounted cash flows exceed the carrying value of the real estate property.

Venture Capital Investments

Other investments include venture capital investments, which are generally non-publicly traded instruments, consisting of early-stage companies and, historically, having a holding period of four to seven years.  These investments have primarily been made in the health care, software and computer services, and networking and information technologies infrastructures industries.  The Company typically is involved with venture capital companies early in their formation, as they are developing and determining the viability of, and market demand for, their product.  Generally, the Company does not expect these venture capital companies to record revenues in the early stages of their development, which can often take three to four years, and does not generally expect them to become profitable for an even longer period of time.  With respect to the Company’s valuation of such non-publicly traded venture capital investments on a quarterly basis, portfolio managers as well as an internal valuation committee review and consider a variety of factors in determining the potential for loss impairment.  Factors considered include the following:

•the issuer’s most recent financing events;

•an analysis of whether fundamental deterioration has occurred;

•whether or not the issuer’s progress has been substantially less than expected;

•whether or not the valuations have declined significantly in the entity’s market sector;

•whether or not the internal valuation committee believes it is probable that the issuer will need financing within six months at a lower price than our carrying value; and

•whether or not the Company has the ability and intent to hold the security for a period of time sufficient to allow for recovery, enabling it to receive value equal to or greater than its cost.

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The quarterly valuation procedures described above are in addition to the portfolio managers’ ongoing responsibility to frequently monitor developments affecting those invested assets, paying particular attention to events that might give rise to impairment write-downs.

Unrealized Investment Losses

The following tables summarize, for all investment securities in an unrealized loss position at June 30, 2005 and December 31, 2004, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position.

	Less than 12 months				12 months or longer				Total
(at June 30, 2005, in millions)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Fixed maturities
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	$	1,247	$	6	$	1,751	$	28	$	2,998	$	34
U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities	1,807		6		614		8		2,421		14
Obligations of states, municipalities and political subdivisions	1,130		4		2,386		24		3,516		28
Debt securities issued by foreign governments	125		—		321		1		446		1
All other corporate bonds	2,285		27		4,089		73		6,374		100
Redeemable preferred stock	14		1		—		—		14		1
Total fixed maturities	6,608		44		9,161		134		15,769		178
Equity securities
Common stock	5		—		16		2		21		2
Nonredeemable preferred stock	91		1		4		1		95		2
Total equity securities	96		1		20		3		116		4
Venture capital	44		18		14		11		58		29
Total	$	6,748	$	63	$	9,195	$	148	$	15,943	$	211

	Less than 12 months				12 months or longer				Total
(at December 31, 2004, in millions)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Fixed maturities
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	$	3,256	$	33	$	30	$	1	$	3,286	$	34
U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities	1,743		22		4		—		1,747		22
Obligations of states, municipalities and political subdivisions	5,708		49		64		1		5,772		50
Debt securities issued by foreign governments	726		4		6		—		732		4
All other corporate bonds	6,190		95		247		4		6,437		99
Redeemable preferred stock	8		—		12		1		20		1
Total fixed maturities	17,631		203		363		7		17,994		210
Equity securities
Common stock	25		1		1		1		26		2
Nonredeemable preferred stock	89		3		17		—		106		3
Total equity securities	114		4		18		1		132		5
Venture capital	53		18		—		—		53		18
Total	$	17,798	$	225	$	381	$	8	$	18,179	$	233

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Impairment charges included in net realized investment gains or losses for the three months and six months ended June 30, 2005 and 2004 were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2005		2004		2005		2004
Fixed maturities	$	2	$	8	$	5	$	14
Equity securities	—		—		—		3
Venture capital	40		14		46		14
Real estate and other	—		1		—		3
Total	$	42	$	23	$	51	$	34

Derivative Financial Instruments

The Company engages in U.S. Treasury note futures transactions to modify the duration of the investment portfolio as part of its 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.  The notional value of the open U.S. Treasury futures contracts was $1.46 billion at June 30, 2005.  These derivative instruments are not designated and do not qualify as hedges under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, and as such the daily mark-to-market settlement is reflected in net realized investment gains or losses.

Securities Lending Activities

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.  Effective April 1, 2004, the Company entered into a new securities lending agreement.  Borrowers of these securities provide collateral equal to at least 102% of the market value of the loaned securities plus accrued interest.  This collateral is held by a third party custodian, 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.  Therefore, the Company does not recognize the receipt of the collateral held by the third party custodian or the obligation to return the collateral.  The loaned securities remain a recorded asset of the Company.

Prior to April 1, 2004, the Company engaged in securities lending activities where it received cash and marketable securities as collateral.  In those cases where cash collateral was received, the Company reinvested the collateral in a short-term investment pool, the loaned securities remained a recorded asset of the Company, and a liability was recorded to recognize the Company’s obligation to return the collateral at the end of the loan.  Where marketable securities had been received as collateral, the collateral was held by a third party custodian, and the Company had the right to access the collateral only in the event that the institution borrowing the Company’s securities was in default under the lending agreement.  In those cases where marketable securities were received as collateral, the Company did not recognize the receipt of the collateral held by the third party custodian or the obligation to return the collateral.  The loaned securities remained a recorded asset of the Company.

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8.CHANGES IN EQUITY FROM NONOWNER SOURCES

The Company’s total changes in equity from nonowner sources are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
(in millions, after-tax)	2005			2004			2005			2004
Net income (loss)	$	1,069		$	(275	)	$	1,281		$	312
Change in net unrealized gain on investment securities	684			(1,082		)	94			(919		)
Other changes	(18		)	(40		)	(22		)	(40		)
Total changes in equity from nonowner sources	$	1,735		$	(1,397	)	$	1,353		$	(647	)

9.EARNINGS PER SHARE (EPS)

Earnings per share (EPS) has been computed in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share (FAS 128).  Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period.  The computation of diluted EPS reflects the effect of potentially dilutive securities.

The Company implemented the provisions of FASB Emerging Issues Task Force (EITF) 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per Share, which provided new guidance on the dilutive effect of contingently convertible debt instruments, as described in note 2 to the consolidated financial statements.  There was no impact on the EPS calculation for the three months and six months ended June 30, 2004, as the inclusion of the Company’s contingently convertible notes would have been anti-dilutive for both periods.

Loss from continuing operations per diluted share for the three months ended June 30, 2004 excluded the weighted average effects of: 3.2 million options to purchase common shares; 0.7 million shares of restricted stock; equity units convertible into 15.2 million common shares; outstanding convertible preferred stock convertible into 5.3 million common shares; zero coupon convertible notes convertible into 2.3 million shares of common stock; and the convertible junior subordinated notes referred to above convertible into 16.7 million common shares.  Income from continuing operations per diluted share for the six months ended June 30, 2004 excluded the weighted average impact of zero coupon convertible notes convertible into 1.2 million common shares, and the convertible junior subordinated notes referred to above convertible into 16.7 million common shares.  The impact of the potential shares of common stock and their effect on income were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive for the respective periods.

The reconciliation of the income and share data used in the basic and diluted earnings per share computations was as follows:

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	Three Months Ended June 30,						Six Months Ended June 30,
(in millions, except per share amounts)	2005			2004			2005			2004
Basic
Income (loss) from continuing operations, as reported	$	931		$	(302	)	$	1,808		$	285
Preferred stock dividends, net of taxes	(2		)	(2		)	(3		)	(2		)
Income (loss) from continuing operations available to common shareholders – basic	$	929		$	(304	)	$	1,805		$	283
Diluted
Income (loss) from continuing operations available to common shareholders – basic	$	929		$	(304	)	$	1,805		$	283
Effect of dilutive securities:
Equity unit stock purchase contracts	3			—			7			4
Convertible preferred stock	2			—			3			1
Zero coupon convertible notes	1			—			2			—
Convertible junior subordinated notes	7			—			13			—
Income (loss) from continuing operations available to common shareholders – diluted	$	942		$	(304	)	$	1,830		$	288
Common Shares
Basic
Weighted average shares outstanding	669.5			664.8			668.8			549.7
Diluted
Weighted average shares outstanding	669.5			664.8			668.8			549.7
Weighted average effects of dilutive securities:
Stock options and other incentive plans	2.2			—			2.2			3.0
Equity unit stock purchase contracts	15.2			—			15.2			7.6
Convertible preferred stock	4.3			—			4.4			2.6
Zero coupon convertible notes	2.4			—			2.4			—
Convertible junior subordinated notes	16.7			—			16.7			—
Total	710.3			664.8			709.7			562.9
Income (Loss) from Continuing Operations Per Common Share
Basic	$	1.39		$	(0.46	)	$	2.70		$	0.51
Diluted	$	1.33		$	(0.46	)	$	2.58		$	0.51

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10.CAPITAL AND DEBT

Debt outstanding was as follows:

(in millions)		June 30, 2005			December 31, 2004
Short-term:
Commercial paper		$	398		$	499
7.875%	Senior notes due April 15, 2005	—			238
7.125%	Senior notes due June 1, 2005	—			79
Medium-term notes with various maturities in 2005		35			99
Total short-term debt		433			915
Long-term:
Medium-term notes with various maturities from 2006 to 2010		298			298
6.75%	Senior notes due November 15, 2006	150			150
5.75%	Senior notes due March 15, 2007	500			500
5.25%*	Senior notes due August 16, 2007	—			442
5.01%*	Senior notes due August 16, 2007	442			—
3.75%	Senior notes due March 15, 2008	400			400
4.50%	Zero coupon convertible notes due 2009	120			117
8.125%	Senior notes due April 15, 2010	250			250
7.81%	Private placement notes due on various dates through 2011	20			20
5.00%	Senior notes due March 15, 2013	500			500
7.75%	Senior notes due April 15, 2026	200			200
7.625%	Subordinated debentures due December 15, 2027	125			125
8.47%	Subordinated debentures due January 10, 2027	81			81
4.50%	Convertible junior subordinated notes due April 15, 2032	893			893
6.375%	Senior notes due March 15, 2033	500			500
8.50%	Subordinated debentures due December 15, 2045	56			56
8.312%	Subordinated debentures due July 1, 2046	73			73
7.60%	Subordinated debentures due October 15, 2050	593			593
Total long-term debt		5,201			5,198
Total debt principal		5,634			6,113
Unamortized fair value adjustment		203			239
Unamortized debt issuance costs		(35		)	(39		)
Total debt		$	5,802		$	6,313

*These senior notes bore an interest rate of 5.25% at December 31, 2004.  The interest rate was reset to 5.01% in May 2005 pursuant to the remarketing of these notes as described below.

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In July 2002, concurrent with the issuance of 17.8 million of SPC common shares in a public offering, SPC issued 8.9 million equity units, each having a stated amount of $50, for gross consideration of $442 million.  Each equity unit initially consisted of a forward purchase contract for the Company’s common stock (maturing in August 2005) and an unsecured $50 senior note of the Company (maturing in 2007).  Total annual distributions on the equity units initially were at the rate of 9.00%, consisting of interest on the note at a rate of 5.25% and fee payments under the forward contract of 3.75%.  The forward contract requires the investor to purchase, for $50, a variable number of shares of the Company’s common stock on the settlement date of August 16, 2005.  The number of shares to be purchased will be determined based on a formula that considers the average closing price of the Company’s stock on each of 20 consecutive trading days ending on the third trading day immediately preceding the settlement date, in relation to the $24.20 per share price of common stock at the time of the offering.  Had the settlement date been June 30, 2005, the Company would have issued approximately 15 million common shares based on the average closing price of the Company’s common stock immediately prior to that date.  Holders of the equity units had the opportunity to participate in a required remarketing of the senior note component.  The initial remarketing date was May 11, 2005.  On that date, the notes were successfully remarketed, and the interest rate on the notes was reset to 5.01%, from 5.25%, effective May 16, 2005.  The remarketed notes mature on August 16, 2007.

The Company’s consolidated balance sheet includes the debt instruments acquired in the merger, which were recorded at fair value as of the acquisition date.  The resulting fair value adjustment is being amortized over the remaining life of the respective debt instruments using the effective-interest method.  The amortization of the fair value adjustment reduced interest expense by $15 million and $34 million for the three months and six months ended June 30, 2005, respectively, and by $19 million for the three months ended June 30, 2004.

The following table presents the unamortized fair value adjustment and the related effective interest rate on the SPC debt instruments acquired in the merger.

				Unamortized Fair Value
				Purchase Adjustment at				Effective
				June 30,		December 31,		Interest Rate
(in millions)	Issue Rate		Maturity Date	2005		2004		to Maturity
Senior notes	7.875	%	Apr. 2005	$	—	$	5	1.645	%
	7.125	%	Jun. 2005	—		2		1.881	%
	5.750	%	Mar. 2007	26		33		2.625	%
	5.250	%	Aug. 2007	—		11		1.389	%
	8.125	%	Apr. 2010	42		45		4.257	%
Medium-term notes	6.4%-7.4	%	Through 2010	26		34		3.310	%
Subordinated debentures	7.625	%	Dec. 2027	22		22		6.147	%
	8.470	%	Jan. 2027	7		7		7.660	%
	8.500	%	Dec. 2045	16		16		6.362	%
	8.312	%	Jul. 2046	20		20		6.362	%
	7.600	%	Oct. 2050	42		42		7.057	%
Zero coupon convertible notes	4.500	%(1)	Mar. 2009	2		2		4.175	%
Total				$	203	$	239

(1)The zero coupon convertible notes mature in 2009, but are redeemable at the option of the holder for an amount equal to the original issue price plus accreted original discount.

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The Company maintains an $800 million commercial paper program with back-up liquidity consisting of a bank credit agreement.  In June 2005, the Company entered into a $1.0 billion, five-year revolving credit agreement with a syndicate of financial institutions.  The new agreement replaced and consolidated the Company’s three prior bank credit agreements that had collectively provided the Company access to $1.0 billion of bank credit lines.  Pursuant to covenants in the new agreement, the Company must maintain an excess of consolidated net worth over goodwill and other intangible assets of not less than $10 billion at all times.  The Company must also maintain a ratio of total consolidated debt to the sum of total consolidated debt plus consolidated net worth of not greater than 0.40.  In addition, the credit agreement contains other customary restrictive covenants as well as certain customary events of default, including with respect to a change in control.  At June 30, 2005, the Company was in compliance with these covenants and all other covenants related to its respective debt instruments outstanding.  Pursuant to the terms of the revolving credit agreement, the Company has an option to increase the credit available under the facility, no more than once a year, up to a maximum facility amount of $1.5 billion, subject to the satisfaction of a ratings requirement and certain other conditions.  There was no amount outstanding under the credit agreement as of June 30, 2005.

On April 1, 2004, The St. Paul Travelers Companies, Inc. fully and unconditionally guaranteed the payment of all principal, premiums, if any, and interest on certain debt obligations of its subsidiaries TPC and Travelers Insurance Group Holdings, Inc. (TIGHI).  The guarantees pertain to the $150 million 6.75% Notes due 2006, the $400 million 3.75% Notes due 2008, the $500 million 5.00% Notes due 2013, the $200 million 7.75% Notes due 2026, the $893 million 4.50% Convertible Notes due 2032 and the $500 million 6.375% Notes due 2033.

The Company’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 $2.61 billion is available in 2005 for such dividends without prior approval of the Connecticut Insurance Department for Connecticut-domiciled subsidiaries and the Minnesota Department of Commerce for Minnesota-domiciled subsidiaries.  The Company received $757 million of dividends from its insurance subsidiaries during the first six months of 2005.

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11.PENSION AND POSTRETIREMENT BENEFIT PLANS

Components of Net Periodic Benefit Cost

The following tables summarize the components of net pension and postretirement benefit expense recognized in continuing operations in the consolidated statement of income for the Company’s plans:

Pension Plans

	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2005			2004			2005			2004
Service cost	$	15		$	14		$	31		$	21
Interest cost on benefit obligation	26			26			52			37
Expected return on plan assets	(35		)	(35		)	(70		)	(47		)
Amortization of unrecognized:
Prior service cost	(1		)	(1		)	(3		)	(3		)
Net actuarial loss	—			2			—			4
Net benefit expense	$	5		$	6		$	10		$	12

Postretirement Benefit Plans

	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2005			2004			2005			2004
Service cost	$	1		$	1		$	2		$	1
Interest cost on benefit obligation	5			5			9			5
Expected return on plan assets	(1		)	(1		)	(1		)	(1		)
Amortization of unrecognized:
Prior service cost	—			—			—			—
Net actuarial loss	—			—			—			—
Net benefit expense	$	5		$	5		$	10		$	5

12.CONTINGENCIES, COMMITMENTS AND GUARANTEES

Contingencies

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

Asbestos and Environmental-Related Proceedings

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

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TPC is involved in three significant proceedings relating to ACandS, Inc. (ACandS), formerly a national distributor and installer of products containing asbestos, including ACandS’ bankruptcy proceedings.  The proceedings involve disputes as to whether and to what extent any of ACandS’ potential liabilities for bodily injury asbestos claims are covered by insurance policies issued by TPC.  These proceedings have resulted in decisions favorable to TPC, although those decisions are subject to appellate review.  The status of the various proceedings is described below.

ACandS filed for bankruptcy in September 2002 (In re: ACandS, Inc., pending in the U.S. Bankruptcy Court for the District of Delaware).  In its proposed plan of reorganization, ACandS sought to establish a trust to pay asbestos bodily injury claims against it and sought to assign to the trust its rights under the insurance policies issued by TPC.  The proposed plan and disclosure statement filed by ACandS claimed that ACandS had settled the vast majority of asbestos-related bodily injury claims currently pending against it for approximately $2.80 billion.  ACandS asserts that, based on a prior agreement between TPC and ACandS and ACandS’ interpretation of the July 31, 2003 arbitration panel ruling described below, TPC is liable for 45% of the $2.80 billion.  On January 26, 2004, the bankruptcy court issued a decision rejecting confirmation of ACandS’ proposed plan of reorganization.  The bankruptcy court found, consistent with TPC’s objections to ACandS’ proposed plan, that the proposed plan was not fundamentally fair, was not proposed in good faith and did not comply with Section 524(g) of the Bankruptcy Code.  ACandS has filed a notice of appeal of the bankruptcy court’s decision and has filed objections to the bankruptcy court’s findings of fact and conclusions of law in the United States District Court.  TPC has moved to dismiss the appeal and objections and has also filed an opposition to ACandS’ objections.

An arbitration was commenced in January 2001 to determine whether and to what extent ACandS’ financial obligations for bodily injury asbestos claims are subject to insurance policy aggregate limits.  On July 31, 2003, the arbitration panel ruled in favor of TPC that asbestos bodily injury claims against ACandS are subject to the aggregate limits of the policies issued to ACandS, which have been exhausted.  In October 2003, ACandS commenced a lawsuit seeking to vacate the arbitration award as beyond the panel’s scope of authority (ACandS, Inc. v. Travelers Casualty and Surety Co., U.S.D.Ct., E.D. Pa.).  On September 16, 2004, the Court entered an order denying ACandS’ motion to vacate the arbitration award.  On October 6, 2004, ACandS filed a notice of appeal.  Briefing of the appeal is complete.  Oral argument was presented on July 11, 2005.

In the other proceeding, a related case pending before the same court and commenced in September 2000 (ACandS v. Travelers Casualty and Surety Co., U.S.D. Ct., E.D. Pa.), ACandS sought a declaration of the extent to which the asbestos bodily injury claims against ACandS are subject to occurrence limits under insurance policies issued by TPC.  TPC filed a motion to dismiss this action based upon the July 31, 2003 arbitration decision described above.  The Court found the dispute was moot as a result of the arbitration panel’s decision.  The Court, therefore, based on the arbitration panel’s decision, dismissed the case. On October 6, 2004, ACandS filed a notice of appeal.  This appeal has been consolidated with the appeal referenced in the paragraph above.  Briefing of the appeal is complete, and oral argument was presented on July 11, 2005.

While the Company cannot predict the outcome of the appeals of the various ACandS rulings or other legal actions, based on these rulings, the Company would not have any significant obligations remaining under any policies issued by TPC to ACandS.

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In October 2001 and April 2002, two purported class action suits (Wise v. Travelers and Meninger v. Travelers), were filed against TPC and other insurers (not including SPC) in state court in West Virginia.  These cases were subsequently consolidated into a single proceeding in Circuit Court of Kanawha County, West Virginia.  Plaintiffs allege that the insurer defendants engaged in unfair trade practices by inappropriately handling and settling asbestos claims.  The plaintiffs seek to reopen large numbers of settled asbestos claims and to impose liability for damages, including punitive damages, directly on insurers.  Lawsuits similar to Wise were filed in Massachusetts and Hawaii (these suits are collectively referred to as the “Statutory and Hawaii Actions”).  Also, in November 2001, plaintiffs in consolidated asbestos actions pending before a mass tort panel of judges in West Virginia state court moved to amend their complaint to name TPC as a defendant, alleging that TPC 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 in Ohio state court against TPC and SPC, in Texas state court against TPC and SPC, and in Louisiana state court against TPC (the claims asserted in these suits, together with the West Virginia suit, are collectively referred to as the “Common Law Claims”).

All of the actions against TPC described in the preceding paragraph, other than the Hawaii Actions, had been subject to a temporary restraining order entered by the federal bankruptcy court in New York that had previously presided over and approved the reorganization in bankruptcy of TPC’s former policyholder Johns-Manville Corporation and affiliated entities.  In August 2002, the bankruptcy court held a hearing on TPC’s motion for a preliminary injunction prohibiting further prosecution of the lawsuits pursuant to the reorganization plan and related orders.  At the conclusion of this hearing, the court ordered the parties to mediation, appointed a mediator and continued the temporary restraining order.  During 2003, the same bankruptcy court extended the existing injunction to apply to an additional set of cases filed in various state courts in Texas and Ohio as well as to the attorneys who are prosecuting these cases.  The order also enjoined these attorneys and their respective law firms from commencing any further lawsuits against TPC based upon these allegations without the prior approval of the court.  Notwithstanding the injunction, additional Common Law Claims were filed and served on TPC.

On November 19, 2003, the parties advised the bankruptcy court that a settlement of the Statutory and Hawaii Actions had been reached.  This settlement includes a lump sum payment of up to $412 million by TPC, subject to a number of significant contingencies.  After continued meetings with the mediator, the parties advised the bankruptcy court on May 25, 2004 that a settlement resolving substantially all pending and similar future Common Law Claims against TPC had also been reached.  This settlement requires a payment of up to $90 million by TPC, subject to a number of significant contingencies.  Each of these settlements is contingent upon, among other things, an order of the bankruptcy court clarifying that all of these claims, and similar future asbestos-related claims against TPC, are barred by prior orders entered by the bankruptcy court in connection with the original Johns-Manville bankruptcy proceedings.

On August 17, 2004, the bankruptcy court entered an order approving the settlements and clarifying its prior orders that all of the pending Statutory and Hawaii Actions and substantially all Common Law Claims pending against TPC are barred.  The order also applies to similar direct action claims that may be filed in the future.

Four appeals were taken from the August 17, 2004 ruling.  These appeals have been consolidated and are currently pending.  The parties have completed briefing all of the issues and await a date for oral argument.  The Company has no obligation to pay any of the settlement amounts unless and until the orders and relief become final and are not subject to any further appellate review.  It is not possible to predict how appellate courts will rule on the pending appeals.

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SPC, which is not covered by the bankruptcy court rulings or the settlements described above, has numerous defenses in all of the direct action cases asserting Common Law Claims that are pending against it.  SPC’s defenses include the fact that these novel theories have no basis in law; that they are directly at odds with the well established law pertaining to the insured/insurer relationship; that there is no generalized duty to warn as alleged by the plaintiffs; and that the applicable statute of limitations as to many of these claims has long since expired. Many of these defenses have been raised in initial motions to dismiss filed by SPC and other insurers.  There have been favorable rulings during 2003 and 2004 in Texas and during 2004 and 2005 in Ohio on some of these motions filed by SPC and other insurers that dealt with statute of limitations and the validity of the alleged causes of actions.  On May 26, 2005, the Court of Appeals of Ohio, Eighth District, affirmed the earliest of these favorable rulings.  In Texas, only one court, in June of 2005, has denied the insurers’ initial challenges to the pleadings.  That ruling was contrary to the rulings by other courts in similar cases, and SPC intends to continue to defend this case vigorously.

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 other information regarding the Company’s asbestos and environmental exposure, see “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations—Asbestos Claims and Litigation”, “-Environmental Claims and Litigation” and “-Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves.”

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

Shareholder Litigation and Related Proceedings

TPC and its board of directors were named as defendants in three putative class action lawsuits brought by shareholders alleging breach of fiduciary duty in connection with the merger of TPC and SPC and seeking injunctive relief as well as unspecified monetary damages.  The actions were captioned Henzel, et al. v. Travelers Property Casualty Corp., et al. (Jud. Dist. of Waterbury, Ct. Nov. 17, 2003); Vozzolo v. Travelers Property Casualty Corp., et al. (Jud. Dist. of Waterbury, Ct. Nov. 17, 2003); and Farina v. Travelers Property Casualty Corp., et al. (Jud. Dist. of Waterbury, Ct. December 15, 2003).  The Farina complaint also named SPC and its former subsidiary, Adams Acquisition Corp., as defendants, alleging that they aided and abetted the alleged breach of fiduciary duty.  On March 18, 2004, TPC and SPC announced that all of these lawsuits had been settled, subject to court approval of the settlements.  The settlement included a modification to the termination fee that could have been paid had the merger not been completed, additional disclosure in the proxy statement distributed in connection with the merger and a nominal amount for attorneys’ fees.  Before court approval of the settlement, additional shareholder litigation was commenced, as described below.  In light of that litigation, the parties are evaluating how to proceed.

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Beginning in August 2004, following post-merger announcements by the Company, various shareholders of the Company commenced fourteen putative class action lawsuits against the Company and certain of its current and former officers and directors in the United States District Court for the District of Minnesota.  Plaintiff shareholders allege that certain disclosures relating to the April 2004 merger between TPC and SPC contained false or misleading statements with respect to the value of SPC’s loss reserves in violation of federal securities laws.  These actions have been consolidated under the caption In re St. Paul Travelers Securities Litigation I and a lead plaintiff and lead counsel have been appointed.  An additional putative class action based on the same allegations was brought in New York State Supreme Court.  This action was subsequently transferred to the District of Minnesota and was consolidated with In re St. Paul Travelers Securities Litigation I.  On June 24, 2005, the lead plaintiff filed an amended consolidated complaint.  The amended consolidated complaint asserts claims under Sections 10(b),
14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and Sections 11 and 15 of the Securities Act of 1933, as amended.  It does not specify damages.

Three other actions against the Company and certain of its current and former officers and directors are pending in the United States District Court for the District of Minnesota.  Two of these actions, Kahn v. The St. Paul Travelers Companies, Inc., et al. (Nov. 2, 2004) and Michael A. Bernstein Profit Sharing Plan v. The St. Paul Travelers Companies, Inc., et al. (Nov. 10, 2004), are putative class actions brought by certain shareholders of the Company against the Company and certain of its current and former officers and directors.  In these two actions, plaintiff shareholders allege violations of federal securities laws in connection with the Company’s alleged failure to make disclosure relating to the practice of paying brokers commissions on a contingent basis.  These actions have been consolidated as In re St. Paul Travelers Securities Litigation II, and a lead plaintiff has been appointed.  On July 11, 2005, the lead plaintiff filed a consolidated class action complaint. The consolidated action will be coordinated with In re St. Paul Travelers Securities Litigation I for pretrial purposes. In the third of these actions, an alleged beneficiary of the Company’s 401(k) savings plan has commenced a putative class action against the Company and certain of its current and former officers and directors captioned Spiziri v. The St. Paul Travelers Companies, Inc., et al. (Dec. 28, 2004).  The plaintiff alleges violations of the Employee Retirement Income Security Act based on allegations similar to those in In re St. Paul Travelers Securities Litigation I.  On June 1, 2005, the Company and the other defendants in Spiziri moved to dismiss the complaint.

In addition, two derivative actions have been brought in the United States District Court for the District of Minnesota against all of the Company’s current directors and certain of the Company’s former Directors, naming the Company as a nominal defendant: Rowe v. Fishman, et al. (Oct. 22, 2004) and Clark v. Fishman, et al. (Nov. 18, 2004).  The derivative actions have been consolidated for pretrial proceedings as Rowe, et al. v. Fishman, et al. and a consolidated derivative complaint has been filed.  The consolidated derivative complaint asserts state law claims, including breach of fiduciary duty, based on allegations similar to those alleged in In re St. Paul Travelers Securities Litigation I and II described above, as well as allegations concerning the Company’s alleged mismanagement of and failure to make disclosure relating to the Company’s alleged involvement in the purchase and sale of finite reinsurance.  On June 10, 2005, the Company and the other defendants in Rowe moved to dismiss the complaint.

The Company believes that these lawsuits have no merit and intends to defend vigorously; however, the Company is not able to provide any assurance that the financial impact of one or more of these proceedings will not be material to the Company’s results of operations in a future period.  The Company is obligated to indemnify its officers and directors to the extent provided under Minnesota law.  As part of that obligation, the Company will advance officers and directors attorneys’ fees and other expenses they incur in defending these lawsuits.

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Other Proceedings

From time to time the Company is involved in proceedings addressing disputes with its reinsurers regarding the collection of amounts due under the Company’s reinsurance agreements.  These proceedings may be initiated by the Company or the reinsurers and may involve the terms of the reinsurance agreements, the coverage of particular claims, exclusions under the agreements, as well as counterclaims for rescission of the agreements.  One of these disputes is the action described in the following paragraph.

Gulf, a wholly-owned subsidiary of TPC, brought an action on May 22, 2003, as amended on May 12, 2004, 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), XL Reinsurance America, Inc. (XL), Odyssey America Reinsurance Corporation (Odyssey), Employers Reinsurance Company (Employers) and Gerling Global Reinsurance Corporation of America (Gerling), 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 reinsurers have asserted counterclaims seeking rescission of the vehicle residual value reinsurance contracts issued to Gulf and unspecified damages for breach of contract. Separate actions filed by Transatlantic and Gerling have been consolidated with the original Gulf action for pre-trial purposes.  On October 1, 2003, Gulf entered into a final settlement agreement with Employers, and all claims and counterclaims with respect to Employers have been dismissed.

On May 26, 2004, the Court denied Gulf’s motion to dismiss certain claims asserted by Transatlantic and a joint motion by Transatlantic, XL and Odyssey for summary judgment against Gulf.  Discovery is currently proceeding in the matters.  Gulf denies the reinsurers’ allegations, believes that it has a strong legal basis to collect the amounts due under the reinsurance contracts and intends to vigorously pursue the actions.

Based on the Company’s beliefs about its legal positions in its various reinsurance recovery proceedings, the Company does not expect any of these matters to have a material adverse effect on its results of operations in a future period.

As part of ongoing, industry-wide investigations, the Company and its affiliates have received subpoenas and written requests for information from government agencies.  The areas of inquiry addressed to the Company include its relationship with brokers and agents, the Company’s involvement with “non-traditional insurance and reinsurance products,” lawyer liability insurance and branding requirements for salvage automobiles.  The Company or its affiliates have received subpoenas or written requests for information from: (i) State of California Office of the Attorney General; (ii) State of California Department of Insurance; (iii) Licensing and Market Conduct Compliance Division, Financial Services Commission of Ontario, Canada; (iv) State of Connecticut Insurance Department; (v) State of Connecticut Office of the Attorney General; (vi) State of Delaware Department of Insurance; (vii) State of Florida Department of Financial Services; (viii) State of Florida Office of Insurance Regulation; (ix) State of Florida Department of Legal Affairs Office of the Attorney General; (x) State of Georgia Office of the Commissioner of Insurance; (xi) State of Illinois Department of Financial and Professional Regulation; (xii) State of Iowa Insurance Division; (xiii) State of Maryland Insurance Administration; (xiv) Commonwealth of Massachusetts Office of the Attorney General; (xv) State of Minnesota Department of Commerce; (xvi) State of Minnesota Office of the Attorney General; (xvii) State of New York Office of the Attorney General; (xviii) State of New York Insurance Department; (xix) State of North Carolina Department of Insurance; (xx) State of Ohio Office of the Attorney General; (xxi) State of Ohio Department of Insurance; (xxii) Commonwealth of Pennsylvania Office of the Attorney General; (xxiii) State of Texas Department of Insurance; (xxiv) State of Washington Office of the Insurance Commissioner; (xxv) State of West Virginia Office of Attorney General; (xxvi) the United States Attorney for the Southern District of New York; and (xxvii) the United States Securities and Exchange Commission.

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The Company is cooperating with these subpoenas and requests for information.  In addition, outside counsel, with the oversight of the Company’s Board of Directors, has been conducting an internal review of certain of the company’s business practices.  This review initially focused on the company’s relationship with brokers and was commenced after the announcement of litigation brought by the New York Attorney General’s office against a major broker.

The internal review was expanded to address the various requests for information described above and to verify whether the Company’s business practices in these areas have been appropriate.  The company’s review has been extensive, involving the examination of e-mails and underwriting files, as well as interviews of current and former employees.  The company also continues to receive and respond to additional requests for information and will expand its review accordingly.

To date, the Company has found only a few instances of conduct that were inconsistent with the company’s employee code of conduct.  The Company has responded, and will continue to respond, appropriately to any such conduct.

The Company’s internal review with respect to finite reinsurance considered finite products the Company both purchased and sold.  The Company has completed its review with respect to the identified finite products purchased and sold, and has concluded that no adjustment to previously issued financial statements is required.

The related industry-wide investigations previously discussed are ongoing, as are the Company’s efforts to cooperate with the authorities, and the various authorities could ask that additional work be performed or reach conclusions different from the Company’s.  Accordingly, it would be premature to reach any conclusions as to the likely outcome of these matters.

Six putative class action lawsuits and one individual action have been brought against a number of insurance brokers and insurers, including the Company, by plaintiffs who allegedly purchased insurance products through one or more of the defendant brokers.  Five of the class actions were filed in federal district court, and the complaints are captioned:  Shell Vacations LLC v. Marsh & McLennan Companies, Inc., et al. (N.D. Ill. Jan. 14, 2005), Redwood Oil Company v. Marsh & McLennan Companies, Inc., et al. (N.D. Ill. Jan. 21, 2005), Boros v. Marsh & McLennan Companies, Inc., et al. (N.D. Cal. Feb. 4, 2005), Mulcahey v. Arthur J. Gallagher & Co., et al. (D.N.J. Feb. 23, 2005) and Golden Gate Bridge, Highway, and Transportation District v. Marsh & McLennan Companies, Inc., et al. (D.N.J. Feb. 23, 2005).  Plaintiff in one of the five actions, Shell Vacations LLC, later voluntarily dismissed its complaint.  The remaining federal class actions were transferred by the Judicial Panel on Multidistrict Litigation to, or filed in, the United States District Court for the District of New Jersey and are being coordinated or consolidated as part of In re Insurance Brokerage Antitrust Litigation, a multidistrict litigation proceeding. Lead plaintiffs have been appointed.  On August 1, 2005, the lead plaintiffs filed an amended consolidated complaint.  Plaintiffs allege that various insurance brokers conspired with each other and with various insurers, including the Company, to allocate brokerage customers and rig bids for insurance products offered to those customers.  The complaints include causes of action under the Sherman Act, the Racketeer Influenced and Corrupt Organizations Act, federal and state common law and the laws of the various states prohibiting antitrust violations and unfair and/or deceptive trade practices.  Plaintiffs seek monetary damages, including punitive damages and trebled damages, permanent injunctive relief, restitution, including disgorgement of profits, interest and costs, including attorneys’ fees.  The sixth class action, Bensley Construction, Inc. v. Marsh & McLennan Companies, Inc., et al. (Mass. Super. Ct. May 16, 2005) and the individual action, Office Depot,

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Inc. v. Marsh & McLennan Companies, Inc., et al. (Fla. Cir. Ct. June 22, 2005), were brought in state court and assert state law claims based on allegations similar to those made in In re Insurance Brokerage Antitrust Litigation.  Certain defendants in Bensley Construction, Inc. have removed the action to the United States District Court for the District of Massachusetts and moved to stay it pending transfer to the District of New Jersey for consolidation with In re Insurance Brokerage Antitrust Litigation.  The Company believes that these lawsuits have no merit and intends to defend vigorously.

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

On July 23, 2004, the Company announced that it was seeking guidance from the staff of the Division of Corporation Finance of the Securities and Exchange Commission with respect to the appropriate purchase accounting treatment for certain second quarter 2004 adjustments totaling $1.63 billion ($1.07 billion after-tax).  The Company recorded these adjustments as charges in its income statement in the second quarter of 2004.  Through an informal comment process, the staff of the Division of Corporation Finance has subsequently asked for further information relating to these adjustments, and the dialogue is ongoing.  Specifically, the staff has asked for information concerning the Company’s adjustments to certain of SPC’s insurance reserves and reserves for reinsurance recoverables and premiums due from policyholders, and how those adjustments may relate to SPC’s reserves for periods prior to the merger.  After reviewing the staff’s questions and comments, the Company continues to believe that its accounting treatment for these adjustments is appropriate.  If, however, the staff disagrees, some or all of the adjustments being discussed may not be recorded as charges in the Company’s income statement, thereby increasing net income for the second quarter and full year 2004 and increasing shareholders’ equity at December 31, 2004 and June 30, 2005, in each case by the approximate after-tax amount of the charge.  The effect on tangible shareholders’ equity at December 31, 2004 and June 30, 2005 would not be material.  Additionally, if such adjustments were made, there would be changes to the amounts recorded for the affected items in purchase accounting and, accordingly, the Company’s balance sheet as of April 1, 2004 would reflect those changes.

Other Commitments and Guarantees

Commitments

Investment Commitments—The Company has long-term commitments to fund venture capital investments through its subsidiary, St. Paul Venture Capital VI, LLC, through new and existing partnerships and certain other venture capital entities.  The Company’s total future estimated obligations related to its venture capital investments were $157 million at June 30, 2005 and $289 million at December 31, 2004.  The Company also has unfunded commitments to partnerships, joint ventures and certain private equity investments in which it invests.  These additional commitments were $664 million and $483 million at June 30, 2005 and December 31, 2004, respectively.

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SPC’s Sale of Minet—In May 1997, SPC completed the sale of its insurance brokerage operation, Minet, to Aon Corporation.  Under the sale agreement, SPC committed to acquire a minimum level of reinsurance brokerage services from Aon through 2012.  That commitment requires the Company to make a contractual payment to Aon to the extent such minimum level of service is not acquired.  The maximum annual amount payable to Aon for such services and any such contractual payment related to that commitment is $20 million.  SPC also had commitments under lease agreements through 2015 for vacated space, as well as a commitment to make payments to a former Minet executive.  The Company assumed all obligations to these commitments upon consummation of the merger.

Guarantees

The Company has certain contingent obligations for guarantees related to agency loans and letters of credit, issuance of debt securities, third party loans related to venture capital investments and various indemnifications related to the sale of business entities.

In the ordinary course of selling business entities to third parties, the Company has agreed to indemnify purchasers for losses arising out of breaches of representations and warranties with respect to the business entities being sold, covenants and obligations of the Company and/or its subsidiaries following the close, and in certain cases obligations arising from undisclosed liabilities, adverse reserve development, premium deficiencies or certain named litigation.  Such indemnification provisions generally survive for periods ranging from 12 months following the applicable closing date to the expiration of the relevant statutes of limitations, or in some cases agreed upon term limitations.  As of June 30, 2005, the aggregate amount of the Company’s quantifiable indemnification obligations in effect for sales of business entities was $1.82 billion.  Certain of these contingent obligations are subject to deductibles which have to be incurred by the obligee before the Company is obligated to make payments.  Included in the indemnification obligations at June 30, 2005 was $188 million related to the Company’s variable interest in Camperdown UK Limited, which SPC sold in December 2003.  The Company’s variable interest results from an agreement to indemnify the purchaser in the event a specified reserve deficiency develops, a reserve-related foreign exchange impact occurs, or a foreign tax adjustment is imposed on a pre-sale reporting period.  The fair value of this obligation as of June 30, 2005 was $44 million, which was included in “Other Liabilities” on the Company’s consolidated balance sheet.

13.REINSURANCE

The Company’s consolidated financial statements reflect the effects of assumed and ceded reinsurance transactions.  Assumed reinsurance refers to the acceptance of certain insurance risks that other insurance companies have underwritten. Ceded reinsurance involves transferring certain insurance risks (along with the related written and earned premiums) the Company has underwritten to other insurance companies who agree to share these risks.  The primary purpose of ceded reinsurance is to protect the Company from potential losses in excess of the amount it is prepared to accept.  Reinsurance is placed on both a quota-share and excess of loss basis.  Ceded reinsurance arrangements do not discharge the Company as the primary insurer, except for cases involving a novation.

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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 years, the Company has experienced an increase in the frequency of these reinsurance coverage disputes.  Some of these disputes could result in lawsuits and arbitrations brought by or against the reinsurers to determine the Company’s rights and obligations under the various reinsurance agreements.  The Company employs dedicated specialists and 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, disputes, applicable coverage defenses and other relevant factors.  Accordingly, the establishment of reinsurance recoverables and the related allowance for uncollectible reinsurance recoverables is an inherently uncertain process involving estimates.  Amounts deemed to be uncollectible, including amounts due from known insolvent reinsurers, are written off against the allowance for estimated uncollectible reinsurance recoverables.  Any subsequent collections of amounts previously written off are reported as part of underwriting results.

The allowance for estimated uncollectible reinsurance recoverables was $754 million and $751 million at June 30, 2005 and December 31, 2004, respectively.

The effects of assumed and ceded reinsurance on premiums written, premiums earned and claims and claim adjustment expenses for the three and six months ended June 30, 2005 and 2004 were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2005			2004			2005			2004
Premiums written
Direct	$	5,814		$	5,905		$	11,352		$	9,828
Assumed	95			237			477			324
Ceded	(693		)	(886		)	(1,833		)	(1,496		)
Net premiums written	$	5,216		$	5,256		$	9,996		$	8,656
Premiums earned
Direct	$	5,720		$	5,909		$	11,452		$	9,667
Assumed	235			332			526			434
Ceded	(846		)	(1,087		)	(1,750		)	(1,608		)
Net premiums earned	$	5,109		$	5,154		$	10,228		$	8,493
Claims and claim adjustment expenses
Direct	$	3,488		$	4,977		$	6,874		$	7,434
Assumed	137			146			446			275
Ceded	(530		)	(243		)	(1,009		)	(555		)
Policyholder dividends	6			(11		)	13			(4		)
Net claims and claim adjustment expenses	$	3,101		$	4,869		$	6,324		$	7,150

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The decline in ceded written premiums for the three months ended June 30, 2005 compared with the same 2004 period reflected changes in the timing and structure of reinsurance purchased in the Specialty segment, which resulted in an increase in ceded premiums in the first quarter of 2005 and a reduction in ceded premiums in the second quarter of 2005, when compared with the same periods of 2004.  The increase in ceded written premiums for the six months ended June 30, 2005 over the same 2004 period primarily reflected the impact of the merger.  The Company also made a modest adjustment to 2004 ceded written premiums to report at inception all ceded written premiums for reinsurance agreements that have minimum amounts required to be ceded.  Previously, ceded written premiums for certain of these agreements were reported over the life of the contracts.  This adjustment only affected the statistical disclosure of net written premiums on a quarter-by-quarter basis; it did not affect amounts over the lives of the respective agreements, nor did it impact gross written premiums, earned premiums, operating results or capital.  The adjustment was made to conform the statistical measurement of production – net written premiums – across the Company’s businesses.

The Company entered into commutation agreements with a major reinsurer, effective June 30, 2004, which resulted in a second quarter 2004 pretax charge of $153 million for amounts received less than the reinsurance balances of approximately $1.26 billion.

14.RESTRUCTURING ACTIVITIES

During the second quarter of 2004, the Company’s management approved and committed to plans to terminate and relocate certain employees and to exit certain activities.  The cost of these actions was recognized in 2004 as a liability and included in either the allocation of the purchase price or recorded as part of general and administrative expenses.  The following table summarizes activity related to these plans.

	Original								Balance at								Balance at
	Accrued		2004						Dec. 31,		2005						June 30,
(in millions)	Costs		Payments			Adjustments			2004		Payments			Adjustments			2005
Restructuring costs included in the allocation of the purchase price:
Employee termination and relocation costs	$	71	$	(43	)	$	(3	)	$	25	$	(14	)	$	5		$	16
Costs to exit leases	4		(1		)	5			8		(1		)	(1		)	6
Other exit costs	4		(2		)	—			2		—			—			2
Total included in the allocation of purchase price	79		(46		)	2			35		(15		)	4			24
Employee termination costs included in general and administrative expenses:
Commercial	33		(4		)	(9		)	20		(7		)	6			19
Specialty	2		(1		)	—			1		(4		)	5			2
Personal	4		—			(1		)	3		(2		)	2			3
Total included in general and administrative expenses	39		(5		)	(10		)	24		(13		)	13			24
Total restructuring costs	$	118	$	(51	)	$	(8	)	$	59	$	(28	)	$	17		$	48

Employee termination and relocation costs consist primarily of severance benefits for which payments will be substantially completed by the end of 2006.  Costs to exit leases include remaining lease obligations on properties to be vacated by the Company and are expected to be fully paid by the end of 2007.  Other exit costs include the remaining costs related to a redundant computer software contract which are expected to be fully paid by the end of 2005.  Adjustments recorded in the six months ended June 30, 2005 primarily represent changes in the original estimate as a result of new information which became available to the Company.

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15.INCOME TAXES

The components of income tax expense (benefit) on continuing operations were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2005			2004			2005			2004
Income tax expense (benefit) on continuing operations:
Federal:
Current	$	(297	)	$	(146	)	$	(118	)	$	95
Deferred	624			(108		)	735			(124		)
Total federal income tax expense (benefit)	327			(254		)	617			(29		)
Foreign	32			12			47			14
State	4			3			10			3
Total income tax expense (benefit) on continuing operations	$	363		$	(239	)	$	674		$	(12	)

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16.CONSOLIDATING FINANCIAL STATEMENTS OF THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

The following consolidating financial statements of the Company have been prepared pursuant to Rule 3-10 of Regulation S-X.  These consolidating financial statements have been prepared from the Company’s financial information on the same basis of accounting as the consolidated financial statements.  The St. Paul Travelers Companies, Inc. has fully and unconditionally guaranteed certain debt obligations of TPC, its wholly-owned subsidiary, which totaled $2.64 billion as of June 30, 2005.

Prior to the merger, TPC fully and unconditionally guaranteed the payment of all principal, premiums, if any, and interest on certain debt obligations of its wholly-owned subsidiary TIGHI.  The Company has fully and unconditionally guaranteed such guarantee obligations of TPC.  TPC is deemed to have no assets or operations independent of TIGHI.  Consolidating financial information for TIGHI has not been presented herein because such financial information would be substantially the same as the financial information provided for TPC.

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF INCOME (Unaudited)

For the three months ended June 30, 2005

(in millions)

	TPC			Other Subsidiaries			St. Paul Travelers (1)			Eliminations			Consolidated
Revenues
Premiums	$	3,611		$	1,498		$	—		$	—		$	5,109
Net investment income	551			235			(11		)	—			775
Fee income	163			2			—			—			165
Net realized investment gains (losses)	(62		)	(30		)	37			—			(55		)
Other revenues	34			9			5			(5		)	43
Total revenues	4,297			1,714			31			(5		)	6,037
Claims and expenses
Claims and claim adjustment expenses	2,127			974			—			—			3,101
Amortization of deferred acquisition costs	579			204			—			—			783
General and administrative expenses	580			182			32			(5		)	789
Interest expense	36			—			34			—			70
Total claims and expenses	3,322			1,360			66			(5		)	4,743
Income (loss) from continuing operations before income taxes	975			354			(35		)	—			1,294
Income tax expense (benefit)	279			225			(141		)	—			363
Equity in earnings of subsidiaries, net of tax	—			—			1,016			(1,016		)	—
Income from continuing operations	696			129			1,122			(1,016		)	931
Discontinued operations:
Operating income (loss), net of taxes	—			(1		)	1			—			—
Gain (loss) on disposal, net of taxes	—			192			(54		)	—			138
Income (loss) from discontinued operations	—			191			(53		)	—			138
Net income	$	696		$	320		$	1,069		$	(1,016	)	$	1,069

(1)  The St. Paul Travelers Companies, Inc., excluding its subsidiaries.

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THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF INCOME (Unaudited)

For the six months ended June 30, 2005

(in millions)

	TPC			Other Subsidiaries			St. Paul Travelers (1)			Eliminations			Consolidated
Revenues
Premiums	$	7,101		$	3,127		$	—		$	—		$	10,228
Net investment income	1,081			467			(8		)	—			1,540
Fee income	331			5			—			—			336
Net realized investment losses	(28		)	(22		)	(5		)	—			(55		)
Other revenues	70			22			6			(5		)	93
Total revenues	8,555			3,599			(7		)	(5		)	12,142
Claims and expenses
Claims and claim adjustment expenses	4,253			2,071			—			—			6,324
Amortization of deferred acquisition costs	1,154			439			—			—			1,593
General and administrative expenses	1,192			387			28			(5		)	1,602
Interest expense	71			(1		)	71			—			141
Total claims and expenses	6,670			2,896			99			(5		)	9,660
Income (loss) from continuing operations before income taxes	1,885			703			(106		)	—			2,482
Income tax expense (benefit)	541			311			(178		)	—			674
Equity in earnings of subsidiaries, net of tax	—			—			1,846			(1,846		)	—
Income from continuing operations	1,344			392			1,918			(1,846		)	1,808
Discontinued operations:
Operating loss, net of taxes	—			(82		)	(583		)	—			(665		)
Gain (loss) on disposal, net of taxes	—			192			(54		)	—			138
Income (loss) from discontinued operations	—			110			(637		)	—			(527		)
Net income	$	1,344		$	502		$	1,281		$	(1,846	)	$	1,281

(1)  The St. Paul Travelers Companies, Inc., excluding its subsidiaries.

47

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEET (Unaudited)

At June 30, 2005

(in millions)	TPC			Other Subsidiaries		St. Paul Travelers (1)			Eliminations			Consolidated
Assets
Fixed maturities, available for sale at fair value (including$2,318 subject to securities lending and repurchase agreements) (amortized cost $56,219)	$	35,679		$	21,387	$	573		$			$	57,639
Equity securities, at fair value (cost $632)	543			95		55			—			693
Real estate	6			777		—						783
Mortgage loans	143			47		—			—			190
Short-term securities	2,224			1,261		1,334			—			4,819
Other investments	1,697			1,197		77			—			2,971
Total investments	40,292			24,764		2,039			—			67,095
Cash	492			240		6			—			738
Investment income accrued	435			306		9			(6		)	744
Premiums receivable	4,567			1,729		—			—			6,296
Reinsurance recoverables	10,505			7,888		—			—			18,393
Ceded unearned premiums	815			784		—			—			1,599
Deferred acquisition costs	1,125			442		—			—			1,567
Deferred tax asset	955			521		(9		)				1,467
Contractholder receivables	4,247			1,445		—			—			5,692
Goodwill	2,412			1,079		—			—			3,491
Intangible assets	337			656		—			—			993
Net assets of discontinued operations	—			1		783			—			784
Investment in subsidiaries	—			—		23,005			(23,005		)	—
Other assets	2,003			714		481			(253		)	2,945
Total assets	$	68,185		$	40,569	$	26,314		$	(23,264	)	$	111,804
Liabilities
Claims and claim adjustment expense reserves	$	35,559		$	22,555	$	—		$	—		$	58,114
Unearned premium reserves	7,781			3,340		—			—			11,121
Contractholder payables	4,247			1,445		—			—			5,692
Payables for reinsurance premiums	225			594		—			—			819
Debt	2,625			208		3,220			(251		)	5,802
Other liabilities	4,832			2,336		725			(6		)	7,887
Total liabilities	55,269			30,478		3,945			(257		)	89,435
Shareholders’ equity
Preferred stock:
Stock Ownership Plan – convertible preferred stock (0.5 shares issued and outstanding)	—			—		173			—			173
Common stock (1,750.0 shares authorized; 675.3 shares issued; 674.6 shares outstanding)	—			745		17,586			(745		)	17,586
Additional paid-in-capital	8,692			7,733		—			(16,425		)	—
Retained earnings	3,394			1,464		3,732			(4,858		)	3,732
Accumulated other changes in equity from nonowner sources	871			149		1,024			(1,020		)	1,024
Treasury stock, at cost (0.7 shares)	—			—		(28		)	—			(28		)
Unearned compensation	(41		)	—		(118		)	41			(118		)
Total shareholders’ equity	12,916			10,091		22,369			(23,007		)	22,369
Total liabilities and shareholders’ equity	$	68,185		$	40,569	$	26,314		$	(23,264	)	$	111,804

(1)  The St. Paul Travelers Companies, Inc., excluding its subsidiaries.

48

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEET

At December 31, 2004

(in millions)	TPC			Other Subsidiaries			St. Paul Travelers (1)			Eliminations			Consolidated
Assets
Fixed maturities, available for sale at fair value (including $2,603 subject to securities lending and repurchase agreements) (amortized cost $53,017)	$	34,347		$	19,895		$	32		$	(5	)	$	54,269
Equity securities, at fair value (cost $687)	601			83			75			—			759
Real estate	2			771			—			—			773
Mortgage loans	148			43			—			—			191
Short-term securities	2,695			2,122			127			—			4,944
Other investments	2,151			1,220			61			—			3,432
Total investments	39,944			24,134			295			(5		)	64,368
Cash	166			79			17			—			262
Investment income accrued	410			261			3			(3		)	671
Premiums receivable	4,115			2,086			—			—			6,201
Reinsurance recoverables	11,058			7,996			—			—			19,054
Ceded unearned premiums	716			849			—			—			1,565
Deferred acquisition costs	1,033			526			—			—			1,559
Deferred tax asset	924			849			596			(171		)	2,198
Contractholder receivables	3,986			1,643			—			—			5,629
Goodwill	2,412			1,152			—			—			3,564
Intangible assets	356			706			—			—			1,062
Net assets of discontinued operations	—			2,041			—			—			2,041
Investment in subsidiaries	—			1			23,738			(23,739		)	—
Other assets	1,698			1,743			361			(730		)	3,072
Total assets	$	66,818		$	44,066		$	25,010		$	(24,648	)	$	111,246
Liabilities
Claims and claim adjustment expense reserves	$	35,796		$	23,274		$	—		$	—		$	59,070
Unearned premium reserves	7,162			4,148			—			—			11,310
Contractholder payables	3,986			1,643			—			—			5,629
Payables for reinsurance premiums	202			694			—			—			896
Debt	2,624			183			3,809			(303		)	6,313
Other liabilities	4,784			2,445			—			(402		)	6,827
Total liabilities	54,554			32,387			3,809			(705		)	90,045
Shareholders’ equity
Preferred stock:
Stock Ownership Plan – convertible preferred stock (0.6 shares issued and outstanding)	—			29			193			(29		)	193
Guaranteed obligation – Stock Ownership Plan	—			—			(5		)	—			(5		)
Common stock (1,750.0 shares authorized; 670.7 shares issued; 670.3 shares outstanding)	4			753			17,414			(757		)	17,414
Additional paid-in capital	8,694			8,932			—			(17,626		)	—
Retained earnings	2,774			2,000			2,744			(4,774		)	2,744
Accumulated other changes in equity from nonowner sources	865			86			952			(951		)	952
Treasury stock, at cost (0.4 shares)	(14		)	—			(14		)	14			(14		)
Unearned compensation	(58		)	—			(83		)	58			(83		)
Minority interest	(1		)	(121		)	—			122			—
Total shareholders’ equity	12,264			11,679			21,201			(23,943		)	21,201
Total liabilities and shareholders’ equity	$	66,818		$	44,066		$	25,010		$	(24,648	)	$	111,246

(1)  The St. Paul Travelers Companies, Inc., excluding its subsidiaries.

49

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

For the six months ended June 30, 2005

(in millions)	TPC			Other Subsidiaries			St. Paul Travelers (1)			Eliminations			Consolidated
Cash flows from operating activities
Net income	$	1,344		$	502		$	1,281		$	(1,846	)	$	1,281
Net adjustments to reconcile net income to net cash provided by operating activities	(302		)	355			(1,449		)	1,846			450
Net cash provided (used) by operating activities	1,042			857			(168		)	—			1,731
Cash flows from investing activities
Proceeds from maturities of investments
Fixed maturities	1,446			974			1			—			2,421
Mortgage loans	6			—			—			—			6
Proceeds from sales of investments
Fixed maturities	1,882			680			149			—			2,711
Equity securities	93			18			1			—			112
Purchases of investments
Fixed maturities	(4,488		)	(3,390		)	(688		)	—			(8,566		)
Equity securities	(1		)	(21		)	—			—			(22		)
Mortgage loans	—			(9		)	—			—			(9		)
Real estate	(6		)	(16		)	—			—			(22		)
Short-term securities (purchased) sold, net	471			861			(1,207		)	—			125
Other investments, net	421			31			—			—			452
Securities transactions in course of settlement	377			(7		)	93			—			463
Other	(57		)	9			—			—			(48		)
Net cash provided (used) by investing activities	144			(870		)	(1,651		)	—			(2,377		)
Cash flows from financing activities
Payment of debt	—			—			(481		)	—			(481		)
Dividends to shareholders	—			—			(307		)	—			(307		)
Issuance of common stock-employee stock options	—			—			61			—			61
Treasury stock acquired – net employee stock-based compensation	—			—			(14		)	—			(14		)
Intercompany dividends	(860		)	133			727			—			—
Capital contributions and loans between subsidiaries	—			45			(45		)	—			—
Net cash provided (used) by financing activities	(860		)	178			(59		)	—			(741		)
Effect of exchange rate changes on cash	—			(4		)	—			—			(4		)
Net proceeds from sale of discontinued operations	—			—			1,867			—			1,867
Net increase (decrease) in cash	326			161			(11		)	—			476
Cash at beginning of period	166			79			17			—			262
Cash at end of period	$	492		$	240		$	6		$	—		$	738
Supplemental disclosure of cash flow information
Income taxes (received) paid	$	697		$	(77	)	$	(250	)	$	—		$	370
Interest paid	$	69		$	—		$	104		$	—		$	173

(1)The St. Paul Travelers Companies, Inc., excluding its subsidiaries.

50

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following is a discussion and analysis of the financial condition and results of operations of The St. Paul Travelers Companies, Inc. (together with its subsidiaries, the Company).  On April 1, 2004, Travelers Property Casualty Corp. (TPC) merged with a subsidiary of The St. Paul Companies, Inc. (SPC), as a result of which TPC became a wholly-owned subsidiary of SPC, and SPC changed its name to The St. Paul Travelers Companies, Inc.  Each share of TPC par value $0.01 class A common stock, including the associated preferred stock purchase rights, and TPC par value $0.01 class B common stock was exchanged for 0.4334 of a share of the Company’s common stock without designated par value.  Share and per share amounts for the first quarter of 2004 reflect the exchange of TPC’s common stock, par value $0.01 per share, for the Company’s common stock without designated par value.  For accounting purposes, this transaction was accounted for as a reverse acquisition with TPC treated as the accounting acquirer.  Accordingly, this transaction was accounted for as a purchase business combination, using TPC’s historical financial information and applying fair value estimates to the acquired assets, liabilities and commitments of SPC as of April 1, 2004.  Beginning on April 1, 2004, the results of operations and financial condition of SPC were consolidated with TPC’s results of operations and financial condition.  Accordingly, all financial information presented herein for the three and six months ended June 30, 2005 reflects the consolidated accounts of SPC and TPC.  The financial information presented herein for the six months ended June 30, 2004 reflects only the accounts of TPC for the three months ended March 31, 2004 and the consolidated accounts of SPC and TPC for the three months ended June 30, 2004. 

In the second quarter of 2005, the Company began implementing a program to sell its 78% equity interest in Nuveen Investments, which is described in more detail later in this discussion.  Accordingly, the Company’s share of Nuveen Investments’ operating results in 2005 was classified as discontinued operations, and the Company’s prior year results were reclassified to conform to the 2005 presentation. 

EXECUTIVE SUMMARY

2005 Second Quarter Consolidated Results of Operations

•      Income from continuing operations of $931 million, or $1.39 per share basic and $1.33 per share diluted

•      Net income of $1.07 billion, or $1.59 per share basic and $1.52 diluted, including income from discontinued operations of $138 million, or $0.20 per share basic and $0.19 diluted

•      Discontinued operations include $138 million after-tax gain on divestiture of 45.9 million shares of Nuveen Investments

•      Gross written premiums of $5.91 billion; net written premiums of $5.22 billion

•      GAAP combined ratio of 87.6%

•      Net investment income of $598 million, after-tax 

•      Strong retention across all three business segments

•      Continuing moderating rates due to more aggressive pricing in the marketplace

2005 Second Quarter Consolidated Financial Condition

•      Total assets of $111.80 billion, up $558 million from December 31, 2004

•      Total investments of $67.10 billion, up $2.73 billion from December 31, 2004; fixed maturities and short-term securities comprise 93% of total investments

•      Increase in investments resulted from proceeds from Nuveen Investments’ divestiture and strong operating cash flows

•      Total debt of $5.80 billion, down $511 million from December 31, 2004

•      Shareholders’ equity of $22.37 billion, up $1.17 billion from December 31, 2004

51

CONSOLIDATED OVERVIEW

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

Consolidated Results of Operations

	Three Months Ended June 30,					Six Months Ended June 30,
(in millions, except per share amounts)	2005		2004			2005			2004
Income (loss) from continuing operations	$	931	$	(302	)	$	1,808		$	285
Income (loss) from discontinued operations	138		27			(527		)	27
Net income (loss)	$	1,069	$	(275	)	$	1,281		$	312
Basic earnings (loss) per share:
Income (loss) from continuing operations	$	1.39	$	(0.46	)	$	2.70		$	0.51
Income (loss) from discontinued operations	0.20		0.04			(0.79		)	0.05
Net income (loss)	$	1.59	$	(0.42	)	$	1.91		$	0.56
Diluted earnings (loss) per share:
Income (loss) from continuing operations	$	1.33	$	(0.46	)	$	2.58		$	0.51
Income (loss) from discontinued operations	0.19		0.04			(0.74		)	0.05
Net income (loss)	$	1.52	$	(0.42	)	$	1.84		$	0.56
Weighted average number of common shares outstanding:
Basic	669.5		664.8			668.8			549.7
Diluted	710.3		664.8			709.7			562.9

The Company’s discussions related to all items, other than net income (loss), income (loss) from continuing operations, income (loss) from discontinued operations, and segment operating income (loss), are presented on a pretax basis, unless otherwise noted. 

Income from continuing operations in the second quarter of 2005 totaled $931 million, or $1.33 per share diluted, a significant improvement over the loss from continuing operations of $302 million, or $0.46 per share diluted, in the second quarter of 2004.  The 2005 second quarter total reflected strong underwriting results from each of the Company’s three business segments, and an increase in net investment income resulting from the investment of proceeds from the Nuveen Investments’ divestiture, strong operational cash flows and significant returns from the Company’s private equity partnership investments.  The 2004 second quarter loss was driven by significant reserve adjustments and restructuring charges associated with the merger that are discussed in more detail later in this report.  For the first six months of 2005, income from continuing operations of $1.81 billion was $1.52 billion higher than the comparable period of 2004.  Net income of $1.07 billion in the second quarter of 2005 included income from discontinued operations of $138 million, primarily comprised of the gain on the divestiture of a portion of the Company’s investment in Nuveen Investments.  Through the first six months of 2005, net income included a net loss from discontinued operations of $527 million, primarily consisting of $710 million of tax expense related to the Company’s equity ownership in Nuveen Investments, partially offset by the second quarter gain on the divestiture and the Company’s share of Nuveen Investments’ net income for the first six months of 2005.  

52

Consolidated revenues from continuing operations were as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
(in millions)	2005			2004		2005			2004
Earned premiums	$	5,109		$	5,154	$	10,228		$	8,493
Net investment income	775			642		1,540			1,261
Fee income	165			171		336			343
Realized investment gains (losses)	(55		)	55		(55		)	13
Other	43			38		93			77
Total revenues	$	6,037		$	6,060	$	12,142		$	10,187

The $45 million decline in earned premiums in the second quarter of 2005 compared with the same 2004 period was concentrated in the Commercial segment and primarily reflected the intentional non-renewal of business in runoff included in that segment.  For the first six months of 2005, the $1.74 billion increase in earned premiums over the same period of 2004 primarily reflected the impact of the merger. 

Net investment income of $775 million in the second quarter of 2005 grew $133 million, or 21%, over the same period in 2004, driven by the increase in invested assets over the last twelve months, as well as strong returns on the Company’s private equity partnership investments.  The increase in invested assets was driven by continued strong operational cash flows and the investment of proceeds from the partial divestiture of the Company’s equity interest in Nuveen Investments.  The $279 million increase in net investment income for the first six months of 2005 over the same 2004 period reflected these factors, as well as the impact of the merger, as the year-to-date 2004 total includes only one quarter of combined data for the Company subsequent to the April 1, 2004 merger.  Net investment income in the first six months of 2004 included the $127 million first quarter impact of the initial public trading of one investment.  Also impacting net investment income in 2005 was the effect of a decline in pretax investment yields due to a higher proportion of tax-exempt investment purchases since the completion of the merger in April 2004.  Yields on the Company’s taxable fixed maturity portfolio in the first six months of 2005 declined from those in the same period of 2004, reflecting the impact of a reduction in yields available on new investment purchases in the last twelve months compared with those on maturing securities during that time period.  In addition, SPC’s investment portfolio acquired in the merger was recorded at its fair value as of the merger date of April 1, 2004 in accordance with purchase accounting, which reduced the Company’s reported average investment yield in the first six months of 2005 when compared with the same 2004 period. 

Fee income in the second quarter and first six months of 2005 declined slightly when compared with the same periods of 2004, as the National Accounts market, the primary source of the Company’s fee-based business, experienced increased competition as described in more detail in the Commercial segment discussion that follows. 

Net pretax realized investment losses in the second quarter of 2005 totaled $55 million, compared with net pretax realized investment gains of $55 million in the same 2004 period.  Pretax impairment losses totaled $42 million in the second quarter of 2005, compared with $23 million in the same 2004 period.  The impairment losses in both periods were concentrated in the venture capital portfolio, as described in more detail later in this discussion.  The 2005 second quarter total also included $45 million of net realized investment losses related to U.S. Treasury futures, which are settled daily and are used to shorten the duration of the fixed maturity portfolio.  These realized losses were partially offset by a second quarter realized gain of $60 million on the sale of one venture capital holding.  The Company recorded less than $0.1 million in net realized investment gains in the first quarter of 2005.  Net pretax realized investment gains in the second quarter of 2004 were primarily generated by gains of $57 million related to U.S. Treasury futures.  Through the first six months of 2004, those second quarter realized investment gains were largely offset by first quarter net realized investment losses related to U.S. Treasury futures. 

53

Consolidated gross and net written premiums were as follows:

	Three Months Ended June 30,
	2005				2004
(in millions)	Gross		Net		Gross		Net
Commercial	$	2,481	$	2,047	$	2,799	$	2,234
Specialty	1,758		1,545		1,743		1,463
Personal	1,670		1,624		1,600		1,559
Total	$	5,909	$	5,216	$	6,142	$	5,256

	Six Months Ended June 30,
	2005				2004
(in millions)	Gross		Net		Gross		Net
Commercial	$	5,232	$	4,239	$	5,012	$	3,999
Specialty	3,449		2,699		2,141		1,732
Personal	3,148		3,058		2,999		2,925
Total	$	11,829	$	9,996	$	10,152	$	8,656

For the three months ended June 30, 2005, gross written premiums decreased 4% and net written premiums decreased 1% from the same period of 2004.  The decline in both gross and net premium volume was concentrated in the Commercial segment and was primarily the result of the non-renewal of business in runoff included in that segment.  For the six months ended June 30, 2005, gross and net written premiums increased 17% and 15%, respectively, over the comparable 2004 amounts, primarily reflecting the impact of the merger. 

In the first quarter of 2005, the Company implemented changes in the timing and structure of reinsurance purchased in the Specialty segment.  Those changes resulted in an increase in ceded premiums in the first quarter of 2005 and a reduction in ceded premiums in the second quarter of 2005, when compared with the same periods of 2004.  The Company also made a modest adjustment to 2004 ceded written premiums to report at inception all ceded written premiums for reinsurance agreements that have minimum amounts required to be ceded.  Previously, ceded written premiums for certain of these agreements were reported over the life of the contracts.  This adjustment affected only the statistical disclosure of net written premiums on a quarter-by-quarter basis; it did not affect net written premium amounts over the lives of the respective agreements, nor did it impact gross written premiums, earned premiums, operating results or capital.  The adjustment was made to conform the statistical measurement of production – net written premiums – across the Company’s businesses. 

Business retention levels in the Company’s Commercial and Specialty segments during the second quarter of 2005 were stronger than in any quarter since the merger, and retention levels in the Personal segment remained strong and consistent with prior year levels.  In addition, new business levels in the Commercial and Specialty segments were higher than they have been in the last three quarters.  Rates, however, continued to moderate in the second quarter of 2005, reflecting increased competition and more aggressive pricing in the marketplace, particularly for new business. 

54

Consolidated claims and expenses were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2005		2004		2005		2004
Claims and claim adjustment expenses	$	3,101	$	4,869	$	6,324	$	7,150
Amortization of deferred acquisition costs	783		805		1,593		1,331
General and administrative expenses	789		864		1,602		1,331
Interest expense	70		63		141		99
Total claims and expenses	$	4,743	$	6,601	$	9,660	$	9,911

Claims and claim adjustment expenses in the second quarter of 2005 included $75 million of net favorable prior year reserve development, compared with $1.40 billion of net unfavorable prior year reserve development in the same period of 2004.  The net favorable reserve development in 2005 was concentrated in the Personal segment.  Excluding prior year reserve development in both years, claims and claim adjustment expenses in the second quarter of 2005 were $296 million below the comparable 2004 total, reflecting significant improvement in current accident year loss experience in 2005 throughout the majority of the Company’s underwriting businesses.  Through the first six months of 2005, net favorable prior year reserve development totaled $130 million, compared with net unfavorable prior year reserve development of $1.44 billion in the same 2004 period. 

The net unfavorable prior year reserve development in the second quarter and first six months of 2004 primarily consisted of provisions related to: surety and construction reserves acquired in the merger; uncollectible reinsurance recoverables; a commutation agreement with a major reinsurer; the financial condition of a construction contractor; and environmental reserves.  The increase in the allowance for uncollectible reinsurance recoverables recognized a change in estimated disputes with reinsurers and was based upon the Company’s reinsurance strategy of reduced reinsurance utilization, including the cessation of ongoing business relationships with certain of SPC’s reinsurers, and aggressive collection of reinsurance recoverables.  Commutations are a complete and final settlement with a reinsurer that results in a discharge of all obligations of the parties to the terminated reinsurance agreement.  The majority of the unfavorable development was recorded in the Specialty segment.  Components of the second quarter 2004 unfavorable prior year reserve development are discussed in more detail in the respective segment discussions that follow. 

The Company incurred catastrophe losses of $11 million and $42 million in the second quarter and first six months of 2005, respectively.  The year-to-date 2005 total primarily resulted from flooding in the United Kingdom and winter storms in the United States in the first quarter, and also included losses from spring storms in the United States in the second quarter.  Catastrophe losses in the second quarter and first six months of 2004 totaled $24 million and $44 million, respectively.

Amortization of deferred acquisition costs in the second quarter of 2005 declined $22 million from the same 2004 period, consistent with the decline in earned premium volume.  Through the first six months of 2005, the amortization of deferred acquisition costs was $262 million higher than in the same 2004 period, reflecting the impact of the merger. 

General and administrative expenses of $789 million in the second quarter of 2005 were $75 million below comparable 2004 expenses of $864 million.  The second quarter 2004 total included a $62 million increase in the allowance for uncollectible amounts due from policyholders for loss-sensitive business (primarily high-deductible business).  This increase resulted from applying the Company’s credit-based methodology for determining uncollectible amounts to the recoverables acquired in the merger.  General and administrative expenses in the second quarter of 2004 also included $40 million of restructuring charges related to the merger. 

55

The $271 million increase in general and administrative expenses in the first six months of 2005 compared with the same 2004 period primarily reflected the impact of the merger.  Included in the 2005 and 2004 six-month totals were $58 million and $35 million, respectively, of amortization expense related to finite-lived intangible assets acquired in the merger, and a benefit of $11 million and $36 million, respectively, associated with the accretion of the fair value adjustment to claims and claim adjustment expenses and reinsurance recoverables. 

The increase in interest expense for the six months ended June 30, 2005 over the same period of 2004 reflected the additional interest expense on SPC debt assumed in the merger on April 1, 2004.

GAAP combined ratios (before policyholder dividends) for the Company’s insurance segments were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
Loss and loss adjustment expense ratio	59.4	%	93.1	%	60.4	%	82.4	%
Underwriting expense ratio	28.2		29.6		28.7		28.2
GAAP combined ratio	87.6	%	122.7	%	89.1	%	110.6	%

The loss and loss adjustment expense ratio for the second quarter of 2005 included a 1.5 point impact of net favorable prior year reserve development, whereas the second quarter 2004 ratio included a 27.1 point impact of net unfavorable prior year reserve development.  Excluding those impacts in both years, the adjusted second quarter 2005 loss and loss adjustment expense ratio of 60.9 was 5.1 points better than the adjusted 2004 ratio of 66.0, reflecting an improvement in current accident year results.  The 1.4 point improvement in the second quarter 2005 underwriting expense ratio compared with the same 2004 period reflected expense efficiencies realized since the completion of the merger, and the absence of merger-related charges that negatively impacted the 2004 second quarter ratio.  Through the first six months of 2005 and 2004, the adjusted loss and loss adjustment expense ratios excluding prior year reserve development were 61.6 and 65.4, respectively, reflecting the improvement in current accident year results.  The 0.5 point increase in the year-to-date 2005 underwriting expense ratio over the same 2004 period primarily reflected the impact of earned premium declines associated with runoff operations in the Commercial segment, and, in the Personal segment, increased commission expenses and investments for process re-engineering and to support business growth and product development. 

Discontinued Operations

In March 2005, the Company and Nuveen Investments jointly announced that the Company would implement a program to divest its 78% equity interest in Nuveen Investments, which constituted the Company’s Asset Management segment and was acquired as part of the merger on April 1, 2004.  In the second quarter of 2005, the Company began implementing that program. 

The following transactions occurred in the second quarter of 2005, resulting in net pretax cash proceeds of approximately $1.87 billion:

•The Company sold 39.9 million shares of Nuveen Investments through a public secondary offering (including 0.5 million shares sold through the underwriters’ partial exercise of an over-allotment provision);

•Nuveen Investments repurchased 6.1 million shares of its common stock from the Company; and

•The Company entered into forward sales agreements, settling no later than March 31, 2006, with respect to 11.9 million shares of Nuveen Investments’ common stock.

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In conjunction with these transactions, the Company recorded a pretax gain on disposal of $212 million ($138 million after-tax) in the second quarter of 2005.  Additionally, the Company recorded a net operating loss from discontinued operations of $665 million in the first six months of 2005, primarily consisting of a $710 million tax expense due to the difference between the tax basis and the GAAP carrying value of the Company’s investment in Nuveen Investments, partially offset by the Company’s share of Nuveen Investments’ net income for the six months ended June 30, 2005. 

Upon closing of the sale of the 39.9 million shares in the secondary offering and the repurchase of the 6.1 million shares by Nuveen Investments in the second quarter, the Company’s ownership interest in Nuveen Investments declined from approximately 78% to 31%; accordingly, the Company’s remaining investment in Nuveen Investments was accounted for using the equity method of accounting.  The assets and liabilities related to Nuveen Investments have been removed from the respective lines of the Company’s consolidated balance sheet and are reported under the caption “Net assets of discontinued operations” in the consolidated balance sheet at June 30, 2005 and December 31, 2004. 

In addition to the transactions described above, the Company entered into an agreement in April 2005 whereby Nuveen Investments would repurchase, upon approval of the change in control by the shareholders of its funds, approximately 12.1 million additional shares of its common stock from the Company for total consideration of approximately $400 million.  In July 2005, all necessary approvals were received and Nuveen Investments settled its agreement to purchase the 12.1 million additional common shares from the Company for $402 million. The sale of 11.9 million shares of Nuveen Investments’ common stock related to the forward sales agreements discussed above is scheduled to close on August 10, 2005.  Also in August 2005, the Company’s remaining holdings of approximately 3.5 million shares of Nuveen Investments’ common stock were sold for approximately $132 million. The completion of Nuveen Investments’ repurchase of 12.1 million shares, the sale of the 11.9 million shares and the sale of the Company’s remaining ownership interest of 3.5 million shares resulted in a pretax gain on disposal of $134 million ($87 million after-tax), which will be reflected in the Company’s results of operations for the quarter ended September 30, 2005.

Total net pretax proceeds to the Company from the second and third quarter transactions described above were approximately $2.40 billion.

RESULTS OF OPERATIONS BY SEGMENT

The Company’s continuing operations are comprised of the following three segments: Commercial, Specialty and Personal.  Prior period results for these segments have been restated, to the extent practicable, to conform to these business segments. 

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Commercial

The Commercial segment offers a broad array of property and casualty insurance and insurance-related services to its clients.  Commercial is organized into three marketing and underwriting groups, each of which focuses on a particular client base and which collectively comprise Commercial’s core operations.  The marketing and underwriting groups include the following:

•Commercial Accounts serves primarily mid-sized businesses for casualty products and large and mid- sized businesses for property products.

•Select Accounts serves small businesses and offers property, liability, commercial auto and workers’ compensation insurance.

•National Accounts is comprised of three distinct business units.  The largest provides casualty products and services to large companies, with particular emphasis on workers’ compensation, general liability and automobile liability.  National Accounts also includes the commercial residual market business, which primarily offers workers’ compensation products and services to the involuntary market.  Beginning in the second quarter of 2005, National Accounts also includes the Company’s Discover Re operation, which provides property and casualty insurance products to insureds who utilize programs such as self-insurance, collateralized deductibles and captives.  Discover Re’s results were reclassified to the Commercial segment from the Specialty segment to more closely align the segment reporting structure with the manner in which the Company’s business is managed after recent changes in the Company’s management structure. 

Commercial also includes the Special Liability Group (which manages the Company’s asbestos and environmental liabilities); the reinsurance, health care, and certain international runoff operations; and policies written by the Company’s Gulf operation, which was placed into runoff during the second quarter of 2004.  These operations are collectively referred to as Commercial Other.

Results of the Company’s Commercial segment are summarized in the following table.  Prior period amounts and year-to-date 2005 amounts have been restated to reflect the reclassification of Discover Re from the Specialty segment to the Commercial segment. 

	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2005			2004			2005			2004
Revenues:
Earned premiums	$	2,164		$	2,411		$	4,368		$	4,142
Net investment income	498			419			978			842
Fee income	156			164			319			332
Other revenues	13			12			28			26
Total revenues	$	2,831		$	3,006		$	5,693		$	5,342
Total claims and expenses	$	2,101		$	2,580		$	4,359		$	4,320
Operating income	$	530		$	316		$	978		$	746
Loss and loss adjustment expense ratio	61.7		%	71.6		%	63.5		%	68.6		%
Underwriting expense ratio	27.8			29.0			28.5			27.7
GAAP combined ratio	89.5		%	100.6		%	92.0		%	96.3		%

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Operating income of $530 million for the second quarter of 2005 was $214 million, or 68%, higher than in the same 2004 period, driven by continued favorable loss trends which resulted in strong current accident year performance and strong net investment income.  Operating income in the second quarter of 2004 included significant charges that are described in more detail in the following narrative.  Through the first six months of 2005, operating income of $978 million was $232 million, or 31%, higher than in the same 2004 period. 

The $247 million decline in earned premiums in the second quarter of 2005 compared with the same 2004 period included a significant decline in runoff operations, where business is intentionally being non-renewed.  The remainder of the earned premium decline reflected lower levels of written premium volume in ongoing operations over the last twelve months.  Earned premium volume through the first half of 2005 grew $226 million, or 5%, over the comparable period of 2004, primarily reflecting the impact of the merger, partially offset by the decline in runoff operations. 

Net investment income in the second quarter of 2005 increased $79 million over the same 2004 period, primarily due to the increase in invested assets resulting from strong operational cash flows since the merger and strong returns from partnership investments.  Through the first half of 2005, the $136 million increase in net investment income over the same 2004 period reflected these factors, as well as the impact of the merger.  Net investment income for the six months ended June 30, 2004 included $82 million of income resulting from the initial public trading of one investment. 

National Accounts is the primary source of fee income due to its service businesses, which include claim and loss prevention services to large companies that choose to self-insure a portion of their insurance risks, and claims and policy management services to workers’ compensation residual market pools, automobile assigned risk plans and self-insurance pools.  The slight decline in fee income in the second quarter and first six months of 2005 compared with the same 2004 periods was primarily due to increased competition, particularly for very large customers.  In addition, several workers’ compensation accounts included in residual market pools in prior quarters re-entered the voluntary insurance market amid increasing competition in the marketplace. 

Claims and expenses for the second quarter of 2005 declined $479 million compared with the same period of 2004.  Claims and expenses in the second quarter of 2004 included a $197 million addition to environmental reserves, a $152 million addition to the reserve for uncollectible reinsurance recoverables, $44 million from the commutation of agreements with a major reinsurer and other net unfavorable prior year reserve development of $45 million.  Partially offsetting the impact of these reserve increases was favorable prior year loss development of $225 million related to less than expected claims from the September 11, 2001 terrorist attack.  Excluding these factors from the second quarter of 2004, claims and expenses in the second quarter of 2005 were down $266 million, reflecting continued favorable loss frequency trends and the decline in earned premium volume.  For the first six months of 2005, claims and expenses were up slightly over the same period of 2004, primarily reflecting the impact of the merger. 

The loss and loss adjustment expense ratio in the second quarter of 2005 included a 0.5 point impact from net favorable prior year reserve development, whereas the second quarter of 2004 included an 8.9 point impact from net unfavorable prior year reserve development.  For the first six months of 2005 and 2004, the impact of prior year reserve development on the loss and loss adjustment expense ratio was 0.1 points favorable and 5.0 points unfavorable, respectively.  There were no catastrophe losses incurred in the Commercial segment in the first six months of 2005 or 2004.  The underwriting expense ratio in the second quarter of 2005 improved by 1.2 points compared with the same quarter of 2004, reflecting the favorable impact of expense management initiatives and continuing personnel reductions in the Commercial Other sector.  In addition, the 2004 second quarter underwriting expense ratio included the impact of merger-related restructuring charges and an increase in the allowance for uncollectible amounts due from policyholders.  Through the first six months of 2005, the underwriting expense ratio was 0.8 points higher than the comparable 2004 ratio, primarily reflecting the earned premium declines associated with Gulf and other business in runoff. 

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Commercial’s gross and net written premiums by market were as follows:

	Three Months Ended June 30,
	2005				2004
(in millions)	Gross		Net		Gross		Net
Commercial Accounts	$	1,134	$	1,068	$	1,191	$	1,116
Select Accounts	729		719		734		709
National Accounts	577		238		573		241
Total Commercial Core	2,440		2,025		2,498		2,066
Commercial Other	41		22		301		168
Total Commercial	$	2,481	$	2,047	$	2,799	$	2,234

	Six Months Ended June 30,
	2005				2004
(in millions)	Gross		Net		Gross		Net
Commercial Accounts	$	2,363	$	2,195	$	2,123	$	1,964
Select Accounts	1,435		1,403		1,279		1,240
National Accounts	1,316		579		1,018		481
Total Commercial Core	5,114		4,177		4,420		3,685
Commercial Other	118		62		592		314
Total Commercial	$	5,232	$	4,239	$	5,012	$	3,999

Gross and net written premiums in the second quarter of 2005 declined 11% and 8%, respectively, compared with the same period of 2004, with the decline concentrated in the runoff operations comprising Commercial Other.  In the core Commercial Accounts market, business retention levels remained strong and new business levels in the second quarter grew over the same period of 2004.  Renewal price changes in Commercial Accounts were slightly negative in the second quarter of 2005, reflecting increasing competition in the marketplace.  In the Select Accounts market, business retention levels in the second quarter of 2005 remained very strong and grew markedly over the same period of 2004.  Renewal price changes in Select Accounts were in the low single digit range in the second quarter of 2005, while new business levels were down slightly from the second quarter of 2004.  The decline in second quarter 2005 gross and net written premium volume in the National Accounts market compared with the same period of 2004 was primarily due to a decline in renewal price changes and new business volume.  Through the first six months of 2005, the increase in gross and net written premium volume in the entire Commercial segment over the same period of 2004 primarily reflected the impact of the merger. 

The significant decline in Commercial Other premium volume in the second quarter and first six months of 2005 compared with the same periods of 2004 was primarily due to intentional non-renewals in the runoff operations comprising this category. 

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Specialty

The Specialty segment was created upon the merger of TPC and SPC.  It combined SPC’s specialty operations with TPC’s Bond and Construction operations, which were included in TPC’s Commercial segment prior to the merger.  The Specialty segment provides a full range of standard and specialized insurance coverages and services through dedicated underwriting, claims handling and risk management groups.  The segment comprises two primary groups: Domestic Specialty and International Specialty.

•Domestic Specialty includes several marketing and underwriting groups, each of which possesses customer expertise and offers products and services to address its respective customers’ specific needs.  These groups include Financial and Professional Services, Bond, Construction, Technology, Ocean Marine, Oil and Gas, Public Sector, Underwriting Facilities, Umbrella/Excess & Surplus Group and Personal Catastrophe Risk.  As discussed in more detail above, the Company’s Discover Re operation was reclassified to the Commercial segment effective in the second quarter of 2005.  In August 2005, the Company announced that it had reached a definitive agreement to sell its Personal Catastrophe Risk operation.

•International Specialty includes coverages marketed and underwritten to several specialty customer groups within the United Kingdom, Canada and the Republic of Ireland and the Company’s participation in Lloyd’s.

Results of the Company’s Specialty segment are summarized in the following table.  Prior period amounts and year-to-date 2005 amounts have been restated to reflect the reclassification of Discover Re from the Specialty segment to the Commercial segment. 

	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2005			2004			2005			2004
Revenues:
Earned premiums	$	1,449		$	1,375		$	2,905		$	1,686
Net investment income	173			129			343			180
Fee income	9			7			17			11
Other revenues	8			3			20			5
Total revenues	$	1,639		$	1,514		$	3,285		$	1,882
Total claims and expenses	$	1,329		$	2,738		$	2,738		$	3,156
Operating income (loss)	$	221		$	(790	)	$	394		$	(818	)
Loss and loss adjustment expense ratio	59.9		%	162.8		%	62.1		%	150.8		%
Underwriting expense ratio	31.0			35.5			31.5			35.5
GAAP combined ratio	90.9		%	198.3		%	93.6		%	186.3		%

Operating income of $221 million in the second quarter of 2005 was $1.01 billion higher than operating results in the second quarter of 2004, which included significant charges that are discussed in more detail in the following narrative.  Through the first six months of 2005, operating income was $1.21 billion higher than in the same period of 2004.  Second quarter and six months operating income in 2005 was driven by profitable results from nearly all of the underwriting groups comprising this segment. 

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Earned premium growth of $74 million in the second quarter of 2005 over the same 2004 period primarily reflected a decline in ceded earned premiums in the Bond operation, which in the second quarter of 2004 included $75 million of ceded earned premiums related to reinstatement premiums.  Earned premiums in the second quarter of 2005 also reflected increasing business volume in Domestic Specialty operations, partially offset by a decline in International Specialty earned premium volume, primarily at Lloyd’s due to the sale of certain business written through Lloyd’s.  Domestic earned premiums totaled $1.15 billion in the second quarter of 2005, compared with $1.07 billion in the same period of 2004.  International earned premiums for the same periods were $296 million and $307 million, respectively.  For the six months ended June 30, 2005, earned premium growth of $1.22 billion over the same period of 2004 primarily reflected the impact of the merger. 

Second quarter 2005 net investment income of $173 million grew $44 million over the same period of 2004, driven by the increase in invested assets over the last twelve months resulting from strong operational cash flows.  For the first six months of 2005, the $163 million increase in net investment income over the same period of 2004 reflected these factors, as well as the impact of the merger. 

Claims and expenses in the second quarter of 2005 and first six months of 2005 included $16 million and $69 million, respectively, of net unfavorable prior year reserve development.  As previously announced, in the second quarter of 2005, the Company reached a settlement with a co-surety whereby the co-surety made a payment to the Company and was released from further financial obligations to the Company in connection with a specific construction exposure.  The settlement payment, coupled with the previously established co-surety reserves, approximated the current estimate of the co-surety’s share of the bonded losses related to this exposure.  In the second quarter and first six months of 2004, claims and expenses included $1.28 billion and $1.43 billion, respectively, of unfavorable prior year reserve development, including provisions to increase the estimate of the acquired net construction reserves by $500 million and the acquired net surety reserves in the Company’s Bond operation by $300 million, and a $252 million loss provision related to the financial condition of a construction contractor.  The following discussion provides more information regarding the net unfavorable prior year loss development related to these items in the second quarter of 2004, as well as other net reserving actions.

Construction Reserves

Beginning on April 1, 2004, upon the completion of the merger of TPC and SPC, personnel from the predecessor companies were able to share detailed policyholder information, claim files and actuarial data related to the acquired construction reserves. This enabled an analysis to be performed in the second quarter of 2004 of the acquired construction reserves using TPC’s long-established practices that include evaluating exposures by type of claim (e.g., construction defect, construction wrap up, other), by type of coverage, (e.g., guaranteed cost, loss responsive, other) and by detailed line of business (general liability, commercial auto, etc.), among others. For general liability exposures, which include construction defect and construction wrap-up, interpretation of underlying trends (both present and future) and the related reserve estimation process is highly judgmental due to the low frequency/high severity and complex nature of these exposures. In particular, for construction defect, there is a high degree of uncertainty relating to whether coverage exists, when losses occur, the size of each loss, expectations for future interpretive rulings concerning contract provisions and the extent to which the assertion of these claims will expand geographically. As a result, material variations can and do occur among actuarial reserve estimates for these types of exposures. In a merger, these differences are likely to be even more pronounced. Prior to a merger, each legacy company consistently applies its assumptions, judgments and actuarial methods to estimate reserves. Differences between these assumptions, judgments and actuarial methods need to be understood and reconciled, and a uniform approach needs to be adopted for the merged entity. In this situation, material adjustments can and do occur for reserves related to exposures having a high degree of uncertainty.

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Analysis of the acquired construction reserves was completed near the end of the second quarter of 2004. Based upon the results of this analysis, the Company increased its estimate of the acquired net construction reserves by $500 million, including $400 million for construction defect and $100 million for construction wrap-up claims, and recognized this change in estimate as an income statement charge in the second quarter of 2004. There was no reinsurance associated with this charge.

Surety Reserves

Beginning on April 1, 2004, upon completion of the merger of TPC and SPC, personnel from the predecessor companies were able to share the detailed SPC policyholder information, including underwriting, claim and actuarial files, related to surety reserves. Access to this detailed information enabled the Company to perform a claim-by-claim review of reserves and claims handling strategies during the second quarter of 2004 using the combined expertise of claims adjusters from the legacy companies. This type of review involves considerable judgment, especially with respect to the economic outlook within which claims will be settled, estimates for dates of loss occurrence and evaluations of IBNR exposures for each insured. For example, as a result of the detailed information obtained concerning contractors with reported claims, the Company considered whether or not losses were incurred but not yet reported on one or more additional projects for each contractor examined.

Also on April 1, 2004, the Company could begin to use this detailed information to compare SPC’s assumptions, judgments and actuarial methods that were underlying the acquired reserves with the Company’s assumptions, judgments and actuarial methods. Similarities and differences were found to exist. Similarities included, but were not limited to, recognizing claim reserves when it was determined that contractors and commercial surety insureds were in default and thereby unable to meet their obligations, estimating initial IBNR provisions, and periodically re-evaluating, at least quarterly, the adequacy of the reserves established based on actual claims recorded and revised estimates of IBNR. Differences included judgments and methods related to determining IBNR development factors and expected salvage, among others.

That these differences exist is not unusual for surety reserve estimates. Surety is a line of business for which there are low frequency, high severity, very complex claims for certain exposures, particularly those related to large construction contractors and commercial surety insureds. Determining the date of loss in these circumstances requires a high degree of judgment. In addition, the claim reserve estimates even for reported claims are also highly judgmental. These two factors, among others, combine to make IBNR reserve estimations for surety extremely difficult. Due to this high degree of uncertainty, the informed judgments of different actuaries could and do vary materially. As discussed above, in a merger, these differences are likely to be even more pronounced.

The claim reviews and actuarial analyses were both completed near the end of the second quarter of 2004. Based upon the results of these reviews and analyses, the Company increased its estimate of the acquired net surety reserves by $300 million, net of $170 million of reinsurance, and recognized this change in estimate as an income statement charge in the second quarter of 2004.

Prior to the merger and beginning in the third quarter of 2003, SPC disclosed that a large construction contractor for which it had written several surety bonds was experiencing financial difficulty. Based upon an analysis of the financial condition of the construction contractor that was performed in the third quarter of 2003, a restructuring plan was adopted by the construction contractor, its banks and SPC, among others, as a means to minimize estimated ultimate losses.  SPC monitored the progress of the construction contractor toward meeting the requirements of the restructuring plan throughout subsequent quarters. SPC also estimated and disclosed its estimated ultimate net losses related to this exposure, beginning in the third quarter of 2003 and updated each quarter thereafter, including the effects of advances made or expected to be made to the construction contractor, applicable collateral, co-surety participations and reinsurance. The size and complexity of these particular construction contracts, coupled with the deteriorating credit quality of the construction contractor and the inherent uncertainty as to whether it would meet the obligations of the restructuring plan, resulted in a high degree of judgment in estimating potential losses.

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A comprehensive analysis that began in the first quarter of 2004 was completed during the last half of the second quarter of 2004.
Based upon this analysis, the Company concluded that the contractor would not be able to meet the targets set forth in its business and restructuring plans.  Therefore, the Company moved from supporting the contractor’s restructuring plan to adopting a workout plan as a means to minimize estimated ultimate losses.  Under the workout plan, the Company would no longer provide additional surety bonds for new projects of the construction contractor.  Also as part of the workout plan, the Company was able to implement additional accounting and engineering procedures for each open project, which included using specialists to implement additional forecasting, cash management, and reporting procedures, on both a project-by-project and consolidated level.  Based upon this second quarter 2004 change to a workout plan and the detailed financial analysis that was able to be performed, the Company increased its estimate of the ultimate net loss by $252 million, including $9 million of reinsurance.  This estimate took into consideration paid amounts, net receivables, liquidated damages, overhead costs, additional completion costs, including costs associated with replacing the contractor, receivable discounts, current and future claims from owners and subcontractors against the contractor, and the value of collateral, among others.

Also during the last half of the second quarter of 2004, a participating co-surety on this exposure announced that insurance regulators had approved its submitted run-off plan.  Based upon industry’s knowledge of the co-surety’s run-off plan and the Company’s analysis of its financial condition, the Company concluded that it was unlikely to collect the full amount projected to be owed by the co-surety and established an appropriate level of reserves.  As discussed in more detail above, the Company reached a settlement with this co-surety in the second quarter of 2005. 

The second quarter 2004 results also included a $109 million charge related to the commutation of agreements with a major reinsurer; a $217 million charge to increase the allowances for estimated amounts due from reinsurance recoverables, policyholder receivables, and a co-surety on the specific construction contractor claim discussed above, and other net charges totaling $55 million.

The loss and loss adjustment expense ratio for the second quarter of 2005 included a 1.1 point impact from unfavorable prior year reserve development, whereas the comparable 2004 ratio included a 93.4 point impact from the significant unfavorable prior year reserve development described above.  Excluding that development in both periods, the adjusted second quarter 2005 loss ratio of 58.8 was 10.6 points improved over the adjusted 2004 second quarter loss ratio of 69.4, driven by lower current accident year losses, particularly in the Bond operation.  Through the first six months of 2005 and 2004, the loss and loss adjustment expense ratios adjusted on a similar basis were 59.7 and 65.7, respectively.  The 4.5 point and 4.0 point improvements in the underwriting expense ratio for the second quarter and first six months of 2005, respectively, over the same 2004 periods reflected the impact of expense management initiatives.  In addition, the respective 2004 underwriting expense ratios were negatively impacted by the reinstatement premiums discussed above, as well as a provision to increase the allowance for estimated amounts due from policyholder receivables and merger-related restructuring costs.  

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Specialty’s gross and net written premiums by market were as follows:

	Three Months Ended June 30,
	2005				2004
(in millions)	Gross		Net		Gross		Net
Construction	$	256	$	261	$	276	$	274
Bond	401		368		399		303
Financial and Professional Services	234		232		191		184
Other	512		388		456		342
Total Domestic Specialty	1,403		1,249		1,322		1,103
International Specialty	355		296		421		360
Total Specialty	$	1,758	$	1,545	$	1,743	$	1,463

	Six Months Ended June 30,
	2005				2004
(in millions)	Gross		Net		Gross		Net
Construction	$	521	$	511	$	410	$	400
Bond	772		531		648		445
Financial and Professional Services	434		352		191		184
Other	993		745		456		342
Total Domestic Specialty	2,720		2,139		1,705		1,371
International Specialty	729		560		436		361
Total Specialty	$	3,449	$	2,699	$	2,141	$	1,732

Gross and net written premiums in the second quarter of 2005 increased 1% and 6%, respectively, over comparable written premium volume in the same 2004 period.  As discussed previously, in the first quarter of 2005, the Company implemented changes in the timing and structure of reinsurance purchased in the Specialty segment.  Those changes resulted in an increase in ceded premiums in the first quarter of 2005 and a reduction in ceded premiums in the second quarter of 2005, when compared with the same periods of 2004.  The modest increase in gross written premiums in the second quarter of 2005 was primarily driven by growth in the Financial & Professional Services, Technology, Ocean Marine and Oil & Gas operations, which was partially offset by the impact of the now-completed process of aligning the Construction underwriting profile of the two predecessor companies, the sale of certain personal lines classes written through Lloyd’s and the timing of certain policy renewals at Lloyd’s.  In Domestic Specialty operations, and International Specialty operations excluding Lloyds, business retention levels remained strong.  New business levels in Domestic Specialty also continued to improve.  In the second quarter of 2005, approximately $50 million of gross written premiums previously written in the Company’s Gulf operation in the Commercial segment were renewed in the Specialty segment.  Through the first six months of 2005, gross and net premiums grew 61% and 56%, respectively, over the same 2004 period, primarily reflecting the impact of the merger. 

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Personal

Personal writes virtually all types of property and casualty insurance covering personal risks. The primary coverages in Personal are automobile and homeowners insurance sold to individuals. These products are distributed through independent agents, sponsoring organizations such as employee and affinity groups, and joint marketing arrangements with other insurers.

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

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

Results of the Company’s Personal segment were as follows: 

	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2005			2004			2005			2004
Revenues:
Earned premiums	$	1,496		$	1,368		$	2,955		$	2,665
Net investment income	116			93			225			238
Other revenues	23			21			47			44
Total revenues	$	1,635		$	1,482		$	3,227		$	2,947
Total claims and expenses	$	1,244		$	1,193		$	2,416		$	2,307
Operating income	$	266		$	197		$	551		$	434
Loss and loss adjustment expense ratio	55.4		%	60.9		%	53.9		%	60.5		%
Underwriting expense ratio	26.2			24.7			26.3			24.5
GAAP combined ratio	81.6		%	85.6		%	80.2		%	85.0		%

Operating income of $266 million for the second quarter of 2005 was $69 million, or 35%, higher than operating income in the same 2004 period.  Through the first half of 2005, operating income of $551 million was $117 million, or 27%, higher than in the first half of 2004.  The improvement in 2005 was driven by a continued decline in claim frequency across both lines of business, strong net investment income and strong earned premium growth reflecting both unit growth and rate increases. 

Earned premiums in the second quarter and first six months of 2005 increased 9% and 11%, respectively, over the same periods of 2004, primarily due to continued strong business retention levels, strong new business volumes in the second half of 2004 and renewal price increases over the last twelve months.

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Net investment income in the second quarter of 2005 increased $23 million, or 25%, over the same 2004 period, primarily due to the increase in invested assets resulting from strong operational cash flows since the merger, and strong returns from partnership investments in the second quarter of 2005.  Through the first six months of 2005, net investment income of $225 million declined $13 million compared with the same period of 2004.  Net investment income in the prior year six-month period included $42 million of income resulting from the initial public trading of one investment. 

Claims and expenses in the second quarter and first six months of 2005 reflected net favorable prior year reserve development of $81 million and $195 million, respectively.  Net favorable prior year reserve development in the same periods of 2004 was $100 million and $201 million, respectively.  The favorable prior year development in 2005 was primarily driven by further declines in the frequency of non-catastrophe losses.  The 2005 results also reflected the recognition of lower current accident year frequency of non-catastrophe claims in the Homeowners and Other line of business and an improvement in frequency trends in the Automobile line of business.  Catastrophe losses in the second quarter of 2005, primarily resulting from wind and hail storms, totaled $11 million, compared with $24 million of catastrophe losses in the same 2004 period.  For the first six months of 2005, catastrophe losses totaled $23 million compared with losses of $44 million in the first half of 2004.  Claims and expenses in 2005 also reflected increased agent profit sharing expenses and continued investments in process re-engineering efforts targeted to improve loss severity, as well as in personnel, technology and infrastructure designed to sustain and accelerate profitable growth. 

The loss and loss adjustment expense ratio for the second quarter and first six months of 2005 improved 5.5 points and 6.6 points, respectively, over the same periods of 2004, primarily due to the recognition of lower frequency in both the Automobile and Homeowners and Other lines of business, consistent with experience in recent quarters.  The impact from net favorable prior year reserve development in the second quarter of 2005 was 5.4 points, compared with 7.3 points in the same 2004 period.  Through the first six months of 2005 and 2004, the net favorable impact of prior year reserve development was 6.6 points and 7.5 points, respectively. 

The 1.5 point and 1.8 point increases in the underwriting expense ratio for the second quarter and first six months of 2005 compared with the respective periods of 2004 reflected an increase in commission expenses as well as an increase in other insurance expenses.  The increase in commissions reflected a changing product mix and higher agent profit sharing expenses driven by continued profitable results.  The increase in other insurance expenses reflected the impact of continued process re-engineering investments and investments in personnel, technology and infrastructure to support business growth and product development.   

Personal’s gross and net written premiums by product line were as follows:

	Three Months Ended June 30,
	2005				2004
(in millions)	Gross		Net		Gross		Net
Automobile	$	888	$	878	$	900	$	893
Homeowners and Other	782		746		700		666
Total Personal	$	1,670	$	1,624	$	1,600	$	1,559

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	Six Months Ended June 30,
	2005				2004
(in millions)	Gross		Net		Gross		Net
Automobile	$	1,758	$	1,732	$	1,754	$	1,740
Homeowners and Other	1,390		1,326		1,245		1,185
Total Personal	$	3,148	$	3,058	$	2,999	$	2,925

Gross and net written premiums in the second quarter of 2005 increased 4% over the same period of 2004.  For the first six months of 2005, gross and net written premiums increased 5% over the first half of 2004.  The increases were primarily due to growth in the Homeowners and Other product line, driven by rate increases and unit growth.  In the Automobile line, efforts to diversify geographically resulted in positive premium growth outside of the Northeastern United States, but did not offset business reductions in the increasingly competitive environment in the Northeast.  Retention rates, however, remained very strong and consistent with prior year levels. 

The Personal segment had approximately 6.4 million and 6.0 million policies in force at June 30, 2005 and 2004, respectively.  In the Automobile line of business, policies in force at June 30, 2005 increased 2% over the same date in 2004.  Policies in force in the Homeowners and Other line of business at June 30, 2005 grew by 8% over the same date in 2004.  Effective in the first quarter of 2005, homeowners and other policies in force include certain endorsements that had previously not been counted as separate policies.  Prior year periods were restated to conform to the current year presentation. 

Interest Expense and Other

	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2005			2004			2005			2004
Revenues	$	(13	)	$	3		$	(8	)	$	3
Net after-tax expense	$	(51	)	$	(60	)	$	(98	)	$	(85	)

The decrease in net after-tax expense for Interest Expense and Other for the second quarter of 2005 compared with the same period of 2004 was primarily due to a reduction in non-interest related expenses.  The second quarter 2004 total included net after-tax non-recurring charges of $9 million related to the merger.  The increase in net after-tax expense for the first six months of 2005 compared with the same 2004 period was primarily due to $23 million of incremental interest expense on debt assumed in the merger, partially offset by the absence of the non-recurring merger-related charges in 2005.  Negative revenues in the second quarter and first six months of 2005 were driven by the amortization of the discount on forward contracts related to the partial divestiture of the Company’s equity interest in Nuveen Investments, which was classified as an investment expense and reduced net investment income allocated to Interest Expense and Other. 

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ASBESTOS CLAIMS AND LITIGATION

The Company believes that the property and casualty insurance industry has suffered from court decisions and other trends that have attempted to expand insurance coverage for asbestos claims far beyond the intent of insurers and policyholders.  As a result, the Company continues to experience a significant 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 claim filings include more intensive advertising by lawyers seeking asbestos claimants, the increasing focus by plaintiffs on new and previously peripheral defendants and entities seeking bankruptcy protection as a result of asbestos-related liabilities.  In addition to contributing to the overall number of 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.  Bankruptcy proceedings are also causing increased settlement demands against those policyholders who are not in bankruptcy but that remain in the tort system.  Recently, in many jurisdictions, those who allege very serious injury and who can present credible medical evidence of their injuries are receiving priority trial settings in the courts, while those who have not shown any credible disease manifestation have their hearing dates delayed or placed on an inactive docket.  This trend, along with the focus on new and previously peripheral defendants, contributes to the loss and loss expense payments experienced by the Company.  In addition, the Company’s asbestos-related loss and loss expense experience is impacted by the exhaustion or unavailability due to insolvency of other insurance potentially available to policyholders along with the insolvency or bankruptcy of other defendants.  The Company is currently involved in coverage litigation concerning a number of policyholders who have filed for bankruptcy, including, among others, ACandS, Inc., who in some instances have asserted that all or a portion of their asbestos-related claims are not subject to aggregate limits on coverage as described generally in the next paragraph. (Also see “Part II - Other Information - Legal Proceedings”).  These trends are expected to continue through 2005.  As a result of the factors described above, there is a high degree of uncertainty with respect to future exposure from asbestos claims.

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

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

In addition, proceedings have been launched directly against insurers, including the Company, challenging insurers’ conduct in respect of asbestos claims, and, as discussed below, claims by individuals seeking damages arising from alleged asbestos-related bodily injuries.  The Company anticipates the filing of other direct actions against insurers, including the Company, in the future.  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.  The Company believes it has meritorious defenses to these claims and has received favorable rulings in certain jurisdictions.  Additionally, TPC has entered into settlement agreements, which have been approved by the court in connection with the proceedings initiated by TPC in the Johns Manville bankruptcy court.  If the rulings of the bankruptcy court are affirmed through the appellate process, then TPC will have resolved substantially all of the pending claims against it of this nature. (Also, see “Part II - Other Information, Item 1 - Legal Proceedings.”)

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

The Company also compares its historical gross and net loss and expense paid experience, year-by-year, to assess any emerging trends, fluctuations, or characteristics suggested by the aggregate paid activity.  Net asbestos losses and expenses paid in the first six months of 2005 were $191 million, compared with $250 million in the same period of 2004.  Approximately 38% in the first six months of 2005 and 53% in the first six months of 2004 of total net paid losses relate to policyholders with whom the Company previously entered into settlement agreements that would limit the Company’s liability.  At June 30, 2005, net asbestos reserves totaled $3.74 billion, compared with $3.05 billion at June 30, 2004.  The increase in reserves was driven by a provision to strengthen reserves in the fourth quarter of 2004.

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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)	2005			2004
Beginning reserves:
Direct	$	4,775		$	3,782
Ceded	(843		)	(805		)
Net	3,932			2,977
Reserves acquired:
Direct	—			502
Ceded	—			(191		)
Net	—			311
Incurred losses and loss expenses:
Direct	—			7
Ceded	—			(2		)
Net	—			5
Accretion of discount:
Direct	1			10
Ceded	—			—
Net	1			10
Losses paid:
Direct	249			249
Ceded	(58		)	1
Net	191			250
Ending reserves:
Direct	4,527			4,052
Ceded	(785		)	(999		)
Net	$	3,742		$	3,053

See “-Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves.”

ENVIRONMENTAL CLAIMS AND LITIGATION

The Company continues to receive claims from policyholders who allege that they are liable for injury or damage arising out of their alleged disposition of toxic substances. Mostly, these claims are due to various legislative as well as regulatory efforts aimed at environmental remediation. For instance, the Comprehensive Environmental Response, Compensation and Liability Act (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.

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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 Company strives to extinguish any obligations it may have under any policy issued to the policyholder for past, present and future environmental liabilities and extinguish any pending coverage litigation dispute with the policyholder.  This form of settlement is commonly referred to as a “buy-back” of policies for future environmental liability.  In addition, many of the agreements have also extinguished any insurance obligation which the Company may have for other claims, including but not limited to asbestos and other cumulative injury claims.  The Company and its policyholders may also agree to settlements which extinguish any future liability arising from known specified sites or claims.  Provisions of these agreements also include appropriate indemnities and hold harmless provisions to protect the Company.  The Company’s general purpose in executing these agreements is to reduce the Company’s potential environmental exposure and eliminate the risks presented by coverage litigation with the policyholder and related costs.

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

The duration of the Company’s investigation and review of these claims and the extent of time necessary to determine an appropriate estimate, if any, of the value of the claim to the Company vary significantly and are dependent upon a number of factors.  These factors include, but are not limited to, the cooperation of the policyholder in providing claim information, the pace of underlying litigation or claim processes, the pace of coverage litigation between the policyholder and the Company and the willingness of the policyholder and the Company to negotiate, if appropriate, a resolution of any dispute pertaining to these claims.  Because these factors vary from claim-to-claim and policyholder-by-policyholder, the Company cannot provide a meaningful average of the duration of an environmental claim.  However, based upon the Company’s experience in resolving these claims, the duration may vary from months to several years.

The Company’s review of policyholders tendering claims for the first time has indicated that they are lower in severity.  These policyholders generally present smaller exposures, have fewer sites and are lower tier defendants. Further, regulatory agencies are utilizing risk-based analysis and more efficient clean-up technologies.  However, there have been judicial interpretations that, in some cases, have been unfavorable to the industry and the Company.  Additionally, the Company has experienced an increase in the anticipated settlement amounts of certain matters as well as an increase in loss adjustment expenses.

In its review of environmental reserves, the Company considers: the exposure presented by each policyholder and the anticipated cost of resolution, if any; the adequacy of reserves for past settlements; changing judicial and legislative trends; the potential for policyholders with smaller exposures to be named in new clean-up action for both on- and off-site waste disposal activities; the potential for adverse development and additional new claims beyond previous expectations; and the potential higher costs for new settlements.  Based on these trends, developments and management judgment, in the second quarter of 2004, the Company recorded a pretax charge of $204 million, net of reinsurance, to increase environmental reserves due to revised estimates of costs related to settlement initiatives. 

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At June 30, 2005, approximately 64%, or approximately $301 million, of the net environmental reserve was carried in a bulk reserve and includes unresolved and incurred but not reported environmental claims for which the Company had not received any specific claims as well as for the anticipated cost of coverage litigation disputes relating to these claims.  The balance, approximately 36%, or approximately $167 million, of the net environmental reserve consisted of case reserves.  The bulk reserve the Company carries is established and adjusted based upon the aggregate volume of in-process environmental claims and the Company’s experience in resolving those claims. 

Gross paid losses in the first six months of 2005 were $178 million, compared with $80 million for the same period in 2004.  This increase was due to the inclusion of the SPC business for the entire period in 2005 and a significant settlement with one policyholder.  TPC executed an agreement with this policyholder which resolved all past, present and future hazardous waste and pollution property damage claims, and all related past and pending bodily injury claims.  In addition, TPC and this policyholder entered into a coverage-in-place agreement which addresses the handling and resolution of all future hazardous waste and pollution bodily injury claims.  Under the coverage-in-place agreement, TPC has no defense obligation, and there is an overall cap with respect to any indemnity obligation that might be owed.  The first two of three payments were made during the first six months of 2005, while the final payment will be paid in 2006. 

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

(at and for the six months ended June 30 in millions)	2005			2004
Beginning reserves:
Direct	$	725		$	331
Ceded	(84		)	(41		)
Net	641			290
Reserves acquired:
Direct	—			271
Ceded	—			(58		)
Net	—			213
Incurred losses and loss expenses:
Direct	—			242
Ceded	—			(38		)
Net	—			204
Losses paid:
Direct	178			80
Ceded	(5		)	(29		)
Net	173			51
Ending reserves:
Direct	547			764
Ceded	(79		)	(108		)
Net	$	468		$	656

See “Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves.”

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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, 2005 were 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 difficult to determine the ultimate exposure for asbestos and environmental claims and related litigation.  As a result, these reserves are subject to revision as new information becomes available and as claims develop.  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 existence and/or amount of available coverage for asbestos and/or environmental 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.  In addition, the Company’s asbestos-related loss and loss expense experience is impacted by the exhaustion or unavailability due to insolvency of other insurance potentially available to policyholders along with the insolvency or bankruptcy of other defendants.  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.  As part of its continuing analysis of asbestos reserves, which includes an annual ground-up review of asbestos policyholders, the Company continues to study the implications of these and other developments.  Also see “Part II - Other Information, Item 1 - - 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 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.

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, the volatility of 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.

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Net cash flows provided by operating activities from continuing operations totaled $1.73 billion and $2.21 billion in the first six months of 2005 and 2004, respectively.  The decrease in 2005 reflected the inclusion in 2004 of $867 million in cash proceeds received pursuant to the commutation of specific reinsurance agreements described previously.  Excluding the impact of the commutation, moderating rates in many of the Company’s insurance operations, improved underwriting profitability and consistently strong investment receipts contributed to the increase in operational cash flows in the first six months of 2005 over the same 2004 period. 

Net cash flows used in investing activities from continuing operations totaled $2.38 billion in the first six months of 2005, compared with $1.78 billion in the same 2004 period.  Funds in both years were invested predominantly in fixed maturity securities. 

The Company’s cash flows in the second quarter of 2005 included $1.87 billion of pretax proceeds (after underwriting fees and transaction costs) from the divestiture of a significant portion of its equity interest in Nuveen Investments.  In July 2005, the Company received an additional $402 million of proceeds upon Nuveen Investments’ repurchase of 12.1 million of its common stock pursuant to an existing agreement, and in August 2005, the Company received an additional $132 million of proceeds from the sale of its remaining equity interest in Nuveen Investments.  A significant portion of the proceeds is expected to be contributed to the capital of the Company’s insurance subsidiaries, with the remainder available for general corporate purposes. 

The majority of funds available for investment are deployed in a widely diversified portfolio of high quality, liquid intermediate-term taxable U.S. government, corporate and mortgage backed bonds and tax-exempt U.S. municipal bonds.  The Company closely monitors the duration of its fixed maturity investments, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy the Company’s insurance and debt obligations.  The Company’s management of the duration of the fixed income investment portfolio generally produces a duration that exceeds the duration of the Company’s net insurance 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 average duration of fixed maturities and short-term securities was 3.9 years as of June 30, 2005, compared with 4.1 years at December 31, 2004.

The Company also invests much smaller amounts in equity securities, venture capital and real estate.  These investment classes have the potential for higher returns but also involve varying degrees of risk, including less stable rates of return and less liquidity.

The primary goals of the Company’s asset liability management process are to satisfy the insurance liabilities, manage the interest rate risk embedded in those insurance liabilities, and maintain sufficient liquidity to cover fluctuations in projected liability cash flows.  Generally, the expected principal and interest payments produced by the Company’s fixed income portfolio adequately fund the estimated runoff of the Company’s insurance reserves.  Although this is not an exact cash flow match in each period, the substantial degree by which the market value of the fixed income portfolio exceeds the present value of the net insurance liabilities, plus the positive cash flow from newly sold policies and the large amount of high quality liquid bonds provides assurance of the Company’s ability to fund the payment of claims without having to sell illiquid assets or access credit facilities. 

At June 30, 2005, total cash, short-term invested assets and other readily marketable securities aggregating $2.03 billion were held at the holding company level.  These assets were primarily funded by dividends received from the Company’s operating subsidiaries and proceeds from the partial divestiture of Nuveen Investments.  These assets, combined with other sources of funds available, primarily additional dividends from operating subsidiaries, are considered sufficient to meet the liquidity requirements of the Company.  These liquidity requirements include primarily shareholder dividends and debt service.  The Company intends to contribute $1.225 billion to its insurance operating companies during the third quarter of 2005.

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Net cash flows used in financing activities from continuing operations totaled $741 million in the first six months of 2005, compared with $598 million in the same 2004 period.  Dividends paid to shareholders totaled $307 million and $344 million in the first six months of 2005 and 2004, respectively.  During the second quarter of 2005, the Company funded the maturity of its $238 million 7.875% senior notes, its $79 million 7.125% senior notes, and $64 million of its medium-term notes bearing interest rates ranging from 6.60% to 7.01%.  In addition, commercial paper borrowings declined by $101 million from year-end 2004.  On August 3, 2005, the Company’s Board of Directors declared a quarterly dividend of $0.23 per share, which is payable September 30, 2005 to shareholders of record on September 9, 2005. 

In July 2002, concurrent with the issuance of 17.8 million of SPC common shares in a public offering, SPC issued 8.9 million equity units, each having a stated amount of $50, for gross consideration of $442 million.  Each equity unit initially consisted of a forward purchase contract for the Company’s common stock (maturing in August 2005) and an unsecured $50 senior note of the Company (maturing in 2007).  Total annual distributions on the equity units are at the rate of 9.00%, consisting of interest on the note at a rate of 5.25% and fee payments under the forward contract of 3.75%.  The forward contract requires the investor to purchase, for $50, a variable number of shares of the Company’s common stock on the settlement date of August 16, 2005.  The number of shares to be purchased will be determined based on a formula that considers the average closing price of the Company’s common stock on each of 20 consecutive trading days ending on the third trading day immediately preceding the settlement date, in relation to the $24.20 per share price of common stock at the time of the offering.  Had the settlement date been June 30, 2005, the Company would have issued approximately 15 million common shares based on the average closing price of the Company’s common stock immediately prior to that date.  Holders of the equity units had the opportunity to participate in a required remarketing of the senior note component.  The initial remarketing date was May 11, 2005.  On that date, the notes were successfully remarketed, and the interest rate on the notes was reset to 5.01%, from 5.25%, effective May 16, 2005.  The remarketed notes mature on August 16, 2007.

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 the Company’s operating subsidiaries, legal requirements, regulatory constraints and other factors as the Board of Directors deems relevant.  Dividends would be paid by the Company only if declared by its Board of Directors out of funds legally available, subject to any other restrictions that may be applicable to the Company.

The Company’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 $2.61 billion will be available in 2005 for such dividends without prior approval of the Connecticut Insurance Department for Connecticut-domiciled subsidiaries and the Minnesota Department of Commerce for Minnesota-domiciled subsidiaries.  The Company received $757 million of dividends from its insurance subsidiaries during the first six months of 2005. 

The Company maintains an $800 million commercial paper program with back-up liquidity consisting of a bank credit agreement.  In June 2005, the Company entered into a $1.0 billion, five-year revolving credit agreement with a syndicate of financial institutions.  The new agreement replaced and consolidated the Company’s three prior bank credit agreements that had collectively provided the Company access to $1.0 billion of bank credit lines.  Pursuant to covenants in the new agreement, the Company must maintain an excess of consolidated net worth over goodwill and other intangible assets of not less than $10 billion at all times.  The Company must also maintain a ratio of total consolidated debt to the sum of total consolidated debt plus consolidated net worth of not greater than 0.40.  In addition, the credit agreement contains other customary restrictive covenants as well as certain customary events of

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default, including with respect to a change in control.  At June 30, 2005, the Company was in compliance with these covenants and all other covenants related to its respective debt instruments outstanding.  Pursuant to the terms of the revolving credit agreement, the Company has an option to increase the credit available under the facility, no more than once a year, up to a maximum facility amount of $1.5 billion, subject to the satisfaction of a ratings requirement and certain other conditions.  There was no amount outstanding under the credit agreement as of June 30, 2005. 

The Company has the option to defer interest payments on its convertible junior subordinated notes for a period not exceeding 20 consecutive quarterly interest periods.  If the Company 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.

Upon completion of the merger on April 1, 2004, the Company acquired all obligations related to SPC’s outstanding debt, which had a carrying value of $3.68 billion at the time of the merger.  In accordance with purchase accounting, the carrying value of the SPC debt acquired was adjusted to market value as of April 1, 2004 using the effective interest rate method, which resulted in a $301 million adjustment to increase the amount of the Company’s consolidated debt outstanding.  That fair value adjustment is being amortized over the remaining life of the respective debt instruments acquired.  That amortization, which totaled $34 million in the first six months of 2005, reduced reported interest expense. 

Ratings

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

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

On April 18, 2005, A.M. Best affirmed the financial strength rating of “A+” of Travelers Property Casualty Pool and the debt ratings of “a-” on senior debt, “bbb+” on subordinated debt, “bbb” on trust preferred securities, “bbb” on preferred stock and “AMB-1” on commercial paper of The St. Paul Travelers Companies, Inc. and subsidiaries.  A.M. Best also removed these ratings from under review and assigned a stable outlook.  The ratings had been placed under review pending the close of a potential divesture of the Company’s investment in Nuveen Investments.

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On July 13, 2005, A.M. Best assigned a financial strength rating (FSR) of “A+” and an issuer credit rating (ICR) of “aa-” to the members of the newly formed St. Paul Travelers Reinsurance Pool.  This ratings action followed the Company’s announcement that it had combined the St. Paul and Travelers pools, forming a new pool effective July 1, 2005, retroactive to January 1, 2005 and merged Gulf Insurance Company, the lead company of the former Gulf Insurance Group, with and into Travelers Indemnity Company, the lead company of the new pool, effective July 1, 2005.  The 28 participants in the new pool, 17 reinsured affiliates and Travelers Casualty and Surety of America constitute the 46 members of A.M. Best’s new rating unit, St. Paul Travelers Insurance Companies.  As a result of the new pooling arrangement, A.M. Best upgraded the FSRs to “A+” from “A” and the ICRs to “aa-” from “a” of the 18 members of the former St. Paul Companies; affirmed the FSRs of “A+” and ICRs of “aa-” of the 24 members of the former Travelers Property Casualty Pool; and upgraded the FSRs to “A+” from “A-” and ICRs to “aa-” from “a-” of three members of the former Gulf Insurance Group.  In addition, A.M. Best affirmed the debt ratings of “a-” on senior debt, “bbb+” on subordinated debt, “bbb” on trust preferred securities, “bbb” on preferred stock and AMB-1 on commercial paper of the Company and its subsidiaries.  The outlook for all ratings remains stable. 

On July 14, 2005, Moody’s upgraded the insurance financial strength ratings of the legacy St. Paul, United States Fidelity and Guaranty (USF&G) and Gulf Insurance Group to “Aa3” following the recent completion of the pooling of the St. Paul and USF&G companies with the legacy Travelers Property Casualty Pool (whose pooled companies were already rated “Aa3” for insurance financial strength) and the merger of the Gulf Insurance Company with and into Travelers Indemnity Company.  Moody’s also affirmed the long-term and short-term ratings of The St. Paul Travelers Companies, Inc. (senior unsecured debt at “A3,” commercial paper at Prime-2) and those of its downstream debt-issuing subsidiaries.  The ratings outlook remains negative. 

The following table summarizes the current claims-paying (or financial strength) ratings of the St. Paul Travelers Reinsurance Pool, Travelers C&S of America, Gulf Insurance Group, Northland Pool, Travelers Personal single state companies, Travelers Europe, Discover Reinsurance Company, Afianzadora Insurgentes, S.A. and St. Paul Guarantee Insurance Company by A.M. Best, Moody’s, S&P and Fitch as of August 4, 2005.  The table also presents the position of each rating in the applicable agency’s rating scale.

	A.M. Best	Moody’s	S&P	Fitch
St. Paul Travelers Reinsurance Pool (a)	A+  (2nd of 16)	Aa3  (4th of 21)	A+  (5th of 21)	AA-(4th of 24)
Travelers C&S of America	A+  (2nd of 16)	Aa3  (4th of 21)	A+  (5th of 21)	AA-(4th of 24)
Gulf Insurance Group (b)	A+  (2nd of 16)	Aa3  (4th of 21)	A+  (5th of 21)	—
Northland Pool (c)	A    (3rd of 16)	—	—	—
First Floridian Auto and Home Ins. Co.	A    (3rd of 16)	—	—	AA-(4th of 24)
First Trenton Indemnity Company	A    (3rd of 16)	—	—	AA-(4th of 24)
The Premier Insurance Co. of MA	A    (3rd of 16)	—	—	AA-(4th of 24)
Travelers Europe	A+  (2nd of 16)	Aa3  (4th of 21)	A+  (5th of 21)	—
Discover Reinsurance Company	A-   (4th of 16)	—	—	—
Afianzadora Insurgentes, S.A.	A-   (4th of 16)	—	—	—
St. Paul Guarantee Insurance Company	A    (3rd of 16)	—	—	—

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(a)The newly formed St. Paul Travelers Reinsurance Pool consists of:  The Travelers Indemnity Company, The Charter Oak Fire Insurance Company, The Phoenix Insurance Company, The Travelers Indemnity Company of Connecticut, The Travelers Indemnity Company of America, Travelers Property Casualty Company of America, Travelers Commercial Casualty Company, TravCo Insurance Company, The Travelers Home and Marine Insurance Company, Travelers Casualty and Surety Company, The Standard Fire Insurance Company, The Automobile Insurance Company of Hartford, CT, Travelers Casualty Insurance Company of America, Farmington Casualty Company, Travelers Commercial Insurance Company, Travelers Casualty Company of Connecticut, Travelers Property Casualty Insurance Company, Travelers Personal Security Insurance Company, Travelers Personal Insurance Company, Travelers Excess and Surplus Lines Company, St. Paul Fire and Marine Insurance Company, St. Paul Surplus Lines Insurance Company, Athena Assurance Company, St. Paul Protective Insurance Company, St. Paul Medical Liability Insurance Company, Discover Property and Casualty Insurance Company, Discover Specialty Insurance Company, and United States Fidelity and Guaranty Company. 

(b)The Gulf Insurance Group consists of the three subsidiaries of the former Gulf Insurance Company: Gulf Underwriters Insurance Company, Select Insurance Company and Atlantic Insurance Company.  The Travelers Indemnity Company reinsures 100% of the business of these subsidiaries. 

(c)The Northland Pool consists of: Northland Insurance Company, Northfield Insurance Company, Northland Casualty Company, Mendota Insurance Company, Mendakota Insurance Company, American Equity Insurance Company and American Equity Specialty Insurance Company.

CRITICAL ACCOUNTING ESTIMATES 

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

Claim and Claim Adjustment Expense Reserves 

Claim and claim adjustment expense reserves (loss reserves) represent management’s estimate of ultimate unpaid costs of losses and loss adjustment expenses for claims that have been reported and claims that have been incurred but not yet reported.  Loss reserves do not represent an exact calculation of liability, but instead represent management estimates, generally utilizing actuarial expertise and projection techniques, at a given accounting date.  These loss reserve estimates are expectations of what the ultimate settlement and administration of claims will cost upon final resolution in the future, based on the Company’s assessment of facts and circumstances then known, review of historical settlement patterns, estimates of trends in claims severity and frequency, expected interpretations of legal theories of liability and other factors.  In establishing reserves, the Company also takes into account estimated recoveries, reinsurance, salvage and subrogation.  The reserves are reviewed regularly by a qualified actuary employed by the Company.

The process of estimating loss reserves involves a high degree of judgment and is subject to a number of variables.  These variables can be affected by both internal and external events, such as changes in claims handling procedures, economic inflation, legal trends and legislative changes, among others.  The impact of many of these items on ultimate costs for loss and loss adjustment expenses is difficult to estimate.  Loss reserve estimation difficulties also differ significantly by product line due to differences in claim complexity, the volume of claims, the potential severity of individual claims, the determination of occurrence date for a claim and reporting lags (the time between the occurrence of the policyholder event and when it is actually reported to the insurer).  Informed judgment is applied throughout the process.  The Company continually refines its loss reserve estimates in a regular ongoing

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process as historical loss experience develops and additional claims are reported and settled.  The Company rigorously attempts to consider all significant facts and circumstances known at the time loss reserves are established.  Due to the inherent uncertainty underlying loss reserve estimates including but not limited to the future settlement environment, final resolution of the estimated liability will be different from that anticipated at the reporting date.  Therefore, actual paid losses in the future may yield a materially different amount than currently reserved, favorable or unfavorable.

Because establishment of loss reserves is an inherently uncertain process involving estimates, currently established reserves may change.  The Company reflects adjustments to reserves in the results of operations in the period the estimates are changed.

A portion of the Company’s loss reserves are for asbestos and environmental claims and related litigation, which aggregated $4.21 billion at June 30, 2005.  While the ongoing study of asbestos claims and associated liabilities and of environmental claims considers the inconsistencies of court decisions as to coverage, plaintiffs’ expanded theories of liability and the risks inherent in major litigation and other uncertainties, in the opinion of the Company’s management, it is possible that the outcome of the continued uncertainties regarding these 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.”

The Company acquired SPC’s runoff health care reserves in the merger, which are included in the General Liability product line in the table below.  SPC decided to exit this market at the end of 2001 and ceased underwriting new business as quickly as regulatory considerations allowed.  SPC had experienced significant adverse loss development on its health care loss reserves both prior to and since its decision to exit this market.  The Company continues to utilize specific tools and metrics to explicitly monitor and validate its key assumptions supporting its conclusions with regard to these reserves since management believed that its traditional statistics and reserving methods needed to be supplemented in order to provide a more meaningful analysis.  The tools developed track three primary indicators which influence those conclusions and include: newly reported claims; reserve development on known claims; and the “redundancy ratio,” which compares the cost of resolving claims to the reserve established for that individual claim.  These three indicators are related such that if one deteriorates, improvement on another is necessary for the Company to conclude that further reserve strengthening is not necessary.  The Company’s current view is that it has recorded a reasonable reserve for its medical malpractice exposures as of June 30, 2005. 

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Claims and claim adjustment expense reserves by product line were as follows:

	June 30, 2005						December 31, 2004
(in millions)	Case		IBNR		Total		Case		IBNR		Total
General liability	$	8,604	$	11,494	$	20,098	$	8,445	$	12,232	$	20,677
Property	1,171		1,004		2,175		1,534		1,359		2,893
Commercial multi-peril	1,916		2,429		4,345		1,979		2,216		4,195
Commercial automobile	2,724		2,069		4,793		2,817		1,966		4,783
Workers’ compensation	8,453		6,639		15,092		8,313		6,658		14,971
Fidelity and surety	1,371		652		2,023		1,216		845		2,061
Personal automobile	1,453		1,195		2,648		1,484		1,219		2,703
Homeowners and personal – other	427		471		898		470		523		993
International and other	2,951		3,006		5,957		2,934		2,774		5,708
Property-casualty	29,070		28,959		58,029		29,192		29,792		58,984
Accident and health	75		10		85		76		10		86
Claims and claim adjustment expense reserves	$	29,145	$	28,969	$	58,114	$	29,268	$	29,802	$	59,070

The $956 million decline in claims and claim adjustment expense reserves since December 31, 2004 reflected the impact of claim and claim expense payments from runoff operations, declines in reserves due to loss payouts for the third quarter 2004 hurricanes and the September 11, 2001 terrorist attack, and favorable loss experience. 

Asbestos and environmental reserves are included in the General Liability, Commercial multi-peril, and International and other lines in the summary table.  See “Asbestos Claims and Litigation,” Environmental Claims and Litigation,” and Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves” sections in this report for a discussion of asbestos and environmental reserves. 

General Discussion

Claims and claim adjustment expense reserves (loss reserves) represent management’s estimate of ultimate unpaid costs of losses and loss adjustment expenses for claims that have been reported and claims that have been incurred but not yet reported.  The process for estimating these liabilities begins with the collection and analysis of claim data.  Data on individual reported claims, both current and historical, including paid amounts and individual claim adjuster estimates, are grouped by common characteristics (“components”) and evaluated by actuaries in their analyses of ultimate claim liabilities by product line.  Such data is occasionally supplemented with external data as available and when appropriate.  The process of analyzing reserves for a component is undertaken on a regular basis, generally quarterly, in light of continually updated information.

Multiple estimation methods are available for the analysis of ultimate claim liabilities.  Each estimation method has its own set of assumption variables and its own advantages and disadvantages, with no single estimation method being better than the others in all situations and no one set of assumption variables being meaningful for all product line components.  The relative strengths and weaknesses of the particular estimation methods when applied to a particular group of claims can also change over time.  Therefore, the actual choice of estimation method(s) can change with each evaluation.  The estimation method(s) chosen are those that are believed to produce the most reliable indication at that particular evaluation date for the claim liabilities being evaluated.

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In most cases, multiple estimation methods will be valid for the particular facts and circumstances of the claim liabilities being evaluated.  This will result in a range of reasonable estimates for any particular claim liability.  The Company uses such range analyses to back test whether previously established estimates for reserves at the reporting segments are reasonable, given subsequent information.  Reported values found to be closer to the endpoints of a range of reasonable estimates are subject to further detailed reviews.  These reviews may substantiate the validity of management’s recorded estimate or lead to a change in the reported estimate.

The exact boundary points of these ranges are more qualitative than quantitative in nature, as no clear line of demarcation exists to determine when the set of underlying assumptions for an estimation method switches from being reasonable to unreasonable.  As a result, the Company does not believe that the endpoints of these ranges are or would be comparable across companies.  In addition, potential interactions among the different estimation assumptions for different product lines make the aggregation of individual ranges a highly judgmental and inexact process.

Property casualty insurance policies are either written on a claims made or on an occurrence basis.  Policies written on a claims made basis require that claims be reported during the policy period.  Policies that are written on an occurrence basis require that the insured demonstrate that a loss occurred in the policy period, even if the insured reports the loss many years later.

Most general liability policies are written on an occurrence basis.  These policies are subject to substantial loss development over time as facts and circumstances change in the years following the policy issuance.  The use of the occurrence form accounts for much of the reserve development in asbestos and environmental exposures, and it is also used to provide coverage for construction general liability, including construction defect.  Occurrence based forms of insurance for general liability exposures require substantial projection of various trends, including future inflation and judicial interpretations and societal litigation dynamics, among others.

A key assumption in most actuarial analyses is that past patterns demonstrated in the data will repeat themselves in the future, absent a material change in the associated risk factors discussed below.  To the extent a material change affecting the ultimate claim liability is known, such change is quantified to the extent possible through an analysis of internal company and, if available and when appropriate, external data.  Such a measurement is specific to the facts and circumstances of the particular claim portfolio and the known change being evaluated.

Informed management judgment is applied throughout the reserving process.  This includes the application, on a consistent basis over time, of various individual experiences and expertise to multiple sets of data and analyses. In addition to actuaries, individuals involved with the reserving process also include underwriting and claims personnel as well as other company management.  Therefore, it is quite possible and, generally, likely that management must consider varying individual viewpoints as part of its estimation of loss reserves.  It is also likely that during periods of significant change, such as a merger, consistent application of informed judgment becomes even more complicated and difficult.

The variables discussed above in this general discussion have different impacts on reserve estimation uncertainty for a given product line, depending on the length of the claim tail, the reporting lag, the impact of individual claims and the complexity of the claim process for a given product line.

Product lines are generally classifiable as either long tail or short tail, based on the average length of time between the event triggering claims under a policy and the final resolution of those claims.  Short tail claims are reported and settled quickly, resulting in less estimation variability.  The longer the time before final claim resolution, the greater the exposure to estimation risks and hence the greater the estimation uncertainty.

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A major component of the claim tail is the reporting lag.  The reporting lag, which is the time between the event triggering a claim and the reporting of the claim to the insurer, makes estimating IBNR inherently more uncertain.  In addition, the greater the reporting lag the greater the proportion of IBNR claims to the total claim liability for the product line.  Writing new products with material reporting lags can result in adding several years worth of IBNR claim exposure before the reporting lag exposure becomes clearly observable, thereby increasing the risk associated with pricing and reserving such products.  The most extreme example of claim liabilities with long reporting lags are asbestos claims.  A more recent but less extreme example is automobile leasing residual value coverage.

For some lines, the impact of large individual claims can be material to the analysis.  These lines are generally referred to as being low frequency/high severity, while lines without this “large claim” sensitivity are referred to as “high frequency/low severity”.  Estimates of claim liabilities for low frequency/high severity lines can be sensitive to a few key assumptions.  As a result, the role of judgment is much greater for these reserve estimates.  In contrast, high frequency/low severity lines tend to have much greater spread of estimation risk, such that the impact of individual claims are relatively minor and the range of reasonable reserve estimates is narrower and more stable.

Claim complexity can also greatly affect the estimation process by impacting the number of assumptions needed to produce the estimate, the potential stability of the underlying data and claim process and the ability to gain an understanding of the data.  Product lines with greater claim complexity, such as for certain surety and construction exposures, have inherently greater estimation uncertainty.

Actuaries have to exercise a considerable degree of judgment in the evaluation of all these factors in their analysis of reserves.  The human element in the application of actuarial judgment is unavoidable when faced with material uncertainty.  Different experts will choose different assumptions when faced with such uncertainty, based on their individual backgrounds, professional experiences and areas of focus.  Hence, the estimate selected by the various actuaries may differ materially from each other.

Lastly, significant structural changes to the available data, product mix or organization can also materially impact the reserve estimation process.  During the past year, the merger of TPC and SPC resulted in the exposure of each other’s actuaries and claim departments to different products, data histories, analysis methodologies, claim settlement experts, and more robust data when viewed on a combined basis.  This has impacted the range of estimates produced by the Company’s actuaries, as they have reacted to new data, approaches, and sources of expertise to draw upon.  It has also resulted in additional levels of uncertainty, as past trends (that were a function of past products, past claim handling procedures, past claim departments, and past legal and other experts) may not repeat themselves, as those items affecting the trends change or evolve due to the merger.  This has also increased the potential for material variation in estimates, as experts can have differing views as to the impact of these frequently evolutionary changes.  Events such as mergers increase the inherent uncertainty of reserve estimates for a period of time, until stable trends reestablish themselves within the new organization.

Risk Factors

The major causes of material uncertainty (“risk factors”) generally will vary for each product line, as well as for each separately analyzed component of the product line. In some cases, such risk factors are explicit assumptions of the estimation method and in others, they are implicit.  For example, a method may explicitly assume that a certain percentage of claims will close each year, but will implicitly assume that the legal interpretation of existing contract language will remain unchanged.  Actual results will likely vary from expectations for each of these assumptions, resulting in an ultimate claim liability that is different from that being estimated currently.

Some risk factors will affect more than one product line.  Examples include changes in claim department practices, changes in settlement patterns, regulatory and legislative actions, court actions, timeliness of claim reporting, state mix of claimants, and degree of claimant fraud.  The extent of the impact of a risk factor will also vary by components within a product line.  Individual risk factors are also subject to interactions with other risk factors within product line components.

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The effect of a particular risk factor on estimates of claim liabilities cannot be isolated in most cases.  For example, estimates of potential claim settlements may be impacted by the risk associated with potential court rulings, but the final settlement agreement typically does not delineate how much of the settled amount is due to this and other factors.

The evaluation of data is also subject to distortion from extreme events or structural shifts, sometimes in unanticipated ways.  For example, the timing of claims payments in one geographic region will be impacted if claim adjusters are temporarily reassigned from that region to help settle catastrophe claims in another region.

While some changes in the claim environment are sudden in nature (such as a new court ruling affecting the interpretation of all contracts in that jurisdiction), others are more evolutionary.  Evolutionary changes can occur when multiple factors affect final claim values, with the uncertainty surrounding each factor being resolved separately, in step-wise fashion.  The final impact is not known until all steps have occurred.

Sudden changes generally cause a one-time shift in claim liability estimates, although there may be some lag in reliable quantification of their impact.  Evolutionary changes generally cause a series of shifts in claim liability estimates, as each component of the evolutionary change becomes evident and estimable.

Management’s Estimates

At least once per quarter, Company management meets with its actuaries to review the latest claim and claim adjustment expense reserve analyses.  Based on these analyses, management determines whether its ultimate claim liability estimates should be changed.  In doing so, it must evaluate whether the new data provided represents credible actionable information or an anomaly that will have no effect on estimated ultimate claim liability.  For example, as described above, payments may have decreased in one geographic region due to fewer claim adjusters being available to process claims.  The resulting claim payment patterns would be analyzed to determine whether or not the change in payment pattern represents a change in ultimate claim liability.

Such an assessment requires considerable judgment.  It is frequently not possible to determine whether a change in the data is an anomaly until sometime after the event.  Even if a change is determined to be permanent, it is not always possible to reliably determine the extent of the change until sometime later.  The overall detailed analyses supporting such an effort can take several months to perform.  This is due to the need to evaluate the underlying cause of the trends observed, and may include the gathering or assembling of data not previously available.  It may also include interviews with experts involved with the underlying processes.  As a result, there can be a time lag between the emergence of a change and a determination that the change should be reflected in the Company’s estimated claim liabilities.  The final estimate selected by management in a reporting period is a function of these detailed analyses of past data, adjusted to reflect any new actionable information.

Reinsurance Recoverables

The following table summarizes the composition of the Company’s reinsurance recoverable assets:

	As of
(in millions)	June 30, 2005			December 31, 2004
Gross reinsurance recoverables on paid and unpaid claims and claim adjustment expenses	$	12,941		$	13,367
Allowance for uncollectible reinsurance	(754		)	(751		)
Net reinsurance recoverables	12,187			12,616
Mandatory pools and associations	2,250			2,497
Structured settlements	3,956			3,941
Total reinsurance recoverables	$	18,393		$	19,054

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Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured business.  The Company evaluates and monitors the financial condition of its reinsurers under voluntary reinsurance arrangements to minimize its exposure to significant losses from reinsurer insolvencies.  In addition, in the ordinary course of business, the Company may become involved in coverage disputes with its reinsurers.  Some of these disputes could result in lawsuits and arbitrations brought by or against the reinsurers to determine the Company’s rights and obligations under the various reinsurance agreements.  The Company employs dedicated specialists and aggressive strategies to manage reinsurance collections and disputes.

The Company reports its reinsurance recoverables net of an allowance for estimated uncollectible reinsurance recoverables.  The allowance is based upon the Company’s ongoing review of amounts outstanding, length of collection periods, changes in reinsurer credit standing, disputes, 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.  Changes in these estimates could result in additional income statement charges. 

Investment Impairments

Fixed Maturities and Equity Securities

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

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

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

•the length of time and the extent to which fair value has been below cost. It is likely that the decline will become “other-than-temporary” if the market value has been below cost for six to nine months or more;

•the financial condition and near-term prospects of the issuer.  The issuer may be experiencing depressed and declining earnings relative to competitors, erosion of market share, deteriorating financial position, lowered dividend payments, declines in securities ratings, bankruptcy, and financial statement reports that indicate an uncertain future.  Also, the issuer may experience specific events that may influence its operations or earnings potential, such as changes in technology, discontinuation of a business segment, catastrophic losses or exhaustion of natural resources; and

•the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery.

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

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Factors affecting performance:

•the investee loses a principal customer or supplier for which there is no short-term prospect for replacement or experiences other substantial changes in market conditions;

•the company is performing substantially and consistently behind plan;

•the investee has announced, or the Company has become aware of, adverse changes or events such as changes or planned changes in senior management, restructurings, or a sale of assets; and

•the regulatory, economic, or technological environment has changed in a way that is expected to adversely affect the investee’s profitability.

Factors affecting on-going financial condition:

•factors that raise doubts about the investee’s ability to continue as a going concern, such as negative cash flows from operations, working-capital deficiencies, investment advisors’ recommendations, or non-compliance with regulatory capital requirements or debt covenants;

•a secondary equity offering at a price substantially lower than the holder’s cost;

•a breach of a covenant or the failure to service debt; and

•fraud within the company.

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

•the securities owned continue to generate reasonable earnings and dividends, despite a general stock market decline;

•bond interest or preferred stock dividend rate (on cost) is lower than rates for similar securities issued currently but quality of investment is not adversely affected;

•the investment is performing as expected and is current on all expected payments;

•specific, recognizable, short-term factors have affected the market value; and

•financial condition, market share, backlog and other key statistics indicate growth.

Venture Capital Investments

Other investments include venture capital investments, which are generally non-publicly traded instruments, consisting of early-stage companies and, historically, having a holding period of four to seven years.  These investments have primarily been made in the health care, software and computer services, and networking and information technologies infrastructures industries.  The Company typically is involved with venture capital companies early in their formation, as they are developing and determining the viability of, and market demand for, their product.  Generally the Company does not expect these venture capital companies to record revenues in the

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early stages of their development, which can often take three to four years, and does not generally expect them to become profitable for an even longer period of time.  With respect to the Company’s valuation of such non-publicly traded venture capital investments, on a quarterly basis, portfolio managers as well as an internal valuation committee review and consider a variety of factors in determining the potential for loss impairment.  Factors considered include the following:

•the issuer’s most recent financing event;

•an analysis of whether fundamental deterioration has occurred;

•whether or not the issuer’s progress has been substantially less than expected;

•whether or not the valuations have declined significantly in the entity’s market sector;

•whether or not the internal valuation committee believes it is probable that the issuer will need financing within six months at a lower price than our carrying value; and

•whether or not we have the ability and intent to hold the security for a period of time sufficient to allow for recovery, enabling us to receive value equal to or greater than our cost.

The quarterly valuation procedures described above are in addition to the portfolio managers’ ongoing responsibility to frequently monitor developments affecting those invested assets, paying particular attention to events that might give rise to impairment write-downs.

The Company manages the portfolio to maximize long-term return, evaluating current market conditions and the future outlook for the entities in which it has invested.  Because this portfolio primarily consists of privately-held, early-stage venture investments, events giving rise to impairment can occur in a brief period of time (e.g., the entity has been unsuccessful in securing additional financing, other investors decide to withdraw their support, complications arise in the product development process, etc.), and decisions are made at that point in time, based on the specific facts and circumstances, with respect to a recognition of “other-than-temporary” impairment or sale of the investment.

Real Estate Investments

The carrying values of real estate properties are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.  The review for impairment includes an estimate of the undiscounted cash flows expected to result from the use and eventual disposition of the real estate property.  An impairment loss is recognized if the expected future undiscounted cash flows exceed the carrying value of the real estate property.

Impairment charges included in net pretax realized investment gains and losses were as follows:

	2005
(in millions)	1st Quarter		2nd Quarter
Fixed maturities	$	3	$	2
Equity securities	—		—
Venture capital	6		40
Real estate and other	—		—
Total	$	9	$	42

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	2004
(in millions)	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter
Fixed maturities	$	6	$	8	$	9	$	2
Equity securities	3		—		2		—
Venture capital	—		14		12		14
Real estate and other	2		1		5		2
Total	$	11	$	23	$	28	$	18

For the three months and six months ended June 30, 2005, the Company recognized other-than-temporary impairments of $2 million and $5 million, respectively, in the fixed income portfolio related to various issuers with credit risk associated with the issuer’s deteriorated financial position. 

For the three months June 30, 2005, the Company realized impairments of $40 million in its venture capital portfolio on seven holdings, one of which had also been impaired in the first quarter.  The year-to-date impairment loss total of $46 million included losses related to those seven holdings, plus one additional holding.  One of the holdings was partially impaired due to new financings at less than favorable rates.  Two of the holdings are public securities whose cost basis are not anticipated to be recovered over the expected holding period.  One of the holdings was impaired due to the liquidation of the entity, and the remaining holdings experienced fundamental economic deterioration (characterized by less than expected revenues or a fundamental change in product).  The Company continues to evaluate current developments in the market that have the potential to affect the valuation of the Company’s investments. 

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

The specific circumstances that led to the impairments described above did not materially impact other individual investments held during 2005. 

Non-Publicly Traded Investments

The Company’s investment portfolio includes non-publicly traded investments, such as venture capital investments, private equity limited partnerships, joint ventures, other limited partnerships, and certain fixed income securities.  Venture capital investments owned directly are consolidated in the Company’s financial statements.  The Company uses the equity method of accounting for joint ventures, limited partnerships and certain private equity securities.  Certain other private equity investments, including venture capital investments, are not subject to the provisions of Statement of Financial Accounting Standards (FAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, but are reported at estimated fair value in accordance with FAS 60, Accounting and Reporting by Insurance Enterprises.  The fair value of the venture capital investments is based on an estimate determined by an internal valuation committee for securities for which there is no public market.  The internal valuation committee reviews such factors as recent filings, operating results, balance sheet stability, growth, and other business and market sector fundamental statistics in estimating fair values of specific investments.

The following is a summary of the approximate carrying value of the Company’s non-publicly traded securities at June 30, 2005:

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(in millions)	Carrying Value
Investment partnerships, including hedge funds	$	1,691
Fixed income securities	384
Equity investments	193
Real estate partnerships and joint ventures	133
Venture capital	409
Total	$	2,810

The following table summarizes for all fixed maturities and equity securities available for sale and for equity securities reported at fair value for which fair value is less than 80% of amortized cost at June 30, 2005, the gross unrealized investment loss by length of time those securities have continuously been in an unrealized loss position:

	Period For Which Fair Value Is Less Than 80% of Amortized Cost
(in millions)	Less Than 3 Months		Greater Than 3 Months, Less Than 6 Months		Greater Than 6 Months, Less Than 12 Months		Greater Than 12 Months		Total
Fixed maturities	$	—	$	—	$	—	$	—	$	—
Equity securities	—		—		—		—		—
Venture capital	9		6		—		11		26
Total	$	9	$	6	$	—	$	11	$	26

The Company believes that the prices of the securities identified above were temporarily depressed primarily as a result of market dislocation and generally poor cyclical economic conditions.  Further, unrealized investment losses as of June 30, 2005 represented less than 1% of the portfolio, and, therefore, any impact on the Company’s financial position would not be significant.

At June 30, 2005, non-investment grade securities comprised 3% of the Company’s fixed income investment portfolio.  Included in those categories at June 30, 2005 were securities in an unrealized loss position that, in the aggregate, had an amortized cost of $648 million and a fair value of $632 million, resulting in a net pretax unrealized loss of $16 million.  These securities in an unrealized loss position represented less than 2% of the total amortized cost and less than 2% of the fair value of the fixed income portfolio at June 30, 2005, and accounted for 9% of the total pretax unrealized loss in the fixed maturity portfolio.

Following are the pretax realized losses on investments sold during the three months ended June 30, 2005:

(in millions)	Loss		Fair Value
Fixed maturities	$	68	$	992
Equity securities	1		10
Other	1		97
Total	$	70	$	1,099

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Following are the pretax realized losses on investments sold during the six months ended June 30, 2005:

(in millions)	Loss		Fair Value
Fixed maturities	$	96	$	1,777
Equity securities	8		151
Other	17		201
Total	$	121	$	2,129

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

OTHER MATTERS

On July 23, 2004, the Company announced that it was seeking guidance from the staff of the Division of Corporation Finance of the Securities and Exchange Commission with respect to the appropriate purchase accounting treatment for certain second quarter 2004 adjustments totaling $1.63 billion ($1.07 billion after-tax).  The Company recorded these adjustments as charges in its income statement in the second quarter of 2004.  Through an informal comment process, the staff of the Division of Corporation Finance has subsequently asked for further information relating to these adjustments, and the dialogue is ongoing.  Specifically, the staff has asked for information concerning the Company’s adjustments to certain of SPC’s insurance reserves and reserves for reinsurance recoverables and premiums due from policyholders, and how those adjustments may relate to SPC’s reserves for periods prior to the merger.  After reviewing the staff’s questions and comments, the Company continues to believe that its accounting treatment for these adjustments is appropriate.  If, however, the staff disagrees, some or all of the adjustments being discussed may not be recorded as charges in the Company’s income statement, thereby increasing net income for the second quarter and full year 2004 and increasing shareholders’ equity at December 31, 2004 and June 30, 2005, in each case by the approximate after-tax amount of the charge.  The effect on tangible shareholders’ equity at December 31, 2004 and June 30, 2005 would not be material.  Additionally, if such adjustments were made, there would be changes to the amounts recorded for the affected items in purchase accounting and, accordingly, the Company’s balance sheet as of April 1, 2004 would reflect those changes. 

FUTURE APPLICATION OF ACCOUNTING STANDARDS

See note 2 of notes to the Company’s consolidated financial statements for a discussion of recently issued accounting pronouncements.

OUTLOOK

There are currently state and federal proposals to reform the existing system for handling asbestos claims and related litigation.  One prominent proposal is the creation of a federal asbestos claims trust to compensate asbestos claimants.  The trust would primarily be funded by former manufacturers, distributors and sellers of asbestos products and insurers.  At this time it is not possible to predict the likelihood or timing of enactment of such proposals.  The effect on the Company, if these proposals are enacted, will depend upon various factors including, among others, the size of the compensation fund, the portion allocated to insurers and the formula for allocating contributions among insurers.  While impossible to predict, if these legislative reform proposals are enacted, the amount of the Company’s eventual contribution allocation thereunder could vary significantly from its current asbestos reserves.

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On November 26, 2002, the Terrorism Risk Insurance Act of 2002 (the Terrorism Act) was enacted into Federal law and established the Terrorism Insurance Program (the Program), a temporary Federal program in the Department of the Treasury, that provides for a system of shared public and private compensation for insured losses resulting from acts of terrorism or war committed by or on behalf of a foreign interest.  In order for a loss to be covered under the Program (subject losses), the loss must be the result of an event that is certified as an act of terrorism by the U.S. Secretary of Treasury.  In the case of a war declared by Congress, only workers’ compensation losses are covered by the Terrorism Act.  The Terrorism Act generally requires that all commercial property casualty insurers licensed in the United States participate in the Program.  The Program terminates on December 31, 2005.  Under the Program, a participating insurer is entitled to be reimbursed by the Federal Government for 90% of subject losses, after an insurer deductible, subject to an annual cap.  In each case, the deductible percentage is applied to the insurer’s direct earned premiums from the calendar year immediately preceding the applicable year.  The deductible under the Program is 15% for 2005.  The Program also contains an annual cap that limits the amount of aggregate subject losses for all participating insurers to $100 billion.  Once subject losses have reached the $100 billion aggregate during a program year, there is no additional reimbursement from the U.S. Treasury and an insurer that has met its deductible for the program year is not liable for any losses (or portion thereof) that exceed the $100 billion cap.  The Company’s estimated deductible under this federal program is $2.51 billion for 2005.  The Company had no terrorism-related losses in 2004 or 2003.  If the Program is not renewed for periods after January 1, 2006, the benefits of the Program will not be available to the Company, and the Company will be subject to losses from acts of terrorism subject only to the terms and provisions of applicable policies, including policies written in 2005 for which the period of coverage extends into 2006.  Given the unpredictable frequency and severity of terrorism losses, as well as the limited terrorism coverage in the Company’s own reinsurance program, future losses from acts of terrorism, particularly those involving nuclear, biological, chemical or radiological events, could be material to the Company’s operating results, financial condition and/or liquidity in future periods, particularly if the Terrorism Act is not extended.  Regardless of whether the Terrorism Act is extended, the Company will continue to manage this type of catastrophic risk by monitoring and controlling terrorism risk aggregations to the best of its ability.

FORWARD-LOOKING STATEMENTS

This report may contain, and management may make, 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 may make forward-looking statements about the Company’s results of operations (including, among others, premium volume, income from continuing operations, net and operating income and return on equity), financial condition and liquidity; the sufficiency of the Company’s asbestos and other reserves (including, among others, asbestos claim payment patterns); the post-merger integration (including, among others, expense savings); and strategic initiatives (including, among others, the sale of the Company’s interest in Nuveen).  Such statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the Company’s control, that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements.

Some of the factors that could cause actual results to differ include, but are not limited to, the following: adverse developments involving asbestos claims and related litigation; the impact of aggregate policy coverage limits for asbestos claims; the impact of bankruptcies of various asbestos producers and related businesses; the willingness of parties including the Company to settle asbestos-related litigation; the Company’s ability to fully integrate the former St. Paul and Travelers businesses in the manner or in the timeframe currently anticipated; the Company’s ability to execute announced and future strategic initiatives as planned; insufficiency of, or changes in, loss and loss adjustment expense reserves; the Company’s inability to obtain prices sought due to competition or otherwise; the occurrence of natural catastrophic events with a severity or frequency exceeding the Company’s expectations and man-made catastrophic events, including terrorist acts in general and those involving nuclear, biological, chemical or radiological events in particular; exposure to, and adverse developments involving, environmental claims and related litigation; exposure to, and adverse developments involving construction defect claims; the impact of claims related to exposure to potentially harmful products or substances, including, but not limited to, lead paint, silica and other potentially harmful substances; adverse changes in loss cost trends, including inflationary pressures in medical costs and auto and building repair costs; the effects of 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 us; adverse developments in legal proceedings; judicial expansion of policy coverage and the impact of new theories of liability; the impact of legislative and other governmental actions, including, but not limited to, federal and state

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legislation related to asbestos liability reform, terrorism insurance and reinsurance (such as the extension of or replacement for the Terrorism Risk Insurance Act of 2002) and governmental actions regarding the compensation of brokers and agents; the impact of well-publicized governmental investigations of certain industry practices, including with respect to business practices between insurers, including the Company, and brokers and the purchase and sale by insurers, including the Company, of finite, or non-traditional, insurance products; 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; 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 policies; and changes to the regulatory 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 its forward-looking statements.

Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes in the Company’s market risk components since December 31, 2004. 

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, as amended (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 our 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.  As a result of the merger of SPC and TPC and the consolidation of the Company’s corporate headquarters in St. Paul, Minnesota, the Company made a number of significant changes in its internal controls over financial reporting beginning in the second quarter of 2004.  The changes involved combining the financial reporting process and the attendant personnel and system changes.  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, 2005.  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, except as described above, 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, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1.LEGAL PROCEEDINGS

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

Asbestos and Environmental-Related Proceedings

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

TPC is involved in three significant proceedings relating to ACandS, Inc. (ACandS), formerly a national distributor and installer of products containing asbestos, including ACandS’ bankruptcy proceedings.  The proceedings involve disputes as to whether and to what extent any of ACandS’ potential liabilities for bodily injury asbestos claims are covered by insurance policies issued by TPC.  These proceedings have resulted in decisions favorable to TPC, although those decisions are subject to appellate review.  The status of the various proceedings is described below.

ACandS filed for bankruptcy in September 2002 (In re: ACandS, Inc., pending in the U.S. Bankruptcy Court for the District of Delaware).  In its proposed plan of reorganization, ACandS sought to establish a trust to pay asbestos bodily injury claims against it and sought to assign to the trust its rights under the insurance policies issued by TPC.  The proposed plan and disclosure statement filed by ACandS claimed that ACandS had settled the vast majority of asbestos-related bodily injury claims currently pending against it for approximately $2.80 billion.  ACandS asserts that, based on a prior agreement between TPC and ACandS and ACandS’ interpretation of the July 31, 2003 arbitration panel ruling described below, TPC is liable for 45% of the $2.80 billion.  On January 26, 2004, the bankruptcy court issued a decision rejecting confirmation of ACandS’ proposed plan of reorganization.  The bankruptcy court found, consistent with TPC’s objections to ACandS’ proposed plan, that the proposed plan was not fundamentally fair, was not proposed in good faith and did not comply with Section 524(g) of the Bankruptcy Code.  ACandS has filed a notice of appeal of the bankruptcy court’s decision and has filed objections to the bankruptcy court’s findings of fact and conclusions of law in the United States District Court.  TPC has moved to dismiss the appeal and objections and has also filed an opposition to ACandS’ objections.

An arbitration was commenced in January 2001 to determine whether and to what extent ACandS’ financial obligations for bodily injury asbestos claims are subject to insurance policy aggregate limits.  On July 31, 2003, the arbitration panel ruled in favor of TPC that asbestos bodily injury claims against ACandS are subject to the aggregate limits of the policies issued to ACandS, which have been exhausted.  In October 2003, ACandS commenced a lawsuit seeking to vacate the arbitration award as beyond the panel’s scope of authority (ACandS, Inc. v. Travelers Casualty and Surety Co., U.S.D.Ct., E.D. Pa.).  On September 16, 2004, the Court entered an order denying ACandS’ motion to vacate the arbitration award.  On October 6, 2004, ACandS filed a notice of appeal.  Briefing of the appeal is complete.  Oral argument  was presented on July 11, 2005.

In the other proceeding, a related case pending before the same court and commenced in September 2000 (ACandS v. Travelers Casualty and Surety Co., U.S.D. Ct., E.D. Pa.), ACandS sought a declaration of the extent to which the asbestos bodily injury claims against ACandS are subject to occurrence limits under insurance policies issued by TPC.  TPC filed a motion to dismiss this action based upon the July 31, 2003 arbitration decision described above.  The Court found the dispute was moot as a result of the arbitration panel’s decision.  The Court, therefore, based on the arbitration panel’s decision, dismissed the case. On October 6, 2004, ACandS filed a notice of appeal.  This appeal has been consolidated with the appeal referenced in the paragraph above.  Briefing of the appeal is complete, and oral argument was presented on July 11, 2005.

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While the Company cannot predict the outcome of the appeals of the various ACandS rulings or other legal actions, based on these rulings, the Company would not have any significant obligations remaining under any policies issued by TPC to ACandS.

In October 2001 and April 2002, two purported class action suits (Wise v. Travelers and Meninger v. Travelers), were filed against TPC and other insurers (not including SPC) in state court in West Virginia.  These cases were subsequently consolidated into a single proceeding in Circuit Court of Kanawha County, West Virginia.  Plaintiffs allege that the insurer defendants engaged in unfair trade practices by inappropriately handling and settling asbestos claims.  The plaintiffs seek to reopen large numbers of settled asbestos claims and to impose liability for damages, including punitive damages, directly on insurers.  Lawsuits similar to Wise were filed in Massachusetts and Hawaii (these suits are collectively referred to as the “Statutory and Hawaii Actions”).  Also, in November 2001, plaintiffs in consolidated asbestos actions pending before a mass tort panel of judges in West Virginia state court moved to amend their complaint to name TPC as a defendant, alleging that TPC 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 in Ohio state court against TPC and SPC, in Texas state court against TPC and SPC, and in Louisiana state court against TPC (the claims asserted in these suits, together with the West Virginia suit, are collectively referred to as the “Common Law Claims”).

All of the actions against TPC described in the preceding paragraph, other than the Hawaii Actions, had been subject to a temporary restraining order entered by the federal bankruptcy court in New York that had previously presided over and approved the reorganization in bankruptcy of TPC’s former policyholder Johns-Manville Corporation and affiliated entities.  In August 2002, the bankruptcy court held a hearing on TPC’s motion for a preliminary injunction prohibiting further prosecution of the lawsuits pursuant to the reorganization plan and related orders.  At the conclusion of this hearing, the court ordered the parties to mediation, appointed a mediator and continued the temporary restraining order.  During 2003, the same bankruptcy court extended the existing injunction to apply to an additional set of cases filed in various state courts in Texas and Ohio as well as to the attorneys who are prosecuting these cases.  The order also enjoined these attorneys and their respective law firms from commencing any further lawsuits against TPC based upon these allegations without the prior approval of the court.  Notwithstanding the injunction, additional Common Law Claims were filed and served on TPC.

On November 19, 2003, the parties advised the bankruptcy court that a settlement of the Statutory and Hawaii Actions had been reached.  This settlement includes a lump sum payment of up to $412 million by TPC, subject to a number of significant contingencies.  After continued meetings with the mediator, the parties advised the bankruptcy court on May 25, 2004 that a settlement resolving substantially all pending and similar future Common Law Claims against TPC had also been reached.  This settlement requires a payment of up to $90 million by TPC, subject to a number of significant contingencies.  Each of these settlements is contingent upon, among other things, an order of the bankruptcy court clarifying that all of these claims, and similar future asbestos-related claims against TPC, are barred by prior orders entered by the bankruptcy court in connection with the original Johns-Manville bankruptcy proceedings.

On August 17, 2004, the bankruptcy court entered an order approving the settlements and clarifying its prior orders that all of the pending Statutory and Hawaii Actions and substantially all Common Law Claims pending against TPC are barred.  The order also applies to similar direct action claims that may be filed in the future.

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Four appeals were taken from the August 17, 2004 ruling.  These appeals have been consolidated and are currently pending.  The parties have completed briefing all of the issues and await a date for oral argument.  The Company has no obligation to pay any of the settlement amounts unless and until the orders and relief become final and are not subject to any further appellate review.  It is not possible to predict how appellate courts will rule on the pending appeals.

SPC, which is not covered by the bankruptcy court rulings or the settlements described above, has numerous defenses in all of the direct action cases asserting Common Law Claims that are pending against it.  SPC’s defenses include the fact that these novel theories have no basis in law; that they are directly at odds with the well established law pertaining to the insured/insurer relationship; that there is no generalized duty to warn as alleged by the plaintiffs; and that the applicable statute of limitations as to many of these claims has long since expired. Many of these defenses have been raised in initial motions to dismiss filed by SPC and other insurers.  There have been favorable rulings during 2003 and 2004 in Texas and during 2004 and 2005 in Ohio on some of these motions filed by SPC and other insurers that dealt with statute of limitations and the validity of the alleged causes of actions.  On May 26, 2005, the Court of Appeals of Ohio, Eighth District, affirmed the earliest of these favorable rulings.  In Texas, only one court, in June of 2005, has denied the insurers’ initial challenges to the pleadings.  That ruling was contrary to the rulings by other courts in similar cases, and SPC intends to continue to defend this case vigorously.

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 other information regarding the Company’s asbestos and environmental exposure, see “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations—Asbestos Claims and Litigation”, “-Environmental Claims and Litigation” and “-Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves.”

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

Shareholder Litigation and Related Proceedings

TPC and its board of directors were named as defendants in three putative class action lawsuits brought by shareholders alleging breach of fiduciary duty in connection with the merger of TPC and SPC and seeking injunctive relief as well as unspecified monetary damages.  The actions were captioned Henzel, et al. v. Travelers Property Casualty Corp., et al. (Jud. Dist. of Waterbury, Ct. Nov. 17, 2003); Vozzolo v. Travelers Property Casualty Corp., et al. (Jud. Dist. of Waterbury, Ct. Nov. 17, 2003); and Farina v. Travelers Property Casualty Corp., et al. (Jud. Dist. of Waterbury, Ct. December 15, 2003).  The Farina complaint also named SPC and its former subsidiary, Adams Acquisition Corp., as defendants, alleging that they aided and abetted the alleged breach of fiduciary duty.  On March 18, 2004, TPC and SPC announced that all of these lawsuits had been settled, subject to court approval of the settlements.  The settlement included a modification to the termination fee that could have been paid had the merger not been completed, additional disclosure in the proxy statement distributed in connection with the merger and a nominal amount for attorneys’ fees.  Before court approval of the settlement, additional shareholder litigation was commenced, as described below.  In light of that litigation, the parties are evaluating how to proceed.

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Beginning in August 2004, following post-merger announcements by the Company, various shareholders of the Company commenced fourteen putative class action lawsuits against the Company and certain of its current and former officers and directors in the United States District Court for the District of Minnesota.  Plaintiff shareholders allege that certain disclosures relating to the April 2004 merger between TPC and SPC contained false or misleading statements with respect to the value of SPC’s loss reserves in violation of federal securities laws.  These actions have been consolidated under the caption In re St. Paul Travelers Securities Litigation I and a lead plaintiff and lead counsel have been appointed.  An additional putative class action based on the same allegations was brought in New York State Supreme Court.  This action was subsequently transferred to the District of Minnesota and was consolidated with In re St. Paul Travelers Securities Litigation I.  On June 24, 2005, the lead plaintiff filed an amended consolidated complaint.  The amended consolidated complaint asserts claims under Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and Sections 11 and 15 of the Securities Act of 1933, as amended.  It does not specify damages.

Three other actions against the Company and certain of its current and former officers and directors are pending in the United States District Court for the District of Minnesota.  Two of these actions, Kahn v. The St. Paul Travelers Companies, Inc., et al. (Nov. 2, 2004) and Michael A. Bernstein Profit Sharing Plan v. The St. Paul Travelers Companies, Inc., et al. (Nov. 10, 2004), are putative class actions brought by certain shareholders of the Company against the Company and certain of its current and former officers and directors.  In these two actions, plaintiff shareholders allege violations of federal securities laws in connection with the Company’s alleged failure to make disclosure relating to the practice of paying brokers commissions on a contingent basis.  These actions have been consolidated as In re St. Paul Travelers Securities Litigation II, and a lead plaintiff has been appointed.  On July 11, 2005, the lead plaintiff filed a consolidated class action complaint. The consolidated action will be coordinated with In re St. Paul Travelers Securities Litigation I for pretrial purposes. In the third of these actions, an alleged beneficiary of the Company’s 401(k) savings plan has commenced a putative class action against the Company and certain of its current and former officers and directors captioned Spiziri v. The St. Paul Travelers Companies, Inc., et al. (Dec. 28, 2004).  The plaintiff alleges violations of the Employee Retirement Income Security Act based on allegations similar to those in In re St. Paul Travelers Securities Litigation I.  On June 1, 2005, the Company and the other defendants in Spiziri moved to dismiss the complaint.

In addition, two derivative actions have been brought in the United States District Court for the District of Minnesota against all of the Company’s current directors and certain of the Company’s former Directors, naming the Company as a nominal defendant: Rowe v. Fishman, et al. (Oct. 22, 2004) and Clark v. Fishman, et al. (Nov. 18, 2004).  The derivative actions have been consolidated for pretrial proceedings as Rowe, et al. v. Fishman, et al. and a consolidated derivative complaint has been filed.  The consolidated derivative complaint asserts state law claims, including breach of fiduciary duty, based on allegations similar to those alleged in In re St. Paul Travelers Securities Litigation I and II described above, as well as allegations concerning the Company’s alleged mismanagement of and failure to make disclosure relating to the Company’s alleged involvement in the purchase and sale of finite reinsurance.  On June 10, 2005, the Company and the other defendants in Rowe moved to dismiss the complaint.

The Company believes that these lawsuits have no merit and intends to defend vigorously; however, the Company is not able to provide any assurance that the financial impact of one or more of these proceedings will not be material to the Company’s results of operations in a future period.  The Company is obligated to indemnify its officers and directors to the extent provided under Minnesota law.  As part of that obligation, the Company will advance officers and directors attorneys’ fees and other expenses they incur in defending these lawsuits.

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Other Proceedings

From time to time the Company is involved in proceedings addressing disputes with its reinsurers regarding the collection of amounts due under the Company’s reinsurance agreements.  These proceedings may be initiated by the Company or the reinsurers and may involve the terms of the reinsurance agreements, the coverage of particular claims, exclusions under the agreements, as well as counterclaims for rescission of the agreements.  One of these disputes is the action described in the following paragraph.

Gulf, a wholly-owned subsidiary of TPC, brought an action on May 22, 2003, as amended on May 12, 2004, 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), XL Reinsurance America, Inc. (XL), Odyssey America Reinsurance Corporation (Odyssey), Employers Reinsurance Company (Employers) and Gerling Global Reinsurance Corporation of America (Gerling), 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 reinsurers have asserted counterclaims seeking rescission of the vehicle residual value reinsurance contracts issued to Gulf and unspecified damages for breach of contract. Separate actions filed by Transatlantic and Gerling have been consolidated with the original Gulf action for pre-trial purposes.  On October 1, 2003, Gulf entered into a final settlement agreement with Employers, and all claims and counterclaims with respect to Employers have been dismissed.

On May 26, 2004, the Court denied Gulf’s motion to dismiss certain claims asserted by Transatlantic and a joint motion by Transatlantic, XL and Odyssey for summary judgment against Gulf.  Discovery is currently proceeding in the matters.  Gulf denies the reinsurers’ allegations, believes that it has a strong legal basis to collect the amounts due under the reinsurance contracts and intends to vigorously pursue the actions.

Based on the Company’s beliefs about its legal positions in its various reinsurance recovery proceedings, the Company does not expect any of these matters to have a material adverse effect on its results of operations in a future period.

As part of ongoing, industry-wide investigations, the Company and its affiliates have received subpoenas and written requests for information from government agencies.  The areas of inquiry addressed to the Company include its relationship with brokers and agents, the Company’s involvement with “non-traditional insurance and reinsurance products,” lawyer liability insurance and branding requirements for salvage automobiles.  The Company or its affiliates have received subpoenas or written requests for information from: (i) State of California Office of the Attorney General; (ii) State of California Department of Insurance; (iii) Licensing and Market Conduct Compliance Division, Financial Services Commission of Ontario, Canada; (iv) State of Connecticut Insurance Department; (v) State of Connecticut Office of the Attorney General; (vi) State of Delaware Department of Insurance; (vii) State of Florida Department of Financial Services; (viii) State of Florida Office of Insurance Regulation; (ix) State of Florida Department of Legal Affairs Office of the Attorney General; (x) State of Georgia Office of the Commissioner of Insurance; (xi) State of Illinois Department of Financial and Professional Regulation; (xii) State of Iowa Insurance Division; (xiii) State of Maryland Insurance Administration; (xiv) Commonwealth of Massachusetts Office of the Attorney General; (xv) State of Minnesota Department of Commerce; (xvi) State of Minnesota Office of the Attorney General; (xvii) State of New York Office of the Attorney General; (xviii) State of New York Insurance Department; (xix) State of North Carolina Department of Insurance; (xx) State of Ohio Office of the Attorney General; (xxi) State of Ohio Department of Insurance; (xxii) Commonwealth of Pennsylvania Office of the Attorney General; (xxiii) State of Texas Department of Insurance; (xxiv) State of Washington Office of the Insurance Commissioner; (xxv) State of West Virginia Office of Attorney General; (xxvi) the United States Attorney for the Southern District of New York; and (xxvii) the United States Securities and Exchange Commission.

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The Company is cooperating with these subpoenas and requests for information.  In addition, outside counsel, with the oversight of the Company’s Board of Directors, has been conducting an internal review of certain of the Company’s business practices.  This review initially focused on the Company’s relationship with brokers and was commenced after the announcement of litigation brought by the New York Attorney General’s office against a major broker.

The internal review was expanded to address the various requests for information described above and to verify whether the Company’s business practices in these areas have been appropriate.  The Company’s review has been extensive, involving the examination of e-mails and underwriting files, as well as interviews of current and former employees.  The Company also continues to receive and respond to additional requests for information and will expand its review accordingly.

To date, the Company has found only a few instances of conduct that were inconsistent with the Company’s employee code of conduct.  The Company has responded, and will continue to respond, appropriately to any such conduct.

The Company’s internal review with respect to finite reinsurance considered finite products the Company both purchased and sold.  The Company has completed its review with respect to the identified finite products purchased and sold, and has concluded that no adjustment to previously issued financial statements is required.

The related industry-wide investigations previously discussed are ongoing, as are the Company’s efforts to cooperate with the authorities, and the various authorities could ask that additional work be performed or reach conclusions different from the Company’s.  Accordingly, it would be premature to reach any conclusions as to the likely outcome of these matters. 

Six putative class action lawsuits and one individual action have been brought against a number of insurance brokers and insurers, including the Company, by plaintiffs who allegedly purchased insurance products through one or more of the defendant brokers.  Five of the class actions were filed in federal district court, and the complaints are captioned:  Shell Vacations LLC v. Marsh & McLennan Companies, Inc., et al. (N.D. Ill. Jan. 14, 2005), Redwood Oil Company v. Marsh & McLennan Companies, Inc., et al. (N.D. Ill. Jan. 21, 2005), Boros v. Marsh & McLennan Companies, Inc., et al. (N.D. Cal. Feb. 4, 2005), Mulcahey v. Arthur J. Gallagher & Co., et al. (D.N.J. Feb. 23, 2005) and Golden Gate Bridge, Highway, and Transportation District v. Marsh & McLennan Companies, Inc., et al. (D.N.J. Feb. 23, 2005).  Plaintiff in one of the five actions, Shell Vacations LLC, later voluntarily dismissed its complaint.  The remaining federal class actions were transferred by the Judicial Panel on Multidistrict Litigation to, or filed in, the United States District Court for the District of New Jersey and are being coordinated or consolidated as part of In re Insurance Brokerage Antitrust Litigation, a multidistrict litigation proceeding. Lead plaintiffs have been appointed. On August 1, 2005, the lead plaintiffs filed an amended consolidated complaint.  Plaintiffs allege that various insurance brokers conspired with each other and with various insurers, including the Company, to allocate brokerage customers and rig bids for insurance products offered to those customers.  The complaints include causes of action under the Sherman Act, the Racketeer Influenced and Corrupt Organizations Act, federal and state common law and the laws of the various states prohibiting antitrust violations and unfair and/or deceptive trade practices.  Plaintiffs seek monetary damages, including punitive damages and trebled damages, permanent injunctive relief, restitution, including disgorgement of profits, interest and costs, including attorneys’ fees.  The sixth class action, Bensley Construction, Inc. v. Marsh & McLennan Companies, Inc., et al. (Mass. Super. Ct. May 16, 2005) and the individual action, Office Depot, Inc. v. Marsh & McLennan Companies, Inc., et al. (Fla. Cir. Ct. June 22, 2005), were brought in state court  and assert state law claims based on allegations similar to those made in In re Insurance Brokerage Antitrust Litigation.  Certain defendants in Bensley Construction, Inc. have removed the action to the United States District Court for the District of Massachusetts and moved to stay it pending transfer to the District of New Jersey for consolidation with In re Insurance Brokerage Antitrust Litigation.  The Company believes that these lawsuits have no merit and intends to defend vigorously.

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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 policyholders, or as an insurer defending claims brought against it relating to coverage or the Company’s business practices.  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 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The table below sets forth information regarding repurchases by the Company of its common stock during the periods indicated. 

ISSUER PURCHASES OF EQUITY SECURITIES (1)

		(a)	(b)		(c)	(d)
Period Beginning	Period Ending	Total number of shares (or units) purchased	Average price paid per share (or unit)		Total number of shares (or units) purchased as part of publicly announced plans or programs	Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
April 1, 2005	April 30, 2005	16,567	$	35.39	—	—
May 1, 2005	May 31, 2005	20,602	37.78		—	—
June 1, 2005	June 30, 2005	106,148	41.42		—	—
Total		143,317	$	40.20	—	—

(1)All amounts in the table represent shares repurchased to cover payroll withholding taxes in connection with the vesting of restricted stock awards and exercises of stock options, and shares used to cover the exercise price of certain stock options that were exercised.

Item 3.DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

Item 5.OTHER INFORMATION

(a)On August 4, 2005, the Company entered into an underwriting agreement with United States Fidelity and Guaranty Company, a wholly-owned subsidiary of the Company, Nuveen Investments and Morgan Stanley & Co. Incorporated in connection with the sale by the Company and United States Fidelity and Guaranty Company of 3,471,010 shares of Class A common stock of Nuveen Investments.  The closing of the sale of shares is scheduled to occur on August 10, 2005.  The underwriting agreement is attached hereto as Exhibit 1.1 and is incorporated herein by reference.

(b) None.

Item 6.EXHIBITS

See Exhibit Index.

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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.

		The St. Paul Travelers Companies, Inc.
Date:	August 8, 2005	By	/s/	Bruce A. Backberg
				Bruce A. Backberg
				Senior Vice President
				(Authorized Signatory)
Date:	August 8, 2005	By	/s/	Douglas K. Russell
				Douglas K. Russell
				Senior Vice President & Treasurer
				(Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit Number	Description of Exhibit
1.1†	Underwriting Agreement, dated August 4, 2005, among the Company, Nuveen Investments, Inc., United States Fidelity and Guaranty Company and Morgan Stanley & Co. Incorporated.
3.1	Amended and Restated Articles of Incorporation of the Company, effective as of April 1, 2004, were filed as Exhibit 3.1 to the Company’s Form 8-K filed on April 1, 2004, and are incorporated herein by reference.
3.2	Amended and Restated Bylaws of the Company, effective as of May 3, 2005, were filed as Exhibit 3.2 to the Company’s Form 8-K filed on May 5, 2005, and are incorporated herein by reference.
10.1†	Revolving Credit Agreement, dated June 10, 2005, between the Company and a syndicate of financial institutions.
10.2†	The St. Paul Travelers Companies, Inc. 2004 Stock Incentive Plan.
10.3	Letter Agreement between the Company and William Heyman, dated April 27, 2005, was filed as Exhibit 10.3 to the Company’s Form 10-Q for the quarter ended March 31, 2005 and is incorporated herein by reference.
10.4	Letter Agreement between the Company and William Heyman, dated April 27, 2005, was filed as Exhibit 10.4 to the Company’s Form 10-Q for the quarter ended March 31, 2005 and is incorporated herein by reference.
10.5	Separation Agreement between T. Michael Miller and The Travelers Indemnity Company, dated April 29, 2005, was filed as Exhibit 10.5 to the Company’s Form 10-Q for the quarter ended March 31, 2005 and is incorporated herein by reference.
10.6	Repurchase Agreement, dated March 29, 2005, between the Company and Nuveen Investments, Inc. was filed as Exhibit 10.1 to the Company’s Form 8-K filed on April 1, 2005 and is incorporated herein by reference.
10.7	Separation Agreement, dated April 1, 2005, between the Company and Nuveen Investments, Inc. was filed as Exhibit 10.2 to the Company’s Form 8-K filed on April 1, 2005 and is incorporated herein by reference.
10.8	Forward Sale Agreement, dated April 6, 2005, among the Company, Merrill Lynch International and Merrill Lynch, Pierce, Fenner & Smith, as agent and collateral agent, was filed as Exhibit 10.2 to the Company’s Form 8-K filed on April 12, 2005 and is incorporated herein by reference.
10.9	Forward Sale Agreement, dated April 6, 2005, among the Company, Morgan Stanley & Co. International Limited and Morgan Stanley & Co. Incorporated, as agent and collateral agent, was filed as Exhibit 10.3 to the Company’s Form 8-K filed on April 12, 2005 and is incorporated herein by reference.
10.10	Indemnity Agreement, dated April 6, 2005, among the Company, Nuveen Investments, Inc., Merrill Lynch & Co., Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated and Merrill Lynch International Limited was filed as Exhibit 10.4 to the Company’s Form 8-K filed on April 12, 2005 and is incorporated herein by reference.

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Exhibit Number	Description of Exhibit
10.11	Indemnity Agreement, dated April 6, 2005, among the Company, Nuveen Investments, Inc., Morgan Stanley, Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. International Limited was filed as Exhibit 10.5 to the Company’s Form 8-K filed on April 12, 2005 and is incorporated herein by reference.
10.12	Non-Employee Director Annual Equity Grant Notification and Agreement was filed as Exhibit 10.1 to the Company’s Form 8-K filed on May 9, 2005 and is incorporated herein by reference.
12.1†	Statement re computation of ratios.
31.1†	Certification of Jay S. Fishman, 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 Jay S. Fishman, 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.

Copies of any of the exhibits referred to above will be furnished to security holders who make written request therefor to The St. Paul Travelers Companies, Inc., 385 Washington Street, Saint Paul, MN 55102, Attention: Corporate Secretary. 

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.

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EX-1.1

EXHIBIT 1.1

3,471,010 Shares

NUVEEN INVESTMENTS, INC.

CLASS A COMMON STOCK (Par Value $0.01 per share)

UNDERWRITING AGREEMENT

August 4, 2005

August 4, 2005

Morgan Stanley & Co. Incorporated

1585 Broadway

New York, New York 10036

Dear Sirs and Mesdames:

The St. Paul Travelers Companies, Inc., a Minnesota corporation (“St. Paul Travelers”), and its wholly-owned subsidiary, United States Fidelity and Guaranty Company, a Maryland corporation, as the selling stockholders (the “Selling Stockholders”), propose to sell to Morgan Stanley & Co. Incorporated (the “Underwriter”) an aggregate of 3,471,010 shares of the Class A common stock, par value $0.01 per share (the “Shares”) of Nuveen Investments, Inc., a Delaware corporation (the “Company”), each Selling Stockholder to sell the amount of Shares set forth opposite such Selling Stockholder’s name in Schedule I hereto.

The Company has filed with the Securities and Exchange Commission (the “Commission”) a registration statement, including a prospectus, relating to the Shares and has filed with, or transmitted for filing to, or shall promptly hereafter file with or transmit for filing to, the Commission a final prospectus supplement (the “Prospectus Supplement”) specifically relating to the Shares pursuant to Rule 424 under the Securities Act of 1933, as amended (the “Securities Act”).  The term “Registration Statement” means the registration statement on Form S-3, including the exhibits thereto, as amended to the date of this Agreement.  The Company has also filed an abbreviated registration statement to register additional shares of common stock pursuant to Rule 462(b) under the Securities Act (the “Rule 462 Registration Statement”), and any reference herein to the term “Registration Statement” shall be deemed to include such Rule 462 Registration Statement.  The term “Basic Prospectus” means the prospectus included in the Registration Statement. The term “Prospectus” means the Basic Prospectus together with the Prospectus Supplement.  The term “preliminary prospectus” means a preliminary prospectus supplement specifically relating to the Shares, together with the Basic Prospectus. As used herein, the terms “Basic Prospectus,” “Prospectus” and “preliminary prospectus” shall include in each case the documents incorporated by reference therein.  The terms “supplement” and “amendment” or “amend” as used in this Agreement shall include all documents deemed to be incorporated by reference in the Prospectus that are filed subsequent to the date of the Basic Prospectus by the Company with the Commission pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

1.Representations and Warranties of the Company.  The Company represents and warrants to and agrees with the Underwriter that:

(a)The Registration Statement has been declared effective by the Commission; no stop order suspending the effectiveness of the Registration Statement has been issued, and no notice has been received from the Commission by the Company that any proceedings for such purpose are pending or, to the knowledge of the Company, threatened by the Commission.

(b)(i) Each document filed or to be filed pursuant to the Exchange Act and incorporated by reference in the Prospectus complied or will comply when so filed in all material respects with the Exchange Act and the applicable rules and regulations of the Commission thereunder, (ii) the Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (iii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder and (iv) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions based upon (x) information relating to the Underwriter furnished to the Company in writing by the Underwriter expressly for use therein, or (y) the Selling Stockholder Information.

(c)The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the State of Delaware, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the financial condition, earnings or results of operations of the Company and its subsidiaries, taken as a whole (a “Material Adverse Effect”).

(d)Each Investment Advisory Subsidiary (as defined below) and each Significant Subsidiary of the Company (as that term is defined under Regulation S-X promulgated under the Exchange Act) (together with the Investment Advisory Subsidiaries, the “Significant Subsidiaries”) has been duly incorporated or formed, is validly existing in good standing under the laws of the jurisdiction of its incorporation or formation, has the requisite power and authority to own its property and to conduct its business as described in the

2

Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect; all of the issued shares of capital stock or interests of each Significant Subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable, or the substantive equivalent thereto, and (except for directors’ qualifying shares) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims, except in each case as would not cause a Material Adverse Effect.

(e)This Agreement has been duly authorized, executed and delivered by the Company.

(f)The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus.

(g)The outstanding shares of Class B common stock held by the Selling Stockholders to be converted into Class A common stock and sold by the Selling Stockholders under this Agreement have been duly authorized and are validly issued, fully paid and non-assessable.

(h)Except as disclosed in the Prospectus, the execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene (i) any provision of applicable law or (ii) the certificate of incorporation or by-laws of the Company or (iii) any agreement or other instrument binding upon the Company or any of its subsidiaries that is material to the Company and its subsidiaries, taken as a whole, or (iv) any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or any subsidiary, except in the case of (i), (iii), and (iv) as would not have a Material Adverse Effect, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except those which have been obtained or made, and except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares and except those for which the failure to obtain, individually or in the aggregate, would not have a Material Adverse Effect.

(i)There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the financial condition or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement).

3

(j)There are no legal or governmental proceedings pending or, to the knowledge of the Company, threatened to which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or any of its subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required.

(k)Each preliminary prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied as to form when so filed in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder.

(l)Except as disclosed in the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement.

(m)Neither the Company nor any of its subsidiaries is in violation of its certificate of incorporation, by-laws or other constituent documents; neither the Company nor any of its subsidiaries is in default in the performance or observance of any obligation, agreement, covenant or condition contained in any agreement or other instrument binding upon the Company or any of its subsidiaries, except to the extent any such default would not, individually or in the aggregate, have a Material Adverse Effect.

(n)Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) the Company and its subsidiaries have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction; (ii) the Company has not purchased any of its outstanding capital stock (other than open market repurchases pursuant to its open market repurchase program), nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock other than ordinary and customary dividends; and (iii) there has not been any material change in the capital stock or any increase in short-term debt or long-term debt of the Company and its subsidiaries, except in each case as described in the Prospectus or as contemplated by the offerings and transactions that are described therein.

(o)The Company and its Significant Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to

4

all personal property owned by them which is material to the business of the Company and its subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries, in each case except as described in the Prospectus.

(p)The Company and its subsidiaries, either directly or through a subsidiary or subsidiaries, own or possess, or can acquire on reasonable terms, all material patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names necessary for the conduct of the business now operated by them, except where the failure to so own, possess or be able to acquire on reasonable terms would not, individually or in the aggregate, have a Material Adverse Effect, and neither the Company nor any of its subsidiaries has received any notice of infringement of or conflict with asserted rights of others with respect to any of the foregoing which, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect.

(q)No labor dispute with the employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is imminent, that would have a Material Adverse Effect; and the Company is not aware of any existing, threatened or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors that would have a Material Adverse Effect.

(r)The Company and its subsidiaries possess all material certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect, except as described in the Prospectus.

(s)The Company and each of its subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles

5

and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

(t)The Shares have been authorized for listing on the New York Stock Exchange, subject only to official notice of issuance and have been registered under the Exchange Act.

(u)Except as described in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), the Company has not sold, issued or distributed any shares of Common Stock during the six-month period preceding the date hereof, including any sales pursuant to Rule 144A under, or Regulation D or S of, the Securities Act, other than shares issued pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans or pursuant to outstanding options, rights or warrants.

(v)KPMG LLP, whose report is included in the Prospectus, has notified us that it is an independent registered public accounting firm with respect to the Company and its combined subsidiaries within the meaning of the Securities Act and the rules and regulations adopted by the Commission thereunder.  The financial statements of the Company and its combined subsidiaries (including the related notes) incorporated in the Registration Statement and the Prospectus present fairly in all material respects the financial condition, results of operations and cash flows of the entities purported to be shown thereby at the dates and for the periods indicated and have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis throughout the periods indicated and conform in all material respects with the rules and regulations adopted by the Commission under the Securities Act.

(w)The Company and its subsidiaries (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (“Environmental Laws”), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, individually or in the aggregate, have a Material Adverse Effect.

6

(x)The Company is not, and after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus will not be, required to register as an “investment company” as such term is defined in the Investment Company Act of 1940, as amended (the “1940 Act”).

(y)Except in each case as would not reasonably be expected to have a Material Adverse Effect:  Each of Rittenhouse Asset Management Inc., NWQ Investment Management Company LLC, Symphony Asset Management Inc., Nuveen Asset Management, Inc., Nuveen Investments Advisers and Nuveen Investments Institutional Services Group, LLC (together, the “Investment Advisory Subsidiaries”) is duly registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”) and none of the Investment Advisory Subsidiaries is prohibited by any provision of the Advisers Act or the 1940 Act, or the respective rules and regulations thereunder, from acting as an investment adviser.  The Investment Advisory Subsidiaries are the only direct or indirect subsidiaries of the Company required to be registered as investment advisers under the Advisers Act.  Each of the Investment Advisory Subsidiaries is duly registered, licensed or qualified as an investment adviser in each jurisdiction where the conduct of its business requires such registration and is in compliance with all federal, state and foreign laws requiring any such registration, licensing or qualification or is subject to no material liability or disability by reason of the failure to be so registered, licensed or qualified in any such jurisdiction or to be in such compliance.  None of the Company or its other direct or indirect subsidiaries is required to be registered, licensed or qualified as an investment adviser under the laws requiring any such registration, licensing or qualification in any jurisdiction in which it or such other subsidiaries conduct business or is subject to material liability or disability by reason of the failure to be so registered, licensed or qualified.

(z)Nuveen Investments, LLC (the “Broker-Dealer Subsidiary”) is duly registered, licensed or qualified as a broker-dealer under the Exchange Act, and under the securities laws of each jurisdiction where the conduct of its business requires such registration and is in compliance with all federal, state and foreign laws requiring such registration, licensing or qualification or is subject to no material liability or disability by reason of the failure to be so registered, licensed or qualified in any such jurisdiction or to be in such compliance.  The Broker-Dealer Subsidiary is a member in good standing of NASD and each other self regulatory organization where the conduct of its business requires such membership.  Neither the Company nor any of the Company’s other direct or indirect subsidiaries is required to be registered, licensed or qualified as a broker-dealer under the laws requiring any such registration, licensing or qualification in any jurisdiction in which it or such other subsidiaries conduct business or is subject to any material liability or disability by reason of the failure to be so

7

registered, licensed or qualified except where the failure to be so registered, licensed or qualified would not have a Material Adverse Effect.

(aa)Each of the Investment Advisory Subsidiaries and the Broker-Dealer Subsidiary is, has been and will upon consummation of the transactions contemplated herein be, in compliance with, and each such entity has received no notice of any kind of any violation of, (A) all laws, regulations, ordinances and rules (including those of any non-governmental self-regulatory agencies) applicable to it or its operations relating to investment advisory or broker-dealer activities, as the case may be, and (B) all other laws, regulations, ordinances and rules applicable to it and its operations, except, in either case, where any failure to comply with any such law, regulation, ordinance or rule would not have, individually or in the aggregate, a Material Adverse Effect.

(bb)Each investment advisory agreement between the Company and any Investment Advisory Subsidiary on the one hand and any advisory client or private client on the other is a legal and valid obligation of the Company and, to the knowledge of the Company, the other parties thereto, and neither the Company nor any Investment Advisory Subsidiary is, to the knowledge of the Company, in breach or violation of or in default under any such agreement, which breach, violation or default would individually or in the aggregate have a Material Adverse Effect.

2.Representations and Warranties of the Selling Stockholders.  Each Selling Stockholder, to the extent applicable, represents and warrants to and agrees with the Underwriter that:

(a)This Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Stockholder.

(b)The execution and delivery by such Selling Stockholder of, and the performance by such Selling Stockholder of its obligations under, this Agreement, will not contravene (i) any provision of applicable law or (ii) the certificate of incorporation or by-laws of such Selling Stockholder or (iii) any agreement or other instrument binding upon such Selling Stockholder that is material to such Selling Stockholder and its subsidiaries taken as a whole, or (iv) any judgment, order or decree of any governmental body, agency or court having jurisdiction over such Selling Stockholder, except in the case of (i), (iii) and (iv) as would not have a material adverse effect on such Selling Stockholder and its subsidiaries taken as a whole, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by such Selling Stockholder of its obligations under this Agreement, except those which have been obtained or made, and as may be required by rules of the National Association of Securities Dealers, Inc., or by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares,

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and except for those the failure of which to obtain would not have a material adverse effect on such Selling Stockholder and its subsidiaries taken as a whole.

(c)Such Selling Stockholder has (with respect to the Class B common stock owned by such Selling Stockholder prior to the conversion of such Class B common stock to Class A common stock), and on the Closing Date will have (with respect to the Shares), valid title to, or a valid “security entitlement” within the meaning of Section 8-501 of the New York Uniform Commercial Code (the “UCC”) in respect of, the Shares to be sold by such Selling Stockholder free and clear of all security interests, claims, liens, equities or other encumbrances and the legal right and power, and all authorization and approval required by law, to enter into this Agreement and to sell, transfer and deliver the Shares to be sold by such Selling Stockholder or a security entitlement in respect of such Shares.

(d)Upon payment for the Shares to be sold by such Selling Stockholder pursuant to this Agreement, delivery of such Shares, as directed by the Underwriter, to Cede & Co. (“Cede”) or such other nominee as may be designated by the Depository Trust Company (“DTC”), registration of such Shares in the name of Cede or such other nominee and the crediting of such Shares on the books of DTC to securities accounts of the Underwriter (assuming that neither DTC nor the Underwriter has notice of any adverse claim (within the meaning of Section 8-105 of the UCC to such Shares), (A) DTC shall be a “protected purchaser” of such Shares within the meaning of Section 8-303 of the UCC, (B) under Section 8-501 of the UCC, the Underwriter will acquire a valid security entitlement in respect of such Shares and (C) no action based on any “adverse claim”, within the meaning of Section 8-102 of the UCC, to such Shares may be validly asserted against the Underwriter with respect to such security entitlement; for purposes of this representation, such Selling Stockholder may assume that when such payment, delivery and crediting occur, (x) such Shares will have been registered in the name of Cede or another nominee designated by DTC, in each case on the Company’s share registry in accordance with its certificate of incorporation, bylaws and applicable law, (y) DTC will be registered as a “clearing corporation” within the meaning of Section 8-102 of the UCC and (z) appropriate entries to the accounts of the Underwriter on the records of DTC will have been made pursuant to the UCC.

(e)Such Selling Stockholder is not prompted by any information concerning the Company or its subsidiaries which is not set forth in the Prospectus or otherwise has been publicly disclosed by such Selling Stockholder to sell its Shares pursuant to this Agreement.

(f)(i)  The Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and

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(ii) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, provided that the representations and warranties set forth in this paragraph 2(f) are limited to statements or omissions based upon information relating to such Selling Stockholder furnished to the Company in writing by such Selling Stockholder expressly for use in the Registration Statement, the Prospectus or any amendments or supplements thereto (such information collectively, the “Selling Stockholder Information”).

3.Agreements to Sell and Purchase.  The Selling Stockholders hereby agree to sell to the Underwriter, and the Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees to purchase from the Selling Stockholders at $38.03 a share (the “Purchase Price”) the Shares.

The Company hereby agrees that, without the prior written consent of the Underwriter, it will not, during the period ending 90 days after the date of the Prospectus, (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock; or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise; or (3) file any registration statement with the Commission relating to the offering of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock.

The restrictions contained in the preceding paragraph shall not apply to (a) the Shares to be sold hereunder, (b) the issuance by the Company of shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof of which the Underwriter has been advised in writing, or (c) the grant by the Company of stock options, restricted stock or other awards pursuant to the Company’s benefit plans in existence on the date hereof or proposed to be approved by the Company’s stockholders at their 2005 annual meeting; provided that such options, restricted stock or awards do not become exercisable or vest during such 90-day period.

4.Terms of Public Offering. The Company and the Selling Stockholders are advised by you that the Underwriter proposes to make a public offering of the Shares as soon after this Agreement has been executed as in your judgment is advisable.  The Company and the Selling Stockholders are further

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advised by you that the Shares are to be offered to the public initially at $38.15 a share (the “Public Offering Price”).

5.Payment and Delivery. Payment for the Shares to be sold by each Selling Stockholder shall be made to such Selling Stockholder in Federal or other funds immediately available in New York City against delivery of such Shares for the account of the Underwriter at 10:00 a.m., New York City time, on August 10, 2005, or at such other time on the same or such other date, not later than August 17, 2005, as shall be designated in writing by you.  The time and date of such payment are hereinafter referred to as the “Closing Date.”

The Shares shall be registered in such names and in such denominations as you shall request in writing not later than one full business day prior to the Closing Date.  The Shares shall be delivered to you on the Closing Date, with any transfer taxes payable in connection with the transfer of the Shares to you duly paid, against payment of the Purchase Price therefor.

6.Conditions to the Underwriter’s Obligations. The obligations of the Underwriter are subject to the following further conditions:

(a)Subsequent to the execution and delivery of this Agreement and prior to the Closing Date:

(i)there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any of the securities of the Company or any of its subsidiaries by any “nationally recognized statistical rating organization,” as such term is defined for purposes of Rule 436(g)(2) under the Securities Act; and

(ii)there shall not have occurred any change, or any development involving a prospective change, in the financial condition or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement) that, in your judgment, is material and adverse and that makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus.

(b)The Underwriter shall have received on the Closing Date a certificate, dated the Closing Date and signed by an executive officer of the Company, to the effect set forth in Section 6(a)(i) above, to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of the Closing Date and that the Company has complied in all material respects with all of the agreements and satisfied in all material respects

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all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date.

The officer signing and delivering such certificate may rely upon the best of his or her knowledge as to proceedings threatened.

(c)The Underwriter shall have received on the Closing Date a certificate, dated the Closing Date and signed by an executive officer of St. Paul Travelers, to the effect that the representations and warranties of the Selling Stockholders contained in this Agreement are true and correct as of the Closing Date and that the Selling Stockholders have complied in all material respects with all of the agreements and satisfied in all material respects all of the conditions on their part to be performed or satisfied hereunder on or before the Closing Date.

(d)The Underwriter shall have received on the Closing Date an opinion of Wachtell, Lipton, Rosen & Katz, special counsel for the Company, dated the Closing Date, to the effect that:

(i)the authorized capital stock of the Company conforms as to legal matters to the description under the caption “Capital Stock” contained in the Prospectus;

(ii)the shares of Common Stock owned by the Selling Stockholders have been duly authorized and are validly issued, fully paid and non-assessable;

(iii)this Agreement has been duly authorized, executed and delivered by the Company;

(iv)the Company is not, and after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus will not be, required to register as an “investment company” as such term is defined in the 1940 Act; and

(v)the Registration Statement and the Prospectus (except for the financial statements and related notes and other financial or statistical data included therein or omitted therefrom, as to which such counsel need not comment) appear on their face to be responsive as to form in all material respects to the requirements of the Securities Act and the applicable rules and regulations of the Commission thereunder.

In the course of such counsel’s participation in the preparation of the Registration Statement and Prospectus and review and discussion of the contents thereof, although such counsel has not independently checked or verified, and is not passing upon and assumes no responsibility for, the accuracy, completeness, or fairness thereof, or otherwise verified the statements made therein, other than

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those mentioned in subclause (i) above, as of the Closing Date no facts have come to the attention of such counsel that cause such counsel to believe that (i) the Registration Statement or the Prospectus included therein (except for the financial statements and related notes and other financial or statistical data included therein or omitted therefrom, as to which such counsel need not comment) on the date the Registration Statement became effective and as of the date of this Agreement contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) the Prospectus (except for the financial statements and related notes and other financial or statistical data included therein or omitted therefrom, as to which such counsel need not comment) as of its date or as of the Closing Date contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.

In rendering such opinion, such counsel may rely, without independent verification, as to matters of fact, to the extent they deem appropriate, on the representations of the Company contained herein and on certificates of responsible officers of the Company and public officials.  Such opinion will be limited to the laws of the State of New York, the federal laws of the United States and the General Corporation Law of the State of Delaware, and such counsel will express no opinion as to the effect on the matters covered by such opinion of the laws of any other jurisdiction.  Such opinion may also state that such counsel acted as special counsel to the Company in connection with the offering of the Shares contemplated hereby and did not act, and has not acted, as the Company’s regular outside counsel.

(e)The Underwriter shall have received on the Closing Date an opinion of Alan G. Berkshire, Esq., General Counsel to the Company, dated the Closing Date, to the effect that:

(i)the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the State of Delaware, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect;

(ii)each Significant Subsidiary of the Company has been duly incorporated or formed, is validly existing in good standing under the laws of the jurisdiction of its incorporation or formation, has the requisite power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact such business

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and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect;

(iii)the Shares to be sold by the Selling Stockholders have been duly authorized and are validly issued, fully paid and non-assessable;

(iv)to such counsel’s knowledge and other than as set forth in the Prospectus, there are no legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or any of its subsidiaries is subject, which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect;

(v)each of the Investment Advisory Subsidiaries is duly registered as an investment adviser under the Advisors Act.  To such counsel’s knowledge, none of the Company or its subsidiaries other than the Investment Advisory Subsidiaries is required to be registered, licensed, or qualified as an investment adviser under the Advisers Act and the rules and regulation of the Commission promulgated thereunder or under applicable state laws, except where any failure to be so registered, licensed, or qualified would not have a Material Adverse Effect.  To such counsel’s knowledge, each of the Investment Advisory Subsidiaries is in compliance with the Advisers Act and applicable state laws, regulations, ordinances and rules applicable to it or its operations relating to investment advisory activities except where any failure by any such Investment Advisory Subsidiary to comply with any such law, regulation, ordinance or rule would not have a Material Adverse Effect.

(vi)to the knowledge of such counsel, neither the Company nor any Investment Advisory Subsidiary is in breach or violation of or in default under any investment advisory contract which would individually or in the aggregate have a have a Material Adverse Effect;

(vii)the Broker-Dealer Subsidiary is duly registered, licensed or qualified as a broker-dealer under the Exchange Act and in each Jurisdiction where the conduct of its business requires registration, licensing or qualification, except to the extent that the failure to be so registered, licensed or qualified would not have a Material Adverse Effect.  None of the Company or its subsidiaries, other than the Broker-Dealer Subsidiary, is required to be registered, licensed or qualified as a broker-dealer under the Exchange Act and the rules and regulations of the Commission promulgated thereunder or under the laws requiring any such

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registration, licensing or qualification in any jurisdiction in which it conducts business, except where any failure to be so registered, licensed, or qualified would not have a Material Adverse Effect.  Each of the Company and the Broker-Dealer Subsidiary is in compliance with all laws, regulations, ordinances and rules (including those of any self regulatory organizations) as applicable to it or its operations relating to broker-dealer activities except where any failure to comply with any such law, regulation, ordinance or rule would not have, individually or in the aggregate, a Material Adverse Effect;

(viii)except as disclosed in the Prospectus, the execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene any provision of applicable law or the certificate of incorporation or by-laws of the Company or, to such counsel’s knowledge, any agreement or other instrument binding upon the Company or any of its subsidiaries that is material to the Company and its subsidiaries, taken as a whole, or, to such counsel’s knowledge, any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or any subsidiary, and no consent, approval, authorization or order of, or qualification with, any U.S. federal, State of Illinois or State of Delaware governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except those which have been obtained or made, and as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares (it being understood that this opinion is limited to those consents, approvals, authorizations, orders, and qualifications that, in such counsel’s experience, are normally applicable to transactions of the type contemplated by this Agreement);

(ix)the Registration Statement and the Prospectus (except for the financial statements and related notes and other financial or statistical data included therein or omitted therefrom, as to which such counsel need not comment) appear on their face to be responsive as to form in all material respects to the requirements of the Securities Act and the applicable rules and regulations of the Commission thereunder; and

In the course of such counsel’s participation in the preparation of the Registration Statement and Prospectus and review and discussion of the contents thereof, although such counsel has not independently checked or verified, and is not passing upon and assumes no responsibility for, the accuracy, completeness, or fairness thereof, or otherwise verified the statements made therein (it being understood that such counsel has prepared and reviewed the disclosures incorporated by reference in the Prospectus under the captions “Business—Regulatory,” and “Legal Proceedings” in the Company’s Annual Report on Form

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10-K for the year ended December 31, 2004 and under the caption “Legal Proceedings” in the Company’s Quarterly Report on Form 10-Q for the three-month period ended March 31, 2005), as of the Closing Date no facts have come to the attention of such counsel that cause such counsel to believe that (i) the Registration Statement or the prospectus included therein (except for the financial statements and related notes and other financial or statistical data included therein or omitted therefrom, as to which such counsel need not comment) on the date the Registration Statement became effective and as of the date of this Agreement contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) the Prospectus (except for the financial statements and related notes and other financial or statistical data included therein or omitted therefrom, as to which such counsel need not comment) as of its date or as of the Closing Date contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.

In rendering such opinion, such counsel may rely, without independent verification, (x) as to matters of fact, to the extent he deems appropriate, on certificates of responsible officers of the Company and public officials, and (y) as to matters involving the application of any jurisdiction other than the State of Illinois, the federal laws of the United States and the General Corporation Law of the State of Delaware, to the extent he deems appropriate and specified in such opinion, upon the opinion of other counsel of good standing whom he reasonably believes to be reliable and who are reasonably satisfactory to counsel for the Underwriter.

(f)The Underwriter shall have received on the Closing Date an opinion of Wachtell, Lipton, Rosen & Katz, counsel for the Selling Stockholders, dated the Closing Date, to the effect that:

(i)this Agreement has been duly authorized, executed and delivered by or on behalf of each of the Selling Stockholders;

(ii)the execution and delivery by the applicable Selling Stockholder of, and the performance by such Selling Stockholder of its obligations under, this Agreement will not contravene any provision of applicable law, or the certificate of incorporation or by-laws of such Selling Stockholder, or, to such counsel’s knowledge, any agreement or other instrument binding upon such Selling Stockholder that is material to such Selling Stockholder and its subsidiaries taken as a whole, or, to such counsel’s knowledge, any judgment, order or decree of any governmental body, agency or court having jurisdiction over such Selling Stockholder, and no consent, approval, authorization or order of, or qualification with, any U.S. federal, New York State or State of Delaware governmental body

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or agency is required for the performance by such Selling Stockholder of its obligations under this Agreement, except those which have been obtained or made, and as may be required by NASD or by the securities or Blue Sky laws of the various states in connection with offer and sale of the Shares (it being understood that this opinion is limited to those consents, approvals, authorizations, orders, and qualifications that, in such counsel’s experience, are normally applicable to transactions of the type contemplated by this Agreement); and

(iii)upon payment for the Shares to be sold by the Selling Stockholders pursuant to this Agreement, delivery of such Shares, as directed by the Underwriter, to Cede or such other nominee as may be designated by DTC, registration of such Shares in the name of Cede or such other nominee and the crediting of such Shares on the books of DTC to securities accounts of the Underwriter (assuming that neither DTC nor the Underwriter has notice of any adverse claim within the meaning of Section 8-105 of the UCC to such Shares), (A) DTC shall be a “protected purchaser” of such Shares within the meaning of Section 8-303 of the UCC, (B) under Section 8-501 of the UCC, the Underwriter will acquire a valid security entitlement in respect of such Shares and (C) no action based on any “adverse claim” (within the meaning of Section 8-102 of the UCC) to such Shares may be validly asserted against the Underwriter with respect to such security entitlement; in giving this opinion, counsel for the Selling Stockholders may assume that when such payment, delivery and crediting occur, (x) such Shares will have been registered in the name of Cede or another nominee designated by DTC, in each case on the Company’s share registry in accordance with its certificate of incorporation, bylaws and applicable law, (y) DTC will be registered as a “clearing corporation” within the meaning of Section 8-102 of the UCC and (z) appropriate entries to the accounts of the Underwriter on the records of DTC will have been made pursuant to the UCC.

In rendering such opinion, such counsel may rely, without independent verification, (x) as to matters of fact, to the extent they deem appropriate, upon the representations of each Selling Stockholder contained herein and in other documents and instruments, provided that you are provided copies of such other documents and instruments and they are reasonably satisfactory to your counsel, and (y) as to legal matters, to the extent they deem appropriate and specified in such opinion, upon the opinion or opinions of other counsel of good standing whom they reasonably believe to be reliable and who are reasonably satisfactory to counsel for the Underwriter.

(g)The Underwriter shall have received on the Closing Date an opinion of Davis Polk & Wardwell, counsel for the Underwriter, dated the Closing Date, covering the matters referred to in Section 6(d)(iii) and the

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penultimate paragraph of Section 6(d), above, and further to the effect that the statements relating to legal matters or documents included in the Prospectus under the caption “Underwriting” fairly summarize in all material respects such matters or documents.

With respect to the penultimate paragraph in Section 6(d), above, Davis Polk & Wardwell may state that their opinions and beliefs are based upon their participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto (other than the documents incorporated by reference) and upon review and discussion of the contents thereof (including documents incorporated by reference), but are without independent check or verification, except as specified.

The opinions of Wachtell, Lipton, Rosen & Katz described in Sections 6(d) and 6(f) above (and any opinions of counsel for the Selling Stockholders referred to in the immediately preceding paragraph) and the opinion of Alan G. Berkshire in Section 6(e) above shall be rendered to the Underwriter at the request of the Company or the Selling Stockholders, as the case may be, and shall so state therein.

(h)The Underwriter shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Underwriter, from KPMG LLP, independent public accountants, containing statements and information of the type ordinarily included in accountants’ “comfort letters” to underwriters with respect to the financial statements and certain financial information contained in or incorporated by reference into the Registration Statement and the Prospectus; provided that the letter delivered on the Closing Date shall use a “cut-off date” not earlier than the date hereof.

7.Covenants of the Company. In further consideration of the agreements of the Underwriter herein contained, the Company covenants with the Underwriter as follows:

(a)To furnish to you, without charge, three signed copies of the Registration Statement (including exhibits thereto and documents incorporated by reference) and to furnish to you in New York City, without charge, prior to 10:00 a.m. New York City time on the business day next succeeding the date of this Agreement and during the period mentioned in Section 7(c) below, as many copies of the Prospectus, any documents incorporated therein by reference and any supplements and amendments thereto or to the Registration Statement as you may reasonably request.

(b)Before amending or supplementing the Registration Statement or the Prospectus, to furnish to you a copy of each such proposed amendment or

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supplement and not to file any such proposed amendment or supplement to which you reasonably object, and to file with the Commission within the applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to such Rule.

(c)If, during such period after the first date of the public offering of the Shares as in the opinion of counsel for the Underwriter the Prospectus is required by law to be delivered in connection with sales by the Underwriter or any dealer, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriter, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriter and to the dealers (whose names and addresses you will furnish to the Company) to which Shares may have been sold by you on behalf of the Underwriter and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law.

(d)To use reasonable efforts to qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request.

(e)To make generally available to the Company’s security holders and to you as soon as practicable an earning statement covering the twelve-month period ending September 30, 2006 that satisfies the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder.

8.Expenses.  Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, St. Paul Travelers agrees to pay or cause to be paid all expenses incident to the performance of the Selling Stockholders’ and the Company’s obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Company’s counsel, the Company’s accountants and counsel for the Selling Stockholders in connection with the registration and delivery of the Shares under the Securities Act and all other fees or expenses in connection with the preparation and filing of the Registration Statement, any preliminary prospectus, the Prospectus and amendments and supplements to any of the foregoing, including all printing costs associated therewith, and the mailing and delivering of copies thereof to the Underwriter and dealers, in the quantities hereinabove specified, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriter, including any transfer or other taxes payable thereon, (iii) the cost of printing or

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producing any Blue Sky memorandum in connection with the offer and sale of the Shares under state securities laws and all expenses in connection with the qualification of the Shares for offer and sale under state securities laws as provided in Section 7(d) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriter in connection with such qualification and in connection with the Blue Sky memorandum, (iv) all costs and expenses incident to listing the Shares on the New York Stock Exchange, (v) the cost of printing certificates representing the Shares, (vi) the costs and charges of any transfer agent, registrar or depositary, (vii) the costs and expenses of the Company relating to investor presentations on any “road show” undertaken in connection with the marketing of the offering of the Shares, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expenses of the representatives (who, for the avoidance of doubt, shall not include the Underwriter) and officers of the Company and any such consultants, and the cost of any aircraft chartered in connection with the road show, (viii) the document production charges and expenses associated with printing this Agreement and (ix) all other costs and expenses incident to the performance of the obligations of the Company and the Selling Stockholders hereunder for which provision is not otherwise made in this Section.  It is understood, however, that except as provided in this Section, Section 9 entitled “Indemnity and Contribution” and the last paragraph of Section 11 below, the Underwriter will pay all of its costs and expenses, including fees and disbursements of its counsel, stock transfer taxes payable on resale of any of the Shares by it and any advertising expenses connected with any offers it may make.

The provisions of this Section shall not supersede or otherwise affect any agreement that the Company and the Selling Stockholders may otherwise have for the allocation of such expenses among themselves.

9.Indemnity and Contribution.  (a) The Company agrees to indemnify and hold harmless the Underwriter, each person, if any, who controls the Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act and each affiliate of the Underwriter within the meaning of Rule 405 under the Securities Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus or any amendment or supplement thereto, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue

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statement or omission based upon (i) information relating to the Underwriter furnished to the Company in writing by the Underwriter expressly for use therein, or (ii) the Selling Stockholder Information; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of the Underwriter, or any person controlling the Underwriter or any affiliate of the Underwriter within the meaning of Rule 405 of the Securities Act, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of the Underwriter to the person asserting any such losses, claims, damages or liabilities who purchased Shares from the Underwriter, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities, unless such failure is the result of noncompliance by the Company with Section 7(a) hereof.

(b)Each Selling Stockholder agrees to indemnify and hold harmless the Underwriter, each person, if any, who controls the Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act and each affiliate of the Underwriter within the meaning of Rule 405 under the Securities Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus or any amendment or supplement thereto, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to the Selling Stockholder Information; provided, however, that the foregoing indemnity agreement shall not cover any such losses, claims, damages or liabilities as are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to the Underwriter furnished to the Company in writing by the Underwriter expressly for use therein; and provided further, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of the Underwriter, or any person controlling the Underwriter or any affiliate of the Underwriter within the meaning of Rule 405 of the Securities Act, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of the Underwriter to the person asserting any such losses, claims, damages or liabilities who purchased Shares from the Underwriter, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities, unless such failure is the result of noncompliance by the Company with Section 7(a)

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hereof.  The liability of each Selling Stockholder under the indemnity agreement contained in this paragraph shall be limited to an amount equal to the net proceeds received by such Selling Stockholder from the Underwriter in respect of the Shares sold by such Selling Stockholder under this Agreement.

(c)The Underwriter agrees to indemnify and hold harmless the Company, the Selling Stockholders, the directors of the Company, the officers of the Company who sign the Registration Statement and each person, if any, who controls the Company or any Selling Stockholder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to information relating to the Underwriter furnished to the Company in writing by the Underwriter expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto.

(d)In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Section 9(a), 9(b) or 9(c), such person (the “indemnified party”) shall promptly notify the person against whom such indemnity may be sought (the “indemnifying party”) in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding.  In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them.  It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (i) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Underwriter and all persons, if any, who control the Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the

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Exchange Act or who are affiliates of the Underwriter within the meaning of Rule 405 under the Securities Act, (ii) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either such Section and (iii) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Selling Stockholders and all persons, if any, who control the Selling Stockholders within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred.  In the case of any such separate firm for the Underwriter and such control persons and affiliates of the Underwriter, such firm shall be designated in writing by the Underwriter.  In the case of any such separate firm for the Company, and such directors, officers and control persons of the Company, such firm shall be designated in writing by the Company.  In the case of any such separate firm for the Selling Stockholders and such control persons of the Selling Stockholders, such firm shall be designated in writing by the Selling Stockholders.  The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment.  No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding.

(e)To the extent the indemnification provided for in Section 9(a), 9(b) or 9(c) is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party or parties on the other hand from the offering of the Shares or (ii) if the allocation provided by clause 9(e)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 9(e)(i) above but also the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations.  The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriter on the other hand in connection with the offering of the Shares shall be deemed to be in the same respective proportions as the net

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proceeds from the offering of the Shares (before deducting expenses) received by the Selling Stockholders and the total underwriting discounts and commissions received by the Underwriter, in each case as set forth in the table on the cover of the Prospectus Supplement, bear to the aggregate Public Offering Price of the Shares.  The relative fault of the Company or the Selling Stockholders on the one hand and the Underwriter on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Stockholders or by the Underwriter and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.  The liability of each Selling Stockholder under the contribution agreement contained in this paragraph shall be limited to an amount equal to the net proceeds received by such Selling Stockholder from the Underwriter in respect of the Shares sold by such Selling Stockholder under this Agreement.

(f)The Company, the Selling Stockholders and the Underwriter agree that it would not be just or equitable if contribution pursuant to this Section 9 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in Section 9(e).  The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim.  Notwithstanding the provisions of this Section 9, the Underwriter shall not be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that the Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission.  No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.  The remedies provided for in this Section 9 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity.

(g)The indemnity and contribution provisions contained in this Section 9 and the representations, warranties and other statements of the Company and the Selling Stockholders contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of the Underwriter, any person controlling the Underwriter or any affiliate of the Underwriter, either Selling Stockholder or any person controlling such Selling Stockholder, or the

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Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Shares.

10.Termination.  The Underwriter may terminate this Agreement by notice given to the Company, if after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on, or by, as the case may be, either the New York Stock Exchange or the Nasdaq National Market (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a material disruption in securities settlement, payment or clearance services in the United States shall have occurred, (iv) any moratorium on commercial banking activities shall have been declared by Federal or New York State authorities or (v) there shall have occurred any outbreak or escalation of hostilities, or any change in financial markets, or any calamity or crisis that, in your judgment, is material and adverse and which, singly or together with any other event specified in this clause (v), makes it, in your judgment, impracticable or inadvisable to proceed with the offer, sale or delivery of the Shares on the terms and in the manner contemplated in the Prospectus.

11.Effectiveness. This Agreement shall become effective upon the execution and delivery hereof by the parties hereto.

If this Agreement shall be terminated by the Underwriter because of any failure or refusal on the part of any the Company or the Selling Stockholders to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company or the Selling Stockholders shall be unable to perform its obligations under this Agreement, the Company or the Selling Stockholders, as the case may be, will reimburse the Underwriter for all out-of-pocket expenses (including the fees and disbursements of its counsel) reasonably incurred by the Underwriter in connection with this Agreement or the offering contemplated hereunder.

12.Counterparts. This Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

13.Applicable Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York.

14.Headings. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement.

15.Notices.  All communications hereunder shall be in writing and effective only upon receipt and if to the Underwriter shall be delivered, mailed or sent to you in care of Morgan Stanley & Co. Incorporated, 1585 Broadway, New York,

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New York 10036, Attention: Global Capital Markets; if to the Company shall be delivered, mailed or sent to Nuveen Investments, Inc., 333 West Wacker Drive, Chicago, Illinois 60606 Attention: Alan G. Berkshire, Esq. and if to the Selling Stockholders shall be delivered, mailed or sent to The St. Paul Travelers Companies, Inc., 385 Washington Street, Saint Paul, MN 55102, Attention: Kenneth F. Spence, III.

[Signatures Follow]

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Very truly yours,
NUVEEN INVESTMENTS, INC.
By:	/s/ Alan G. Berkshire, Esq.
	Name:	Alan G. Berkshire, Esq.
	Title:	Senior Vice President and General Counsel
THE ST. PAUL TRAVELERS COMPANIES, INC.
By:	/s/ Bruce A. Backberg
	Name:	Bruce A. Backberg
	Title:	Senior Vice President
UNITED STATES FIDELITY AND GUARANTY COMPANY
By:	/s/ Bruce A. Backberg
	Name:	Bruce A. Backberg
	Title:	Senior Vice President

Accepted as of the date hereof

MORGAN STANLEY & CO. INCORPORATED

By:	/s/ John D. Tyree
	Name:	John D. Tyree
	Title:	Executive Director

SCHEDULE I

Selling Stockholder	Number of Shares To Be Sold
The St. Paul Travelers Companies, Inc.	3,389,500
United States Fidelity and Guaranty Company	81,510
Total:	3,471,010

EX-10.1

Exhibit 10.1

EXECUTION COPY

U.S. $1,000,000,000

FIVE YEAR CREDIT AGREEMENT

Dated as of June 10, 2005

Among

THE ST. PAUL TRAVELERS COMPANIES, INC.

as Borrower

and

THE INITIAL LENDERS NAMED HEREIN

as Initial Lenders

and

CITICORP USA, INC.

as Administrative Agent

and

CITIGROUP GLOBAL MARKETS INC.

J.P. MORGAN SECURITIES INC.

as Joint Lead Arrangers

and

JPMORGAN CHASE BANK, N.A.

as Syndication Agent

and

BANK OF AMERICA, N.A.

THE BANK OF NEW YORK

and

WELLS FARGO BANK, NATIONAL ASSOCIATION

as Documentation Agents

TABLE OF CONTENTS

SECTION 2.08. Interest on Revolving Credit Advances

SECTION 2.09. Interest Rate Determination

SECTION 2.10. Optional Conversion of Revolving Credit Advances

SECTION 2.11. Prepayments of Revolving Credit Advances

SECTION 2.12. Increased Costs

SECTION 2.13. Illegality

SECTION 2.14. Payments and Computations

SECTION 2.15. Taxes

SECTION 2.16. Sharing of Payments, Etc.

SECTION 2.17. Evidence of Debt

SECTION 2.18. Use of Proceeds

SECTION 2.19. Increase in the Aggregate Commitments

SECTION 2.20. Extension of Termination Date

SECTION 2.21. Replacement of Lenders

ARTICLE III

SECTION 3.01. Conditions Precedent to Effectiveness of Sections 2.01 and 2.04

SECTION 3.02. Conditions Precedent to Each Revolving Credit Borrowing, Issuance, Commitment Increase and Extension of Commitments.

SECTION 3.03. Conditions Precedent to Each Competitive Bid Borrowing

SECTION 3.04. Determinations Under Section 3.01

ARTICLE IV

SECTION 4.01. Representations and Warranties of the Borrower

ARTICLE V

SECTION 5.01. Affirmative Covenants

SECTION 5.02. Negative Covenants

SECTION 5.03. Financial Covenants

ARTICLE VI

SECTION 6.01. Events of Default

SECTION 6.02. Actions in Respect of the Letters of Credit upon Default

ARTICLE VII

SECTION 7.01. Authorization and Action

SECTION 7.02. Agent’s Reliance, Etc.

SECTION 7.03. Citicorp and Affiliates

SECTION 7.04. Lender Credit Decision

SECTION 7.05. Indemnification

SECTION 7.06. Successor Agent

SECTION 7.07. Other Agents.

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ARTICLE VIII

SECTION 8.01. Amendments, Etc.

SECTION 8.02. Notices, Etc.

SECTION 8.03. No Waiver; Remedies

SECTION 8.04. Costs and Expenses

SECTION 8.05. Right of Set-off

SECTION 8.06. Binding Effect

SECTION 8.07. Assignments and Participations

SECTION 8.08. Confidentiality

SECTION 8.09. Governing Law

SECTION 8.10. Execution in Counterparts

SECTION 8.11. Jurisdiction, Etc.

SECTION 8.12. No Liability of the Issuing Banks

SECTION 8.13. Patriot Act

SECTION 8.14. Waiver of Jury Trial

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Schedules
Schedule I - List of Applicable Lending Offices
Schedule 2.01(b) – Existing Letters of Credit
Schedule 3.01(b) - Disclosed Litigation
Schedule 4.01(e) - Accounting Matters
Schedule 5.02(a) - Existing Liens
Exhibits
Exhibit A-1	-	Form of Revolving Credit Note
Exhibit A-2	-	Form of Competitive Bid Note
Exhibit B-1	-	Form of Notice of Revolving Credit Borrowing
Exhibit B-2	-	Form of Notice of Competitive Bid Borrowing
Exhibit C	-	Form of Assignment and Acceptance
Exhibit D	-	Form of Opinion of Counsel for the Borrower

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FIVE YEAR CREDIT AGREEMENT

Dated as of June 10, 2005

THE ST. PAUL TRAVELERS COMPANIES, INC., a Minnesota corporation (the “Borrower”), the banks, financial institutions and other institutional lenders (the “Initial Lenders”) and issuers of letters of credit (“Initial Issuing Banks”) listed on Schedule I hereto, JPMORGAN CHASE BANK, N.A., as syndication agent, BANK OF AMERICA, N.A., THE BANK OF NEW YORK and WELLS FARGO BANK, NATIONAL ASSOCIATION, as documentation agents, CITIGROUP GLOBAL MARKETS INC. and J.P. MORGAN SECURITIES INC., as joint lead arrangers, and CITICORP USA, INC. (“Citicorp”), as agent (the “Agent”) for the Lenders (as hereinafter defined), agree as follows:

ARTICLE I

DEFINITIONS AND ACCOUNTING TERMS

SECTION 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):

“Advance” means a Revolving Credit Advance or a Competitive Bid Advance.

“Affiliate” means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person.

“Agent’s Account” means the account of the Agent maintained by the Agent at Citibank at its office at Two Penns Way, New Castle, Delaware 19720, Account No. 36852248, Attention:  Bank Loan Syndications.

“Applicable Lending Office” means, with respect to each Lender, such Lender’s Domestic Lending Office in the case of a Base Rate Advance and such Lender’s Eurodollar Lending Office in the case of a Eurodollar Rate Advance and, in the case of a Competitive Bid Advance, the office of such Lender notified by such Lender to the Agent as its Applicable Lending Office with respect to such Competitive Bid Advance.

“Applicable Margin” means (a) for Base Rate Advances, 0% per annum and (b) for Eurodollar Rate Advances, as of any date, a percentage per annum determined by reference to the Public Debt Rating in effect on such date as set forth below:

Public Debt Rating S&P/Moody’s	Applicable Margin for Eurodollar Rate Advances
Level 1 A+ or A1	0.200	%
Level 2 A or A2	0.215	%
Level 3 A- or A3	0.275	%
Level 4 BBB+ or Baa1	0.300	%
Level 5 Lower than Level 4	0.375	%

“Applicable Percentage” means, as of any date a percentage per annum determined by reference to the Public Debt Rating in effect on such date as set forth below:

Public Debt Rating S&P/Moody’s	Applicable Percentage
Level 1 A+ or A1	0.050	%
Level 2 A or A2	0.060	%
Level 3 A- or A3	0.075	%
Level 4 BBB+ or Baa1	0.100	%
Level 5 Lower than Level 4	0.125	%

“Applicable Utilization Fee” means, as of any date that the aggregate Advances exceed 50% of the aggregate Revolving Credit Commitments, a percentage per annum determined by reference to the Public Debt Rating in effect on such date as set forth below:

Public Debt Rating S&P/Moody’s	Applicable Utilization Fee
Level 1 A+ or A1	0.075	%
Level 2 A or A2	0.075	%
Level 3 A- or A3	0.075	%
Level 4 BBB+ or Baa1	0.075	%
Level 5 Lower than Level 4	0.075	%

“Assignment and Acceptance” means an assignment and acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Agent, in substantially the form of Exhibit C hereto.

“Assuming Lender” has the meaning specified in Section 2.19(d).

“Assumption Agreement” has the meaning specified in Section 2.19(d)(ii).

“Available Amount” of any Letter of Credit means, at any time, the maximum amount available to be drawn under such Letter of Credit at such time (assuming compliance at such time with all conditions to drawing).

“Base Rate” means a fluctuating interest rate per annum in effect from time to time, which rate per annum shall at all times be equal to the higher of:

(a)           the rate of interest announced publicly by Citibank in New York, New York, from time to time, as Citibank’s base rate;

(b)           ½ of one percent per annum above the Federal Funds Rate.

“Base Rate Advance” means a Revolving Credit Advance that bears interest as provided in Section 2.08(a)(i).

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“Borrowing” means a Revolving Credit Borrowing or a Competitive Bid Borrowing.

“Business Day” means a day of the year on which banks are not required or authorized by law to close in New York City and, if the applicable Business Day relates to any Eurodollar Rate Advances or LIBO Rate Advances, on which dealings are carried on in the London interbank market.

“Citibank” means Citibank, N.A.

“Commitment” means a Revolving Credit Commitment or a Letter of Credit Commitment.

“Commitment Date” has the meaning specified in Section 2.19(b).

“Commitment Increase” has the meaning specified in Section 2.19(a).

“Competitive Bid Advance” means an advance by a Lender to the Borrower as part of a Competitive Bid Borrowing resulting from the competitive bidding procedure described in Section 2.04 and refers to a Fixed Rate Advance or a LIBO Rate Advance.

“Competitive Bid Borrowing” means a borrowing consisting of simultaneous Competitive Bid Advances from each of the Lenders whose offer to make one or more Competitive Bid Advances as part of such borrowing has been accepted under the competitive bidding procedure described in Section 2.04.

“Competitive Bid Note” means a promissory note of the Borrower payable to the order of any Lender, in substantially the form of Exhibit A-2 hereto, evidencing the indebtedness of the Borrower to such Lender resulting from a Competitive Bid Advance made by such Lender.

“Confidential Information” means all non-public information that the Borrower furnishes to the Agent or any Lender, but does not include any such information that is or becomes generally available to the public or that is or becomes available to the Agent or such Lender from a source other than the Borrower or a Person who is known by the Agent or such Lender to be in violation of a confidentiality agreement with the Borrower.

“Consenting Lender” has the meaning specified in Section 2.20(b).

“Consolidated” refers to the consolidation of accounts in accordance with GAAP.

“Convert”, “Conversion” and “Converted” each refers to a conversion of Revolving Credit Advances of one Type into Revolving Credit Advances of the other Type pursuant to Section 2.09 or 2.10.

“Debt” of any Person means, without duplication, (a) all indebtedness of such Person for borrowed money, (b) all obligations of such Person for the deferred purchase price of property or services (other than trade payables incurred in the ordinary course of such Person’s business that (x) are not overdue by more than 120 days or (y) are being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained), (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all obligations of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all obligations of such Person as lessee under leases that have been or should be, in accordance with GAAP, recorded as capital leases (the amount of Debt attributable thereto to be the capitalized amount thereof in accordance with GAAP), (f) all obligations, contingent or otherwise, of such Person in respect of acceptances, letters of credit or similar extensions of credit, (g) all obligations of such Person in respect of Hedge Agreements, (h) all Debt of others referred to in clauses (a) through (g) above or clause (i) below and other payment obligations guaranteed directly or indirectly in any manner by such Person, or in effect guaranteed directly or indirectly by such Person

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through an agreement (1) to pay or purchase such Debt or to advance or supply funds for the payment or purchase of such Debt, (2) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Debt or to assure the holder of such Debt against loss, (3) to supply funds to or in any other manner invest in the debtor (including any agreement to pay for property or services irrespective of whether such property is received or such services are rendered) or (4) otherwise to assure a creditor against loss, and (i) all Debt referred to in clauses (a) through (h) above secured by (or for which the holder of such Debt has an existing right to be secured by) any Lien on property (including, without limitation, accounts and contract rights) owned by such Person (the amount of Debt attributable thereto to be equal to the lesser of (i) the amount of such Debt and (ii) the fair market value of the property subject to such Lien), even though such Person has not assumed or become liable for the payment of such Debt. For purposes of calculating the amount of Debt pursuant to clause (g) of the foregoing definition, such amount shall be equal to the amount that would be payable (giving effect to netting arrangements) by the relevant Person if the Hedge Agreement were terminated.

“Default” means any Event of Default or any event that would constitute an Event of Default but for the requirement that notice be given or time elapse or both.

“Disclosed Litigation” has the meaning specified in Section 3.01(b).

“Domestic Lending Office” means, with respect to any Lender, the office of such Lender specified as its “Domestic Lending Office” opposite its name on Schedule I hereto or in the Assumption Agreement or the Assignment and Acceptance pursuant to which it became a Lender, or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Agent.

“Effective Date” has the meaning specified in Section 3.01.

“Eligible Assignee” means (i) a Lender; (ii) an Affiliate of a Lender; and (iii) any other Person approved by the Agent and, unless an Event of Default has occurred and is continuing at the time any assignment is effected in accordance with Section 8.07, the Borrower, such approval not to be unreasonably withheld or delayed, provided, that if an Event of Default has occurred and is continuing such that the Borrower does not have a right of approval with respect to any Eligible Assignee under this clause (iii), such Person shall be a commercial bank organized or licensed under the laws of the United States, or any State thereof, and have a long-term senior unsecured debt rating of not worse than A by S&P or A2 by Moody’s (unless the Borrower otherwise approves such Eligible Assignee); provided, however, that neither the Borrower nor an Affiliate of the Borrower shall qualify as an Eligible Assignee.

“Environmental Law” means any federal, state, local or foreign statute, law, ordinance, rule, regulation, code, order, judgment, decree or judicial or agency interpretation, policy or guidance relating to pollution or protection of the environment, health, safety or natural resources, including, without limitation, those relating to the use, handling, transportation, treatment, storage, disposal, release or discharge of hazardous materials.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder.

“ERISA Affiliate” means any Person that for purposes of Title IV of ERISA is a member of the Borrower’s controlled group, or under common control with the Borrower, within the meaning of Section 414 of the Internal Revenue Code.

“ERISA Event” means (a) (i) the occurrence of a reportable event, within the meaning of Section 4043 of ERISA, with respect to any Plan unless the 30-day notice requirement with respect to such event has been waived by the PBGC, or (ii) the requirements of subsection (1) of Section 4043(b) of ERISA are met with respect to a contributing sponsor, as defined in Section 4001(a)(13) of ERISA, of a

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Plan, and an event described in paragraph (9), (10), (11), (12) or (13) of Section 4043(c) of ERISA is reasonably expected to occur with respect to such Plan within the following 30 days; (b) the application for a minimum funding standard waiver with respect to a Plan; (c) the provision by the administrator of any Plan of a notice of intent to terminate such Plan pursuant to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan amendment referred to in Section 4041(e) of ERISA); (d) the cessation of operations at a facility of the Borrower or any ERISA Affiliate in the circumstances described in Section 4062(e) of ERISA that is treated as a withdrawal under such Section; (e) the withdrawal by the Borrower or any ERISA Affiliate from a Multiple Employer Plan during a plan year for which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (f) the imposition of a lien under Section 302(f) of ERISA with respect to any Plan; (g) the adoption of an amendment to a Plan requiring the provision of security to such Plan pursuant to Section 307 of ERISA; or (h) the institution by the PBGC of proceedings to terminate a Plan pursuant to Section 4042 of ERISA, or the occurrence of any event or condition described in Section 4042 of ERISA that constitutes grounds for the termination of, or the appointment of a trustee to administer, a Plan, provided, however, that the event or condition described in Section 4042(a)(4) shall be an ERISA Event only if the PBGC shall have notified the Borrower or any ERISA Affiliate that it intends to terminate, or appoint a trustee to administer, a Plan on such basis.

“Eurocurrency Liabilities” has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time.

“Eurodollar Lending Office” means, with respect to any Lender, the office of such Lender specified as its “Eurodollar Lending Office” opposite its name on Schedule I hereto or in the Assumption Agreement or the Assignment and Acceptance pursuant to which it became a Lender (or, if no such office is specified, its Domestic Lending Office), or in each such case, such other office of such Lender as such Lender may from time to time specify to the Borrower and the Agent.

“Eurodollar Rate” means, for any Interest Period for each Eurodollar Rate Advance comprising part of the same Revolving Credit Borrowing, an interest rate per annum equal to the rate per annum (rounded upward to the nearest whole multiple of 1/16 of 1% per annum) appearing on Moneyline Telerate Markets Page 3750 (or any successor or substitute page of such service, or any successor to such service, providing rate quotations comparable to those currently provided on such page of such service, as determined by the Agent from time to time, for purposes of providing quotations of interest rates applicable to U.S. dollar deposits in the London interbank market) as the London interbank offered rate for deposits in U.S. dollars at approximately 11:00 A.M. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period or, if for any reason such rate is not available, the average (rounded upward to the nearest whole multiple of 1/16 of 1% per annum, if such average is not such a multiple) of the rate per annum at which deposits in U.S. dollars are offered by the principal office of each of the Reference Banks in London, England to prime banks in the London interbank market at 11:00 A.M. (London time) two Business Days before the first day of such Interest Period in an amount substantially equal to such Reference Bank’s Eurodollar Rate Advance comprising part of such Revolving Credit Borrowing to be outstanding during such Interest Period and for a period equal to such Interest Period. If the Moneyline Telerate Markets Page 3750 (or any successor or substitute page of such service, or any successor to such service, providing rate quotations comparable to those currently provided on such page of such service, as determined by the Agent from time to time, for purposes of providing quotations of interest rates applicable to U.S. dollar deposits in the London interbank market) is unavailable, the Eurodollar Rate for any Interest Period for each Eurodollar Rate Advance comprising part of the same Revolving Credit Borrowing shall be determined by the Agent on the basis of applicable rates furnished to and received by the Agent from the Reference Banks two Business Days before the first day of such Interest Period, subject, however, to the provisions of Section 2.09.

“Eurodollar Rate Advance” means a Revolving Credit Advance that bears interest as provided in Section 2.08(a)(ii).

“Events of Default” has the meaning specified in Section 6.01.

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“Extension Date” has the meaning specified in Section 2.20(b).

“Federal Funds Rate” means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent.

“Fixed Rate Advances” has the meaning specified in Section 2.04(a)(i).

“GAAP” has the meaning specified in Section 1.03.

“Hedge Agreements” means interest rate swap, cap or collar agreements, interest rate future or option contracts, currency swap agreements, currency future or option contracts and other similar agreements.

“Increase Date” has the meaning specified in Section 2.19(a).

“Increasing Lender” has the meaning specified in Section 2.19(b).

“Information Memorandum” means the Confidential Information Memorandum dated May 2005 used by the Agent in connection with the syndication of the Commitments.

“Insurance Subsidiary” means any Subsidiary of the Borrower that is licensed by any governmental authority to engage in the insurance business by issuing insurance policies or entering into reinsurance agreements.

“Interest Period” means, for each Eurodollar Rate Advance comprising part of the same Revolving Credit Borrowing and each LIBO Rate Advance comprising part of the same Competitive Bid Borrowing, the period commencing on the date of such Eurodollar Rate Advance or LIBO Rate Advance or the date of the Conversion of any Base Rate Advance into such Eurodollar Rate Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below and, thereafter, with respect to Eurodollar Rate Advances, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below. The duration of each such Interest Period shall be one, two, three or six months, as the Borrower may, upon notice received by the Agent not later than 11:00 A.M. (New York City time) on the third Business Day prior to the first day of such Interest Period, select; provided, however, that:

(a)           the Borrower may not select any Interest Period that ends after the Termination Date;

(b)           Interest Periods commencing on the same date for Eurodollar Rate Advances comprising part of the same Revolving Credit Borrowing or for LIBO Rate Advances comprising part of the same Competitive Bid Borrowing shall be of the same duration;

(c)           whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided, however, that, if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; and

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(d)           whenever the first day of any Interest Period occurs on a day of an initial calendar month for which there is no numerically corresponding day in the calendar month that succeeds such initial calendar month by the number of months equal to the number of months in such Interest Period, such Interest Period shall end on the last Business Day of such succeeding calendar month.

“Internal Revenue Code” means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder.

“Invested Assets” means cash, cash equivalents, short term investments, investments held for sale and any other assets which are treated as investments under GAAP.

“Issuance” with respect to any Letter of Credit means the issuance, amendment (to the extent that same increases the Available Amount thereunder), renewal or extension of such Letter of Credit.

“Issuing Bank” means an Initial Issuing Bank or any Lender designated as an “Issuing Bank” hereunder by written notice to such effect to the Agent by the Borrower and such Lender so long as such Lender expressly agrees to perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as an Issuing Bank and notifies the Agent of its Applicable Lending Office (which information shall be recorded by the Agent in the Register).

“L/C Related Documents” has the meaning specified in Section 2.07(b)(i).

“L/C Securities Account” means a securities account to be established and maintained by the Borrower with the Agent or another financial institution selected by the Borrower, over which the Agent shall have control (as such term is defined in the Uniform Commercial Code), upon terms as may be reasonably satisfactory to the Agent and the Borrower.

“Lenders” means each Initial Lender, each Issuing Bank, each Assuming Lender that shall become a party hereto pursuant to Section 2.19 or 2.20 and each Person that shall become a party hereto pursuant to Section 8.07.

“Letter of Credit” has the meaning specified in Section 2.01(b).

“Letter of Credit Agreement” has the meaning specified in Section 2.03(a).

“Letter of Credit Commitment” means, with respect to each Issuing Bank, the obligation of such Issuing Bank to issue Letters of Credit for the account of the Borrower and their specified Subsidiaries in (a) the amount set forth opposite the Issuing Bank’s name on the signature pages hereof or (b)in the notice designating such Issuing Bank as an Issuing Bank hereunder, in each case as such amount may be reduced prior to such time pursuant to Section 2.06.

“Letter of Credit Facility” means, at any time, an amount equal to the least of (a) the aggregate amount of the Issuing Banks’ Letter of Credit Commitments at such time, (b) $250,000,000 and (c) the aggregate amount of the Revolving Credit Commitments, as such amount may be reduced at or prior to such time pursuant to Section 2.06.

“LIBO Rate” means, for any Interest Period for all LIBO Rate Advances comprising part of the same Competitive Bid Borrowing, an interest rate per annum equal to the rate per annum (rounded upward to the nearest whole multiple of 1/16 of 1% per annum) appearing on Moneyline Telerate Markets Page 3750 (or any successor or substitute page of such service, or any successor to such service, providing rate quotations comparable to those currently provided on such page of such service, as determined by the Agent from time to time, for purposes of providing quotations of interest rates applicable to U.S. dollar deposits in the London interbank market) as the London interbank offered rate for deposits in U.S. dollars

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at approximately 11:00 A.M. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period or, if for any reason such rate is not available, the average (rounded upward to the nearest whole multiple of 1/16 of 1% per annum, if such average is not such a multiple) of the rate per annum at which deposits in U.S. dollars offered by the principal office of each of the Reference Banks in London, England to prime banks in the London interbank market at 11:00 A.M. (London time) two Business Days before the first day of such Interest Period in an amount substantially equal to the amount that would be the Reference Banks’ respective ratable shares of such Borrowing if such Borrowing were to be a Revolving Credit Borrowing to be outstanding during such Interest Period and for a period equal to such Interest Period. If the Moneyline Telerate Markets Page 3750 (or any successor or substitute page of such service, or any successor to such service, providing rate quotations comparable to those currently provided on such page of such service, as determined by the Agent from time to time, for purposes of providing quotations of interest rates applicable to U.S. dollar deposits in the London interbank market) is unavailable, the LIBO Rate for any Interest Period for each LIBO Rate Advance comprising part of the same Competitive Bid Borrowing shall be determined by the Agent on the basis of applicable rates furnished to and received by the Agent from the Reference Banks two Business Days before the first day of such Interest Period, subject, however, to the provisions of Section 2.09.

“LIBO Rate Advances” means a Competitive Bid Advance bearing interest based on the LIBO Rate.

“Lien” means any lien, security interest or other charge or encumbrance of any kind, or any other type of preferential arrangement, including, without limitation, the lien or retained security title of a conditional vendor and any easement, right of way or other encumbrance on title to real property.

“Mandatory Convertible Securities” means, as of any date, the Borrower’s 5 1/4% Senior Notes issued July 31, 2002, which require investors therein to purchase shares of the Borrower’s common stock on the settlement date of August 16, 2005. If at any date, the Borrower issues additional debt that is mandatorily convertible into common equity, such debt will be Mandatory Convertible Securities under this definition if the Borrower provides satisfactory evidence to the Agent and the Required Lenders that such debt is afforded equity capital credit by S&P.

“Material Adverse Change” means any material adverse change in the business, financial condition or results of operations of the Borrower and its Subsidiaries taken as a whole.

“Material Adverse Effect” means a material adverse effect on (a) the business, financial condition or operations of the Borrower and its Subsidiaries taken as a whole, (b) the legality, validity or enforceability of this Agreement or any Note or (c) the ability of the Borrower to perform its payment obligations under this Agreement or any Note.

“Moody’s” means Moody’s Investors Service, Inc.

“Multiemployer Plan” means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which the Borrower or any ERISA Affiliate is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions.

“Multiple Employer Plan” means, at a particular time, a single employer plan, as defined in Section 4001(a)(15) of ERISA, (a) that is maintained for employees of the Borrower or any ERISA Affiliate and at least one contributing sponsor of such plan is a Person other than the Borrower and the ERISA Affiliates or (b) in respect of which the Borrower or any ERISA Affiliate would under Section 4064 or 4069 of ERISA be deemed to be a “contributing sponsor” as defined in Section 4001(a)(13) of ERISA if such plan were terminated at such time.

“Net Worth” of the Borrower means, as of any date, its total shareholders’ equity determined in accordance with GAAP plus (a) the amount of Trust Preferred Securities to the extent that the amount of

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Trust Preferred Securities do not exceed 15% of Total Capital plus (b) the amount of Mandatory Convertible Securities to the extent that the amount of Mandatory Convertible Securities plus Trust Preferred Securities do not in the aggregate exceed 25% of Total Capital.

“Non-Consenting Lender” has the meaning specified in Section 2.20(b).

“Note” means a Revolving Credit Note or a Competitive Bid Note.

“Notice of Competitive Bid Borrowing” has the meaning specified in Section 2.04(a).

“Notice of Issuance” has the meaning specified in Section 2.03(a).

“Notice of Revolving Credit Borrowing” has the meaning specified in Section 2.02(a).

“PBGC” means the Pension Benefit Guaranty Corporation (or any successor).

“Permitted Liens” means:  (a) Liens for taxes, assessments and governmental charges or levies to the extent not required to be paid under Section 5.01(b) hereof; (b) Liens imposed by law, such as materialmen’s, mechanics’, carriers’, workmen’s and repairmen’s Liens and other similar Liens arising in the ordinary course of business securing obligations that are not overdue for a period of more than 60 days; (c) pledges or deposits to secure obligations under workers’ compensation laws or similar legislation or to secure public or statutory obligations; and (d) easements, rights of way and other encumbrances on title to real property that do not render title to the property encumbered thereby unmarketable or materially adversely affect the use of such property for its present purposes.

“Person” means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, limited liability company or other entity, or a government or any political subdivision or agency thereof.

“Plan” means a Single Employer Plan or a Multiple Employer Plan.

“Primary Policies” means any insurance policies issued by an Insurance Subsidiary.

“Public Debt Rating” means, as of any date, the lowest rating that has been most recently announced by either S&P or Moody’s, as the case may be, for any class of non-credit enhanced long-term senior unsecured debt issued by the Borrower. For purposes of the foregoing, (a) if only one of S&P and Moody’s shall have in effect a Public Debt Rating, the Applicable Margin, the Applicable Percentage and the Applicable Utilization Fee shall be determined by reference to the available rating; (b) if neither S&P nor Moody’s shall have in effect a Public Debt Rating, the Applicable Margin, the Applicable Percentage and the Applicable Utilization Fee will be set in accordance with Level 5 under the definition of “Applicable Margin”, “Applicable Percentage” or “Applicable Utilization Fee”, as the case may be; (c) if the ratings established by S&P and Moody’s shall fall within different levels, the Applicable Margin, the Applicable Percentage and the Applicable Utilization Fee shall be based upon the higher rating unless such ratings differ by two or more levels, in which case the applicable level will be one level above the lower of such levels; (d) if any rating established by S&P or Moody’s shall be changed, such change shall be effective as of the date on which such change is first announced publicly by the rating agency making such change; and (e) if S&P or Moody’s shall change the basis on which ratings are established, each reference to the Public Debt Rating announced by S&P or Moody’s, as the case may be, shall refer to the then equivalent rating by S&P or Moody’s, as the case may be.

“Public Filings” means the public filings of the Borrower made on or prior to the date of this Agreement.

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“Ratable Share” of any amount means, with respect to any Lender at any time, the product of such amount times a fraction the numerator of which is the amount of such Lender’s Revolving Credit Commitment at such time (or, if the Revolving Credit Commitments shall have been terminated pursuant to Section 2.06 or 6.01, such Lender’s Revolving Credit Commitment as in effect immediately prior to such termination) and the denominator of which is the aggregate amount of all Revolving Credit Commitments at such time (or, if the Revolving Credit Commitments shall have been terminated pursuant to Section 2.06 or 6.01, the aggregate amount of all Revolving Credit Commitments as in effect immediately prior to such termination).

“Reference Banks” means Citibank, JPMorgan Chase Bank, N.A. and                       .

“Register” has the meaning specified in Section 8.07(d).

“Reinsurance Agreements” means any agreement, contract, treaty, certificate or other arrangement whereby the Borrower or any Subsidiary agrees to assume from or reinsure an insurer or reinsurer all or part of the liability of such insurer or reinsurer under a policy or policies of insurance issued by such insurer or reinsurer.

“Required Lenders” means at any time Lenders owed more than 50% in interest of the then aggregate unpaid principal amount of the Revolving Credit Advances owing to Lenders, or, if no such principal amount is then outstanding, Lenders having more than 50% of the Revolving Credit Commitments.

“Revolving Credit Advance” means an advance by a Lender to the Borrower as part of a Revolving Credit Borrowing and refers to a Base Rate Advance or a Eurodollar Rate Advance (each of which shall be a “Type” of Revolving Credit Advance).

“Revolving Credit Borrowing” means a borrowing consisting of simultaneous Revolving Credit Advances of the same Type made by each of the Lenders pursuant to Section 2.01.

“Revolving Credit Commitment” means as to any Lender (a) the amount set forth opposite such Lender’s name on the signature pages hereto as such Lender’s “Revolving Credit Commitment”, (b) if such Lender has become a Lender hereunder pursuant to an Assumption Agreement, the amount set forth in such Assumption Agreement or (c) if such Lender has entered into an Assignment and Acceptance, the amount set forth for such Lender in the Register maintained by the Agent pursuant to Section 8.07(d), as such amount may be reduced pursuant to Section 2.06 or increased pursuant to Section 2.19.

“Revolving Credit Note” means a promissory note of the Borrower payable to the order of any Lender, delivered pursuant to a request made under Section 2.17 in substantially the form of Exhibit A-1 hereto, evidencing the aggregate indebtedness of the Borrower to such Lender resulting from the Revolving Credit Advances made by such Lender.

“S&P” means Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.

“Secured Letter of Credit” means a Letter of Credit designated by the Borrower for which the Borrower maintains on deposit in the L/C Securities Account cash and Permitted Investments (as defined therein) in an amount equal to the Available Amount of such Letter of Credit. The Borrower may by notice to the Agent from time to time pursuant to Section 2.03(f) designate which outstanding Letters of Credit at such time shall be “Secured Letters of Credit.”

“Significant Subsidiary” means any Subsidiary that constitutes a “significant subsidiary” under Regulation S-X promulgated by the Securities and Exchange Commission, as in effect from time to time.

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“Single Employer Plan” means, at a particular time, a single employer plan, as defined in Section 4001(a)(15) of ERISA, (a) that is maintained for employees of the Borrower or any ERISA Affiliate and no Person other than the Borrower and the ERISA Affiliates is a contributing sponsor of such plan or (b) in respect of which the Borrower or any ERISA Affiliate would under Section 4069 of ERISA be deemed to be a “contributing sponsor” as defined in Section 4001(a)(13) of ERISA if such plan were terminated at such time.

“St. Paul Fire” means St. Paul Fire and Marine Insurance Company, a Minnesota corporation.

“Subsidiary” of any Person means any corporation, partnership, joint venture, limited liability company, trust or estate of which (or in which) more than 50% of the issued and outstanding capital interests having ordinary voting power to elect a majority of the Board of Directors or comparable governing body of such entity (irrespective of whether at the time capital interests of any other class or classes of such entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person’s other Subsidiaries.

“Termination Date” means the earlier of (a) June 10, 2010, subject to the extension thereof pursuant to Section 2.20 and (b) the date of termination in whole of the Commitments pursuant to Section 2.06 or 6.01; provided, however, that the Termination Date of any Lender that is a Non-Consenting Lender to any requested extension pursuant to Section 2.20 shall be the Termination Date in effect immediately prior to the applicable Extension Date for all purposes of this Agreement.

“Total Capital” means the sum, without duplication, of (a) all items that would, in accordance with GAAP, be classified as indebtedness on a Consolidated balance sheet of the Borrower and its consolidated Subsidiaries, (b) total Consolidated shareholders’ equity of the Borrower and its consolidated Subsidiaries determined in accordance with GAAP, (c) Trust Preferred Securities and (d) Mandatory Convertible Securities.

“Total Consolidated Debt” means, as of any date, all items that, in accordance with GAAP, would be classified as indebtedness on a Consolidated balance sheet of the Borrower and its consolidated Subsidiaries, provided that (a) Total Consolidated Debt shall not include any indebtedness represented by Trust Preferred Securities except to the extent that such Securities (other than those convertible to equity) exceed 15% of Total Capital and (b) Total Consolidated Debt shall not include any indebtedness represented by Mandatory Convertible Securities except to the extent that such Mandatory Convertible Securities plus Trust Preferred Securities exceed 25% of Total Capital; provided however, that in the event the notes related to the Mandatory Convertible Securities remain outstanding following the exercise of forward purchase contracts related to such Mandatory Convertible Securities, then such outstanding notes will constitute indebtedness thereafter.

“Trust Preferred Securities” means, as of any date, all items in respect of trust preferred securities that would, in accordance with GAAP, be classified under Debt on a Consolidated balance sheet (or the footnotes thereto) of the Borrower and its consolidated Subsidiaries.

“Unissued Letter of Credit Commitment” means, with respect to any Issuing Bank, the obligation of such Issuing Bank to issue Letters of Credit for the account of the Borrower or its specified Subsidiaries in an amount equal to the excess of (a) the amount of its Letter of Credit Commitment over (b) the aggregate Available Amount of all Letters of Credit issued by such Issuing Bank.

“Unused Commitment” means, with respect to each Lender at any time, (a) such Lender’s Revolving Credit Commitment at such time minus (b) the sum of (i) the aggregate principal amount of all Revolving Credit Advances made by such Lender (in its capacity as a Lender) and outstanding at such time, plus (ii) such Lender’s Ratable Share of (A) the aggregate Available Amount of all the Letters of Credit outstanding at such time, (B) the aggregate principal amount of all Revolving Credit Advances made

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by each Issuing Bank pursuant to Section 2.03(c) that have not been ratably funded by such Lender and outstanding at such time and (C) the aggregate principal amount of all Competitive Bid Advances then outstanding.

“Voting Stock” means capital stock issued by a corporation, or equivalent interests in any other Person, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even if the right so to vote has been suspended by the happening of such a contingency.

SECTION 1.02. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word “from”  means “from and including” and the words “to” and “until” each mean “to but excluding”.

SECTION 1.03. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 4.01(e) (“GAAP”); provided that, if the Borrower notifies the Agent that the Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Agent notifies the Borrower that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith.

ARTICLE II

AMOUNTS AND TERMS OF THE ADVANCES AND LETTERS OF CREDIT

SECTION 2.01. The Revolving Credit Advances and Letters of Credit. (a)  Revolving Credit Advances. Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make Revolving Credit Advances to the Borrower from time to time on any Business Day during the period from the Effective Date until the Termination Date in an amount not to exceed such Lender’s Unused Commitment (immediately prior to the making of such Revolving Credit Advance). Each Revolving Credit Borrowing shall be in an aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof and shall consist of Revolving Credit Advances of the same Type made, or continued as or converted into Eurodollar Rate Advances, on the same day by the Lenders ratably according to their respective Revolving Credit Commitments. Within the limits of each Lender’s Revolving Credit Commitment, the Borrower may borrow under this Section 2.01(a), prepay pursuant to Section 2.11 and reborrow under this Section 2.01(a).

(b)           Letters of Credit. Each Issuing Bank agrees, on the terms and conditions hereinafter set forth, in reliance upon the agreements of the other Lenders set forth in this Agreement, to issue letters of credit (each, a “Letter of Credit”) for the account of the Borrower and its specified Subsidiaries from time to time on any Business Day during the period from the Effective Date until 30 days before the Termination Date in an aggregate Available Amount (i) for all Letters of Credit not to exceed at any time the Letter of Credit Facility at such time, (ii) for all Letters of Credit issued by each Issuing Bank not to exceed at any time such Issuing Bank’s Letter of Credit Commitment at such time and (iii) for each such Letter of Credit not to exceed an amount equal to the Unused Commitments (immediately prior to such Issuance) of the Lenders at such time. No Letter of Credit shall have an expiration date (including all rights of the Borrower or the beneficiary to require renewal) later than five Business Days before the Termination Date. Within the limits referred to above, the Borrower may from time to time request the Issuance of Letters of Credit under this Section 2.01(b). Each letter of credit listed on Schedule 2.01(b) shall be deemed to constitute a Letter of Credit issued hereunder, and each Lender that is an issuer of such a Letter of Credit shall, for purposes of Section 2.03, be deemed to be an Issuing Bank for each such letter of credit, provided that renewal or replacement of any such letter of credit shall not be Letters of Credit under this Agreement unless such renewal or replacement is issued by an Issuing Bank (other than Issuing Banks solely by operation of this sentence) pursuant to the terms of this Agreement.

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SECTION 2.02. Making the Revolving Credit Advances. (a)  Except as otherwise provided in Section 2.03(c), each Revolving Credit Borrowing shall be made on notice, given not later than (x) 11:00 A.M. (New York City time) on the third Business Day prior to the date of the proposed Revolving Credit Borrowing in the case of a Revolving Credit Borrowing consisting of Eurodollar Rate Advances or (y) 11:00 A.M. (New York City time) on the date of the proposed Revolving Credit Borrowing in the case of a Revolving Credit Borrowing consisting of Base Rate Advances, by the Borrower to the Agent, which shall give to each Lender prompt notice thereof by telecopier. Each such notice of a Revolving Credit Borrowing (a “Notice of Revolving Credit Borrowing”) shall be by telephone, confirmed immediately in writing, or telecopier in substantially the form of Exhibit B-1 hereto, specifying therein the requested (i) date of such Revolving Credit Borrowing, (ii) Type of Advances comprising such Revolving Credit Borrowing, (iii) aggregate amount of such Revolving Credit Borrowing, and (iv) in the case of a Revolving Credit Borrowing consisting of Eurodollar Rate Advances, initial Interest Period for each such Revolving Credit Advance. Each Lender shall, before 1:00 P.M. (New York City time) on the date of such Revolving Credit Borrowing make available for the account of its Applicable Lending Office to the Agent at the Agent’s Account, in same day funds, such Lender’s ratable portion of such Revolving Credit Borrowing. After the Agent’s receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Agent will promptly make such funds available to the Borrower at the Agent’s address referred to in Section 8.02.

(b)           Anything in subsection (a) above to the contrary notwithstanding, (i) the Borrower may not select Eurodollar Rate Advances for any Revolving Credit Borrowing if the aggregate amount of such Revolving Credit Borrowing is less than $10,000,000 or if the obligation of the Lenders to make Eurodollar Rate Advances shall then be suspended pursuant to Section 2.09 or 2.13 and (ii) the Eurodollar Rate Advances may not be outstanding as part of more than twelve separate Revolving Credit Borrowings.

(c)           In the case of any Revolving Credit Borrowing that the related Notice of Revolving Credit Borrowing specifies is to be comprised of Eurodollar Rate Advances, the Borrower shall indemnify each Lender against any loss, cost or expense incurred by such Lender as a result of any failure of the Borrower to borrow such funds on the date specified in such Notice of Revolving Credit Borrowing, whether as a result of any failure to fulfill on or before the date specified in such Notice of Revolving Credit Borrowing for such Revolving Credit Borrowing the applicable conditions set forth in Section 3.02 or otherwise, including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Revolving Credit Advance to be made by such Lender as part of such Revolving Credit Borrowing when such Revolving Credit Advance, as a result of such failure, is not made on such date.

(d)           Unless the Agent shall have received notice from a Lender prior to the time of any Revolving Credit Borrowing that such Lender will not make available to the Agent such Lender’s ratable portion of such Revolving Credit Borrowing, the Agent may assume that such Lender has made such portion available to the Agent on the date of such Revolving Credit Borrowing in accordance with subsection (a) of this Section 2.02 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made such ratable portion available to the Agent, such Lender and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, the interest rate applicable at the time to Revolving Credit Advances comprising such Revolving Credit Borrowing and (ii) in the case of such Lender, the Federal Funds Rate. If such Lender shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Lender’s Revolving Credit Advance as part of such Revolving Credit Borrowing for purposes of this Agreement.

(e)           The failure of any Lender to make the Revolving Credit Advance to be made by it as part of any Revolving Credit Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Revolving Credit Advance on the date of such Revolving Credit Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Revolving Credit Advance to be made by such other Lender on the date of any Revolving Credit Borrowing.

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SECTION 2.03. Issuance of and Drawings and Reimbursement Under Letters of Credit. (a)  Request for Issuance. (i) Each Letter of Credit shall be issued upon notice, given not later than 11:00 A.M. (New York City time) on the fifth Business Day prior to the date of the proposed Issuance of such Letter of Credit (or on such shorter notice as the applicable Issuing Bank may agree), by the Borrower to any Issuing Bank, and such Issuing Bank shall give the Agent, prompt notice thereof. Each such notice by the Borrower of Issuance of a Letter of Credit (a “Notice of Issuance”) shall be by telecopier or telephone, confirmed immediately in writing, specifying therein the requested (A) date of such Issuance (which shall be a Business Day), (B) Available Amount of such Letter of Credit, (C) expiration date of such Letter of Credit (which shall not be later than 10 Business Days before the Termination Date), (D) name and address of the beneficiary of such Letter of Credit and (E) form of such Letter of Credit. Such Letter of Credit shall be issued pursuant to such application and agreement for letter of credit as such Issuing Bank and the Borrower shall agree for use in connection with such requested Letter of Credit (a “Letter of Credit Agreement”). If the requested form of such Letter of Credit is acceptable to such Issuing Bank in its reasonable discretion (it being understood that any such form shall have only explicit documentary conditions to draw and shall not include discretionary conditions), such Issuing Bank will, upon fulfillment of the applicable conditions set forth in Section 3.02, make such Letter of Credit available to the Borrower at its office referred to in Section 8.02 or as otherwise agreed with the Borrower in connection with such Issuance. In the event and to the extent that the provisions of any Letter of Credit Agreement shall conflict with this Agreement, the provisions of this Agreement shall govern (and in no event shall any provision of any such Letter of Credit Agreement regarding representations, warranties, covenants, events of default, set-off rights or collateral be effective).

(b)           Participations. By the Issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing or decreasing the amount thereof) and without any further action on the part of the applicable Issuing Bank or the Lenders, such Issuing Bank hereby grants to each Lender, and each Lender hereby acquires from such Issuing Bank, a participation in such Letter of Credit equal to such Lender’s Ratable Share of the Available Amount of such Letter of Credit. The Borrower hereby agrees to each such participation. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Revolving Credit Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Each Lender further acknowledges and agrees that its participation in each Letter of Credit will be automatically adjusted to reflect such Lender’s Ratable Share of the Available Amount of such Letter of Credit at each time such Lender’s Revolving Credit Commitment is amended pursuant to a Commitment Increase in accordance with Section 2.19, an assignment in accordance with Section 8.07 or otherwise pursuant to this Agreement.

(c)           Drawing and Reimbursement. The payment by an Issuing Bank of a draft drawn under any Letter of Credit which is not reimbursed by the Borrower prior to 1:00 P.M. (New York City time) on the date made shall constitute for all purposes of this Agreement the making by any such Issuing Bank of a Revolving Credit Advance, which shall be a Base Rate Advance, in the amount of such draft, without regard to whether the making of such a Revolving Credit Advance would exceed such Issuing Bank’s Unused Commitment (it being understood that such Issuing Bank shall use its best efforts to notify the Borrower of any drawing prior to 12:00 noon (New York City time) on the date such drawing is made). Each Issuing Bank shall give prompt notice of each drawing under any Letter of Credit issued by it to the Borrower and the Agent. Upon written demand by such Issuing Bank or by the Borrower, with a copy of such demand to the Agent (in the case of any notice issued by the Issuing Bank) and the Borrower, each Lender shall pay to the Agent, for the account of the relevant Issuing Bank, such Lender’s Ratable Share of such outstanding Revolving Credit Advance pursuant to Section 2.03(b). Each Lender acknowledges and agrees that its obligation to make Revolving Credit Advances pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Revolving Credit Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Promptly after receipt thereof, the Agent shall transfer such funds to such Issuing Bank. Each Lender agrees to fund its Ratable Share of an outstanding Revolving Credit Advance on (i) the Business Day on which demand therefor is made by such Issuing Bank or the Borrower, as the case may be, provided that notice of such demand is given not later than 11:00 A.M. (New York City time) on such Business Day, or (ii) the first Business Day next succeeding such demand if notice of such demand is given after such time. If and to the extent that any Lender shall not have so made the amount of such

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Advance available to the Agent, such Lender agrees to pay to the Agent forthwith on demand such amount together with interest thereon, for each day from the date of demand by any such Issuing Bank until the date such amount is paid to the Agent, at the Federal Funds Rate for its account or the account of such Issuing Bank, as applicable. If such Lender shall pay to the Agent such amount for the account of any such Issuing Bank on any Business Day, such amount so paid in respect of principal shall constitute a Revolving Credit Advance made by such Lender on such Business Day for purposes of this Agreement, and the outstanding principal amount of the Revolving Credit Advance made by such Issuing Bank shall be reduced by such amount on such Business Day.

(d)           Letter of Credit Reports. Each Issuing Bank shall furnish (A) to the Agent (with a copy to the Borrower) on the first Business Day of each month a written report summarizing Issuance and expiration dates of Letters of Credit issued by such Issuing Bank during the preceding month and drawings during such month under all Letters of Credit and (B) to the Agent (with a copy to the Borrower) on the first Business Day of each calendar quarter a written report setting forth the average daily aggregate Available Amount during the preceding calendar quarter of all Letters of Credit issued by such Issuing Bank.

(e)           Failure to Make Advances. The failure of any Lender to make the Revolving Credit Advance to be made by it on the date specified in Section 2.03(c) shall not relieve any other Lender of its obligation hereunder to make its Revolving Credit Advance on such date, but no Lender shall be responsible for the failure of any other Lender to make the Revolving Credit Advance to be made by such other Lender on such date.

(f)            Secured Letters of Credit. The Borrower may from time to time designate any Letter of Credit to be a Secured Letter of Credit by notice to the Agent (with a copy to the applicable Issuing Bank). Upon the drawing of any Secured Letter of Credit, to the extent cash and/or Permitted Investments are on deposit in the L/C Securities Account, such cash and/or Permitted Investments shall, at the Borrower’s option, be applied to reimburse the applicable Issuing Bank to the extent permitted by applicable law and to the extent the Borrower elects not to reimburse such drawing (to avoid liquidating Permitted Investments) as provided in Section 2.03(c). Subject to Section 6.02, to the extent any Secured Letters of Credit shall have expired or been drawn upon, any excess amounts in such L/C Securities Account shall be returned to the Borrower at the Borrower’s request.

SECTION 2.04. The Competitive Bid Advances. (a)  Each Lender severally agrees that the Borrower may make Competitive Bid Borrowings under this Section 2.04 from time to time on any Business Day during the period from the date hereof until the date occurring 35 days prior to the Termination Date in the manner set forth below; provided that each Competitive Bid Borrowing shall not exceed the aggregate amount of the Unused Commitments of the Lenders immediately prior to the making of such Competitive Bid Borrowing.

(i)            The Borrower may request a Competitive Bid Borrowing under this Section 2.04 by delivering to the Agent, by telecopier, a notice of a Competitive Bid Borrowing (a “Notice of Competitive Bid Borrowing”), in substantially the form of Exhibit B-2 hereto, specifying therein the requested (v) date of such proposed Competitive Bid Borrowing, (w) aggregate amount of such proposed Competitive Bid Borrowing, (x) in the case of a Competitive Bid Borrowing consisting of LIBO Rate Advances, Interest Period, or in the case of a Competitive Bid Borrowing consisting of Fixed Rate Advances, maturity date for repayment of each Fixed Rate Advance to be made as part of such Competitive Bid Borrowing (which maturity date may not be earlier than the date occurring seven days after the date of such Competitive Bid Borrowing or later than the earlier of (I) 180 days after the date of such Competitive Bid Borrowing and (II) the Termination Date), (y) interest payment date or dates relating thereto, and (z) other terms (if any) to be applicable to such Competitive Bid Borrowing, not later than 10:00 A.M. (New York City time) (A) at least one Business Day prior to the date of the proposed Competitive Bid Borrowing, if the Borrower shall specify in the Notice of Competitive Bid Borrowing that the rates of interest to be offered by the Lenders shall be fixed rates per annum (the Advances comprising any such Competitive Bid Borrowing being referred to herein as “Fixed Rate Advances”) and (B) at least four Business Days prior to the date of the proposed Competitive Bid Borrowing, if the Borrower shall instead specify in the Notice of Competitive Bid Borrowing that the Advances comprising such Competitive Bid Borrowing shall be LIBO Rate Advances. Each Notice of Competitive Bid Borrowing shall be irrevocable and binding on the Borrower. The Agent shall in turn promptly notify each Lender of each request for a Competitive Bid Borrowing

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received by it from the Borrower by sending such Lender a copy of the related Notice of Competitive Bid Borrowing.

(ii)           Each Lender may, if, in its sole discretion, it elects to do so, irrevocably offer to make one or more Competitive Bid Advances to the Borrower as part of such proposed Competitive Bid Borrowing at a rate or rates of interest specified by such Lender in its sole discretion, by notifying the Agent (which shall give prompt notice thereof to the Borrower), (A) before 9:30 A.M. (New York City time) on the date of such proposed Competitive Bid Borrowing, in the case of a Competitive Bid Borrowing consisting of Fixed Rate Advances and (B) before 10:00 A.M. (New York City time) three Business Days before the date of such proposed Competitive Bid Borrowing, in the case of a Competitive Bid Borrowing consisting of LIBO Rate Advances of the minimum amount and maximum amount of each Competitive Bid Advance which such Lender would be willing to make as part of such proposed Competitive Bid Borrowing (which amounts may, subject to the proviso to the first sentence of this Section 2.04(a), exceed such Lender’s Commitment, if any), the rate or rates of interest therefor and such Lender’s Applicable Lending Office with respect to such Competitive Bid Advance; provided that if the Agent in its capacity as a Lender shall, in its sole discretion, elect to make any such offer, it shall notify the Borrower of such offer at least 30 minutes before the time and on the date on which notice of such election is to be given to the Agent, by the other Lenders. If any Lender shall elect not to make such an offer, such Lender shall so notify the Agent before 10:00 A.M. (New York City time) on the date on which notice of such election is to be given to the Agent by the other Lenders, and such Lender shall not be obligated to, and shall not, make any Competitive Bid Advance as part of such Competitive Bid Borrowing; provided that the failure by any Lender to give such notice shall not cause such Lender to be obligated to make any Competitive Bid Advance as part of such proposed Competitive Bid Borrowing.

(iii)          The Borrower shall, in turn, (A) before 10:30 A.M. (New York City time) on the date of such proposed Competitive Bid Borrowing, in the case of a Competitive Bid Borrowing consisting of Fixed Rate Advances and (B) before 11:00 A.M. (New York City time) three Business Days before the date of such proposed Competitive Bid Borrowing, in the case of a Competitive Bid Borrowing consisting of LIBO Rate Advances, either:

(x)            cancel such Competitive Bid Borrowing by giving the Agent notice to that effect, or

(y)           accept one or more of the offers made by any Lender or Lenders pursuant to paragraph (ii) above, in its sole discretion, by giving notice to the Agent of the amount of each Competitive Bid Advance (which amount shall be equal to or greater than the minimum amount, and equal to or less than the maximum amount, notified to the Borrower by the Agent on behalf of such Lender for such Competitive Bid Advance pursuant to paragraph (ii) above) to be made by each Lender as part of such Competitive Bid Borrowing, and reject any remaining offers made by Lenders pursuant to paragraph (ii) above by giving the Agent notice to that effect. The Borrower shall accept the offers made by any Lender or Lenders to make Competitive Bid Advances in order of the lowest to the highest rates of interest offered by such Lenders. If two or more Lenders have offered the same interest rate, the amount to be borrowed at such interest rate will be allocated among such Lenders in proportion to the amount that each such Lender offered at such interest rate.

(iv)          If the Borrower notifies the Agent that such Competitive Bid Borrowing is cancelled pursuant to paragraph (iii)(x) above, the Agent shall give prompt notice thereof to the Lenders and such Competitive Bid Borrowing shall not be made.

(v)           If the Borrower accepts one or more of the offers made by any Lender or Lenders pursuant to paragraph (iii)(y) above, the Agent shall in turn promptly notify (A) each Lender that has made an offer as described in paragraph (ii) above, of the date and aggregate amount of such Competitive Bid Borrowing and whether or not any offer or offers made by such Lender pursuant to paragraph (ii) above

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have been accepted by the Borrower, (B) each Lender that is to make a Competitive Bid Advance as part of such Competitive Bid Borrowing, of the amount of each Competitive Bid Advance to be made by such Lender as part of such Competitive Bid Borrowing, and (C) each Lender that is to make a Competitive Bid Advance as part of such Competitive Bid Borrowing, upon receipt, that the Agent has received forms of documents appearing to fulfill the applicable conditions set forth in Section 3.03. Each Lender that is to make a Competitive Bid Advance as part of such Competitive Bid Borrowing shall, before 12:00 noon (New York City time) on the date of such Competitive Bid Borrowing specified in the notice received from the Agent pursuant to clause (A) of the preceding sentence or any later time when such Lender shall have received notice from the Agent pursuant to clause (C) of the preceding sentence, make available for the account of its Applicable Lending Office to the Agent at the Agent’s Account, in same day funds, such Lender’s portion of such Competitive Bid Borrowing. Upon fulfillment of the applicable conditions set forth in Section 3.03 and after receipt by the Agent of such funds, the Agent will make such funds available to the Borrower at the Agent’s address referred to in Section 8.02. Promptly after each Competitive Bid Borrowing the Agent will notify each Lender of the amount and tenor of the Competitive Bid Borrowing.

(vi)          If the Borrower notifies the Agent that it accepts one or more of the offers made by any Lender or Lenders pursuant to paragraph (iii)(y) above, such notice of acceptance shall be irrevocable and binding on the Borrower. The Borrower shall indemnify each Lender against any loss, cost or expense incurred by such Lender as a result of any failure to fulfill on or before the date specified in the related Notice of Competitive Bid Borrowing for such Competitive Bid Borrowing the applicable conditions set forth in Section 3.03, including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Competitive Bid Advance to be made by such Lender as part of such Competitive Bid Borrowing when such Competitive Bid Advance, as a result of such failure, is not made on such date.

(b)           Each Competitive Bid Borrowing shall be in an aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof and, following the making of each Competitive Bid Borrowing, the Borrower shall be in compliance with the limitation set forth in the proviso to the first sentence of subsection (a) above.

(c)           Within the limits and on the conditions set forth in this Section 2.04, the Borrower may from time to time borrow under this Section 2.04, repay or prepay pursuant to subsection (d) below, and reborrow under this Section 2.04, provided that a Competitive Bid Borrowing shall not be made within three Business Days of the date of any other Competitive Bid Borrowing.

(d)           The Borrower shall repay to the Agent for the account of each Lender that has made a Competitive Bid Advance, on the maturity date of each Competitive Bid Advance (such maturity date being that specified by the Borrower for repayment of such Competitive Bid Advance in the related Notice of Competitive Bid Borrowing delivered pursuant to subsection
(a)(i) above and provided in the Competitive Bid Note evidencing such Competitive Bid Advance), the then unpaid principal amount of such Competitive Bid Advance. The Borrower shall have no right to prepay any principal amount of any Competitive Bid Advance unless, and then only on the terms, specified by the Borrower for such Competitive Bid Advance in the related Notice of Competitive Bid Borrowing delivered pursuant to subsection (a)(i) above and set forth in the Competitive Bid Note evidencing such Competitive Bid Advance.

(e)           The Borrower shall pay interest on the unpaid principal amount of each Competitive Bid Advance from the date of such Competitive Bid Advance to the date the principal amount of such Competitive Bid Advance is repaid in full, at the rate of interest for such Competitive Bid Advance specified by the Lender making such Competitive Bid Advance in its notice with respect thereto delivered pursuant to subsection (a)(ii) above, payable on the interest payment date or dates specified by the Borrower for such Competitive Bid Advance in the related Notice of Competitive Bid Borrowing delivered pursuant to subsection (a)(i) above, as provided in the Competitive Bid Note evidencing such Competitive Bid Advance. Upon the occurrence and during the continuance of an Event of Default, the Borrower shall pay interest on the amount of unpaid principal of and interest on each Competitive Bid Advance owing to a Lender, payable in arrears on the date or dates interest is payable thereon, at a rate per annum equal at all times to 2% per annum above the rate per annum required to be paid on such

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Competitive Bid Advance under the terms of the Competitive Bid Note evidencing such Competitive Bid Advance unless otherwise agreed in such Competitive Bid Note.

(f)            The indebtedness of the Borrower resulting from each Competitive Bid Advance made to the Borrower as part of a Competitive Bid Borrowing shall be evidenced by a separate Competitive Bid Note of the Borrower payable to the order of the Lender making such Competitive Bid Advance.

SECTION 2.05. Fees. (a)  Facility Fee. The Borrower agrees to pay to the Agent for the account of each Lender a facility fee on the aggregate amount of such Lender’s Commitment from the date hereof in the case of each Initial Lender and from the effective date specified in the Assumption Agreement or in the Assignment and Acceptance pursuant to which it became a Lender in the case of each other Lender until the Termination Date at a rate per annum equal to the Applicable Percentage in effect from time to time, payable in arrears quarterly on the last day of each March, June, September and December, commencing June 30, 2005, and on the Termination Date.

(b)           Letter of Credit Fees. (i)  The Borrower shall pay to the Agent for the account of each Lender a commission on such Lender’s Ratable Share of (A) the average daily aggregate Available Amount of all Secured Letters of Credit issued and outstanding from time to time at a rate per annum equal to (x) the Applicable Margin for Eurodollar Rate Advances in effect from time to time during such calendar quarter minus (y) 0.10% and (B) the average daily aggregate Available Amount of all other Letters of Credit issued and outstanding from time to time at a rate per annum equal to the Applicable Margin for Eurodollar Rate Advances in effect from time to time during such calendar quarter, in each case payable in arrears quarterly on the last day of each March, June, September and December, commencing June 30, 2005, and on the Termination Date; provided that the amount of such commission in respect of Letters of Credit (other than Secured Letters of Credit) shall be increased (without duplication of amounts otherwise payable under Section 2.08(b)) by 2% per annum if the Borrower is required to pay default interest pursuant to Section 2.08(b).

(ii)           The Borrower shall pay to each Issuing Bank, for its own account, a fronting fee and such other commissions, issuance fees, transfer fees and other fees and charges in connection with the Issuance or administration of each Letter of Credit as the Borrower and such Issuing Bank shall agree.

(c)           Agent’s Fees. The Borrower shall pay to the Agent for its own account such fees as may from time to time be agreed between the Borrower and the Agent.

SECTION 2.06. Optional Termination or Reduction of the Commitments. The Borrower shall have the right, upon at least three Business Days’ notice to the Agent, to terminate in whole or permanently reduce ratably in part the Unused Commitments or the Unissued Letter of Credit Commitments of the Lenders, provided that each partial reduction shall be in the aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof; provided further that a notice of termination of the Commitments delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Agent on or prior to the specified effective date) if such condition is not satisfied.

SECTION 2.07. Repayment of Revolving Credit Advances. (a) Revolving Credit Advances. The Borrower shall repay to the Agent for the ratable account of the Lenders on the Termination Date the aggregate principal amount of the Revolving Credit Advances then outstanding.

(b)           Letter of Credit Drawings. The obligation of the Borrower to reimburse drawings under any Letter of Credit shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation, the following circumstances (it being understood that any such payment by the Borrower is without prejudice to, and does not constitute a waiver of, any rights the Borrower might have or might acquire as a result of the payment by any Lender of any draft or the reimbursement by the Borrower thereof, including, without limitation, pursuant to Section 8.12):

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(i)            any lack of validity or enforceability of this Agreement, any Note, any Letter of Credit Agreement, any Letter of Credit or any other agreement or instrument relating thereto (all of the foregoing being, collectively, the “L/C Related Documents”);

(ii)           any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations of the Borrower in respect of any L/C Related Document or any other amendment or waiver of or any consent to departure from all or any of the L/C Related Documents;

(iii)          the existence of any claim, set-off, defense or other right that the Borrower may have at any time against any beneficiary or any transferee of a Letter of Credit (or any Persons for which any such beneficiary or any such transferee may be acting), any Issuing Bank, the Agent, any Lender or any other Person, whether in connection with the transactions contemplated by the L/C Related Documents or any unrelated transaction;

(iv)          any statement or any other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect;

(v)           payment by any Issuing Bank under a Letter of Credit against presentation of a draft or certificate that does not comply with the terms of such Letter of Credit;

(vi)          any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any guarantee, for all or any of the obligations of the Borrower in respect of the L/C Related Documents; or

(vii)         without prejudice to the other provisions of this Agreement, any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including, without limitation, any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Borrower or a guarantor.

SECTION 2.08. Interest on Revolving Credit Advances. (a)  Scheduled Interest. The Borrower shall pay interest on the unpaid principal amount of each Revolving Credit Advance owing to each Lender from the date of such Revolving Credit Advance until such principal amount shall be paid in full, at the following rates per annum:

(i)            Base Rate Advances. During such periods as such Revolving Credit Advance is a Base Rate Advance, a rate per annum equal at all times to the sum of (x) the Base Rate in effect from time to time plus (y) the Applicable Margin in effect from time to time plus (z) the Applicable Utilization Fee in effect from time to time, payable in arrears quarterly on the last day of each March, June, September and December during such periods and on the date such Base Rate Advance shall be Converted or paid in full.

(ii)           Eurodollar Rate Advances. During such periods as such Revolving Credit Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during each Interest Period for such Revolving Credit Advance to the sum of (x) the Eurodollar Rate for such Interest Period for such Revolving Credit Advance plus (y) the Applicable Margin in effect from time to time plus (z) the Applicable Utilization Fee in effect from time to time, payable in arrears on the last day of such Interest Period and, if such Interest Period has a duration of more than three months, on each day that occurs during such Interest Period every three months from the first day of such Interest Period and on the date such Eurodollar Rate Advance shall be Converted or paid in full.

(b)           Default Interest. Upon the occurrence and during the continuance of an Event of Default, the Agent may, and upon the request of the Required Lenders shall, require the Borrower to pay interest (“Default Interest”) on (i) the overdue and unpaid principal amount of each Revolving Credit Advance owing to each Lender which is not paid when due whether at stated maturity, upon acceleration or otherwise, payable in arrears on the dates referred to in clause (a)(i) or (a)(ii) above, at a rate per annum equal at all times to 2% per annum above the

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rate per annum required to be paid on such Revolving Credit Advance pursuant to clause (a)(i) or (a)(ii) above and (ii) to the fullest extent permitted by law, the amount of any interest, fee or other amount payable hereunder that is not paid when due, from the date such amount shall be due until such amount shall be paid in full, payable in arrears on the date such amount shall be paid in full and on demand, at a rate per annum equal at all times to 2% per annum above the rate per annum required to be paid on Base Rate Advances pursuant to clause (a)(i) above, provided, however, that following acceleration of the Advances pursuant to Section 6.01, Default Interest shall accrue and be payable hereunder whether or not previously required by the Agent.

SECTION 2.09. Interest Rate Determination. (a)  Each Reference Bank agrees, if requested by the Agent, to furnish to the Agent timely information for the purpose of determining each Eurodollar Rate and each LIBO Rate. If any one or more of the Reference Banks shall not furnish such timely information to the Agent for the purpose of determining any such interest rate, the Agent shall determine such interest rate on the basis of timely information furnished by the remaining Reference Banks. The Agent shall give prompt notice to the Borrower and the Lenders of the applicable interest rate determined by the Agent for purposes of Section 2.08(a)(i) or (ii), and the rate, if any, furnished by each Reference Bank for the purpose of determining the interest rate under Section 2.08(a)(ii).

(b)           If, with respect to any Eurodollar Rate Advances, the Required Lenders notify the Agent that the Eurodollar Rate for any Interest Period for such Advances will not adequately reflect the cost to such Required Lenders of making, funding or maintaining their respective Eurodollar Rate Advances for such Interest Period, the Agent shall forthwith so notify the Borrower and the Lenders, whereupon (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance, and (ii) the obligation of the Lenders to make, or to Convert Revolving Credit Advances into, Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist.

(c)           If the Borrower shall fail to select the duration of any Interest Period for any Eurodollar Rate Advances in accordance with the provisions contained in the definition of “Interest Period” in Section 1.01, the Agent will forthwith so notify the Borrower and the Lenders and such Advances will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances.

(d)           On the date on which the aggregate unpaid principal amount of Eurodollar Rate Advances comprising any Borrowing shall be reduced, by payment or prepayment or otherwise, to less than $10,000,000, such Advances shall automatically Convert into Base Rate Advances.

(e)           If an Event of Default has occurred and is continuing and the Required Lenders through the Agent so notify the Borrower, then, so long as such Event of Default is continuing (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance and (ii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended.

(f)            If Moneyline Telerate Markets Page 3750 (or any successor page as contemplated in the definitions of Eurodollar Rate or LIBO Rate) is unavailable and fewer than two Reference Banks furnish timely information to the Agent for determining the Eurodollar Rate or LIBO Rate for any Eurodollar Rate Advances or LIBO Rate Advances, as the case may be,

(i)            the Agent shall forthwith notify the Borrower and the Lenders that the interest rate cannot be determined for such Eurodollar Rate Advances or LIBO Rate Advances, as the case may be,

(ii)           with respect to Eurodollar Rate Advances, each such Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance (or if such Advance is then a Base Rate Advance, will continue as a Base Rate Advance), and

(iii)          the obligation of the Lenders to make Eurodollar Rate Advances or LIBO Rate Advances or to Convert Revolving Credit Advances into Eurodollar Rate Advances shall be suspended until the

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Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist.

SECTION 2.10. Optional Conversion of Revolving Credit Advances. The Borrower may on any Business Day, upon notice given to the Agent not later than 11:00 A.M. (New York City time) on the third Business Day prior to the date of the proposed Conversion and subject to the provisions of Sections 2.09 and 2.13, Convert all Revolving Credit Advances of one Type comprising the same Borrowing into Revolving Credit Advances of the other Type; provided, however, that any Conversion of Eurodollar Rate Advances into Base Rate Advances shall be made only on the last day of an Interest Period for such Eurodollar Rate Advances, any Conversion of Base Rate Advances into Eurodollar Rate Advances shall be subject to Section 2.02(b) and no Conversion of any Revolving Credit Advances shall result in more separate Revolving Credit Borrowings than permitted under Section 2.02(b). Each such notice of a Conversion shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the Revolving Credit Advances to be Converted, and (iii) if such Conversion is into Eurodollar Rate Advances, the duration of the initial Interest Period for each such Advance. Each notice of Conversion shall be irrevocable and binding on the Borrower.

SECTION 2.11. Prepayments of Revolving Credit Advances. The Borrower may, upon notice at least two Business Days’ prior to the date of such prepayment, in the case of Eurodollar Rate Advances, and not later than 11:00 A.M. (New York City time) on the date of such prepayment, in the case of Base Rate Advances, to the Agent stating the proposed date and aggregate principal amount of the prepayment, and if such notice is given the Borrower shall, prepay the outstanding principal amount of the Revolving Credit Advances comprising part of the same Revolving Credit Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the principal amount prepaid; provided, however, that (x) each partial prepayment shall be in an aggregate principal amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof and (y) in the event of any such prepayment of a Eurodollar Rate Borrowing, the Borrower shall be entitled to select the Eurodollar Rate Borrowings to be prepaid and shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 8.04(c).

SECTION 2.12. Increased Costs. (a)  If any governmental authority shall have in effect at any time during the term of this Agreement any reserve, liquid asset or similar requirement with respect to any category of deposits or liabilities customarily used to fund Eurodollar Rate Advances or LIBO Rate Advances, or by reference to which interest rates applicable to Eurodollar Rate Advances or LIBO Rate Advances are determined, and the result of such requirement shall be to increase the cost to any Lender of making or maintaining any Eurodollar Rate Advances or LIBO Rate Advances and such Lender shall have requested, by notice to the Borrower and the Administrative Agent (which notice shall specify the costs applicable to such Lender), compensation under this paragraph, then the Borrower will pay to such Lender following delivery of such notice (until the earlier of the date such Lender shall advise the Borrower that such requirement is no longer in effect or the date such Lender shall withdraw such request) such additional amounts as shall be necessary to compensate such Lender for such increased costs.

(b)           If, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law) after the date hereof, there shall be any increase in the cost to any Lender of agreeing to make or making, funding or maintaining Eurodollar Rate Advances or LIBO Rate Advances or of agreeing to issue or of issuing or maintaining or participating in Letters of Credit (excluding for purposes of this Section 2.12 any such increased costs resulting from (i) Taxes or Other Taxes (as to which Section 2.15 shall govern) and (ii) changes in the basis of taxation of overall net income or overall gross income by the United States or by the foreign jurisdiction or state under the laws of which such Lender is organized or has its Applicable Lending Office or any political subdivision thereof), then the Borrower shall from time to time, upon demand by such Lender (with a copy of such demand to the Agent), pay to the Agent for the account of such Lender additional amounts sufficient to compensate such Lender for such increased cost; provided, however, that before making any such demand, each Lender agrees to use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such a designation would avoid the need for, or reduce the amount of, such increased cost and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. A certificate as to the amount of such increased cost,

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submitted to the Borrower and the Agent by such Lender, shall constitute prima facie evidence of the amounts required to be paid by the Borrower in respect thereof, absent manifest error.

(c)           If any Lender determines that compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender and that the amount of such capital is increased by or based upon the existence of such Lender’s commitment to lend or to issue or participate in Letters of Credit hereunder and other commitments of such type or the issuance or maintenance of or participation in the Letters of Credit, then, upon demand by such Lender (with a copy of such demand to the Agent), the Borrower shall pay to the Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender or such corporation in the light of such circumstances, to the extent that such Lender reasonably determines such increase in capital to be allocable to the existence of such Lender’s commitment to lend or to issue or participate in Letters of Credit hereunder or to the issuance or maintenance of or participation in any Letters of Credit. A certificate as to such amounts, submitted to the Borrower and the Agent by such Lender, shall constitute prima facie evidence of the amounts required to be paid by the Borrower in respect thereof, absent manifest error.

(d)           Failure or delay on the part of any Lender to demand compensation pursuant to this Section 2.12 shall not constitute a waiver of such Lender’s right to demand such compensation; provided that the Borrower shall not be required to compensate such Lender pursuant to this Section for any increased costs or reductions incurred more than 180 days prior to the date that such Lender notifies the Borrower of the change in or in the interpretation of law or regulation giving rise to such increased costs or reductions and of such Lender’s intention to claim compensation therefore; provided further that, if the change in or in the interpretation of law or regulation giving rise to such increased costs or reductions is retroactive, then the 180-day period referred to above shall be extended to include the period of retroactive effect thereof.

SECTION 2.13. Illegality. Notwithstanding any other provision of this Agreement, if any Lender shall notify the Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for any Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Advances or LIBO Rate Advances or to fund or maintain Eurodollar Rate Advances or LIBO Rate Advances hereunder, (a) each Eurodollar Rate Advance or LIBO Rate Advance, as the case may be, will automatically, upon such demand, Convert into a Base Rate Advance or an Advance that bears interest at the rate set forth in Section 2.08(a)(i), as the case may be, and (b) the obligation of the Lenders to make Eurodollar Rate Advances or LIBO Rate Advances or to Convert Revolving Credit Advances into Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist; provided, however, that before making any such demand, each Lender agrees to use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different Eurodollar Lending Office if the making of such a designation would allow such Lender or its Eurodollar Lending Office to continue to perform its obligations to make Eurodollar Rate Advances or to continue to fund or maintain Eurodollar Rate Advances and would not, in the judgment of such Lender, be otherwise disadvantageous to such Lender.

SECTION 2.14. Payments and Computations. (a)  The Borrower shall make each payment hereunder, irrespective of any right of counterclaim or set-off,  not later than 12:00 noon (New York City time) on the day when due in U.S. dollars to the Agent at the Agent’s Account in same day funds. The Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal, interest, fees or commissions ratably (other than amounts payable pursuant to Section 2.04, 2.05(b) or (c), 2.12, 2.15 or 8.04(c)) to the Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon any Assuming Lender becoming a Lender hereunder as a result of a Commitment Increase pursuant to Section 2.19 or an extension of the Termination Date pursuant to Section 2.20, and upon the Agent’s receipt of such Lender’s Assumption Agreement and recording of the information contained therein in the Register, from and after the applicable Increase Date or Extension Date, as the case may be, the Agent shall make all payments hereunder and under any Notes issued in connection therewith in respect of the interest assumed thereby to the Assuming Lender. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 8.07(c), from and after the

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effective date specified in such Assignment and Acceptance, the Agent shall make all payments hereunder and under the Notes in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves.

(b)           All computations of interest based on the Base Rate shall be made by the Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate, the LIBO Rate or the Federal Funds Rate or in respect of Fixed Rate Advances and of fees and Letter of Credit commissions shall be made by the Agent on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest, fees or commissions are payable. Each determination by the Agent of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error.

(c)           Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest, fee or commission, as the case may be; provided, however, that, if such extension would cause payment of interest on or principal of Eurodollar Rate Advances or LIBO Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day.

(d)           Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Lenders hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent the Borrower shall not have so made such payment in full to the Agent, each Lender shall repay to the Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Agent, at the Federal Funds Rate.

SECTION 2.15. Taxes. (a)  Any and all payments by the Borrower to or for the account of any Lender or the Agent hereunder or under the Notes or any other documents to be delivered hereunder shall be made, in accordance with Section 2.14 or the applicable provisions of such other documents, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Agent, taxes imposed on its overall net income, and franchise taxes imposed on it in lieu of net income taxes, by the jurisdiction under the laws of which such Lender or the Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Lender, taxes imposed on its overall net income, and franchise taxes imposed on it in lieu of net income taxes, by the jurisdiction of such Lender’s Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities in respect of payments hereunder or under the Notes being hereinafter referred to as “Taxes”). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note or any other documents to be delivered hereunder to any Lender or the Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.15) such Lender or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law.

(b)           In addition, the Borrower shall pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or under the Notes or any other documents to be delivered hereunder or from the execution, delivery or registration of, performing under, or otherwise with respect to, this Agreement or the Notes or any other documents to be delivered hereunder (hereinafter referred to as “Other Taxes”).

(c)           The Borrower shall indemnify each Lender and the Agent for and hold it harmless against the full amount of Taxes or Other Taxes (including, without limitation, taxes of any kind imposed or asserted by any jurisdiction on amounts payable under this Section 2.15) imposed on or paid by such Lender or the Agent (as the

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case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be made within 30 days from the date such Lender or the Agent (as the case may be) makes written demand therefor.

(d)           Within 30 days after the date of any payment of Taxes, the Borrower shall furnish to the Agent, at its address referred to in Section 8.02, the original or a certified copy of a receipt evidencing such payment to the extent such a receipt is issued therefor, or other written proof of payment thereof that is reasonably satisfactory to the Agent. For purposes of this subsection (d) and subsection (e), the terms “United States” and “United States person” shall have the meanings specified in Section 7701 of the Internal Revenue Code.

(e)           Each Lender organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Initial Lender and on the date of the Assumption Agreement or the Assignment and Acceptance pursuant to which it becomes a Lender in the case of each other Lender, and from time to time thereafter as reasonably requested in writing by the Borrower (but only so long as such Lender remains lawfully able to do so), shall provide each of the Agent and the Borrower with two original Internal Revenue Service forms W-8BEN or W-8ECI, as appropriate, or any successor or other form prescribed by the Internal Revenue Service, certifying that such Lender is exempt from or entitled to a reduced rate of United States withholding tax on payments pursuant to this Agreement or the Notes. If the form provided by a Lender at the time such Lender first becomes a party to this Agreement indicates a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from Taxes unless and until such Lender provides the appropriate forms certifying that a lesser rate applies, whereupon withholding tax at such lesser rate only shall be considered excluded from Taxes for periods governed by such form; provided, however, that, if at the date of the Assignment and Acceptance pursuant to which a Lender assignee becomes a party to this Agreement, the Lender assignor was entitled to payments under subsection (a) in respect of United States withholding tax with respect to interest paid at such date, then, to such extent, the term Taxes shall include (in addition to withholding taxes that may be imposed in the future or other amounts otherwise includable in Taxes) United States withholding tax, if any, applicable with respect to the Lender assignee on such date. If any form or document referred to in this subsection (e) requires the disclosure of information, other than information necessary to compute the tax payable and information required on the date hereof by Internal Revenue Service form W-8BEN or W-8ECI, that the Lender reasonably considers to be confidential, the Lender shall give notice thereof to the Borrower and shall not be obligated to include in such form or document such confidential information.

(f)            For any period with respect to which a Lender has failed to provide the Borrower with the appropriate form, certificate or other document described in Section 2.15(e) (other than if such failure is due to a change in law, or in the interpretation or application thereof, occurring subsequent to the date on which a form, certificate or other document originally was required to be provided, or if such form, certificate or other document otherwise is not required under subsection (e) above), such Lender shall not be entitled to indemnification under Section 2.15(a) or (c) with respect to Taxes imposed by the United States by reason of such failure; provided, however, that should a Lender become subject to Taxes because of its failure to deliver a form, certificate or other document required hereunder, the Borrower shall take such steps as the Lender shall reasonably request to assist the Lender to recover such Taxes.

(g)           Any Lender claiming any additional amounts payable pursuant to this Section 2.15 agrees to use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Eurodollar Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts that may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender.

(h)           If the Agent or any Lender determines, in its sole discretion, that it has received a refund of any Taxes or Other Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this Section 2.15, it shall pay over such refund to the Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this Section 2.15 with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of the Agent or such Lender and without interest (other than any interest paid by the relevant governmental authority with respect to such refund); provided, that the Borrower, upon the request of the Agent or such Lender, agrees to repay the amount paid over to the Borrower (plus any penalties, interest or other charges imposed by the relevant

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governmental authority) to the Agent or such Lender in the event the Agent or such Lender is required to repay such refund to such governmental authority. This paragraph shall not be construed to require the Agent or any Lender to make available its tax returns (or any other information relating to its taxes which it deems confidential) to the Borrower or any other Person.

SECTION 2.16. Sharing of Payments, Etc. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Revolving Credit Advances owing to it (other than (x) as payment of an Advance made by an Issuing Bank pursuant to the first sentence of Section 2.03(c) or (y) pursuant to Section 2.12, 2.15 or 8.04(c)) in excess of its Ratable Share of payments on account of the Revolving Credit Advances obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participations in the Revolving Credit Advances owing to them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery together with an amount equal to such Lender’s ratable share (according to the proportion of (i) the amount of such Lender’s required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.16 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off provided in Section 8.05) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation.

SECTION 2.17. Evidence of Debt. (a)  Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Revolving Credit Advance owing to such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder in respect of Revolving Credit Advances. The Borrower agrees that upon notice by any Lender to the Borrower (with a copy of such notice to the Agent) to the effect that a Revolving Credit Note is required or appropriate in order for such Lender to evidence (whether for purposes of pledge, enforcement or otherwise) the Revolving Credit Advances owing to, or to be made by, such Lender, the Borrower shall promptly execute and deliver to such Lender a Revolving Credit Note payable to the order of such Lender in a principal amount up to the Revolving Credit Commitment of such Lender.

(b)           The Register maintained by the Agent pursuant to Section 8.07(d) shall include a control account, and a subsidiary account for each Lender, in which accounts (taken together) shall be recorded (i) the date and amount of each Borrowing made hereunder, the Type of Advances comprising such Borrowing and, if appropriate, the Interest Period applicable thereto, (ii) the terms of each Assumption Agreement and each Assignment and Acceptance delivered to and accepted by it, (iii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iv) the amount of any sum received by the Agent from the Borrower hereunder and each Lender’s share thereof.

(c)           Entries made in good faith by the Agent in the Register pursuant to subsection (b) above, and by each Lender in its account or accounts pursuant to subsection (a) above, shall be prima facie evidence of the amount of principal and interest due and payable or to become due and payable from the Borrower to, in the case of the Register, each Lender and, in the case of such account or accounts, such Lender, under this Agreement, absent manifest error; provided, however, that the failure of the Agent or such Lender to make an entry, or any finding that an entry is incorrect, in the Register or such account or accounts shall not limit or otherwise affect the obligations of the Borrower under this Agreement.

SECTION 2.18. Use of Proceeds. The proceeds of the Advances shall be available (and the Borrower agrees that it shall use such proceeds) solely for general corporate purposes of the Borrower and its Subsidiaries.

SECTION 2.19. Increase in the Aggregate Commitments. (a) The Borrower may, at any time but in any event not more than once in any calendar year prior to the Termination Date, by notice to the Agent, request that the aggregate amount of the Revolving Credit Commitments be increased (with, at the Borrower’s option, a proportionate increase in the Letter of Credit Facility) by an amount of $10,000,000 or an integral multiple of

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$10,000,000 in excess thereof (each a “Commitment Increase”) to be effective as of a date that is at least 90 days prior to the scheduled Termination Date then in effect (the “Increase Date”) as specified in the related notice to the Agent; provided, however that (i) in no event shall the aggregate amount of the Revolving Credit Commitments at any time exceed $1,500,000,000 and (ii) on the date of any request by the Borrower for a Commitment Increase and on the related Increase Date, (x) the Public Debt Rating shall be BBB or better from S&P and Baa2 or better from Moody’s and (y) the applicable conditions set forth in Section 3.02 shall be satisfied.

(b)           The Agent shall promptly notify the Lenders of a request by the Borrower for a Commitment Increase, which notice shall include (i) the proposed amount of such requested Commitment Increase, (ii) the proposed Increase Date and (iii) the date by which Lenders wishing to participate in the Commitment Increase must commit to an increase in the amount of their respective Revolving Credit Commitments (the “Commitment Date”). Each Lender that is willing to participate in such requested Commitment Increase (each an “Increasing Lender”) shall, in its sole discretion, give written notice to the Agent on or prior to the Commitment Date of the amount by which it is willing to increase its Revolving Credit Commitment. If the Lenders notify the Agent that they are willing to increase the amount of their respective Revolving Credit Commitments by an aggregate amount that exceeds the amount of the requested Commitment Increase, the requested Commitment Increase shall be allocated among the Lenders willing to participate therein in such amounts as are agreed between the Borrower and the Agent.

(c)           Promptly following each Commitment Date, the Agent shall notify the Borrower as to the amount, if any, by which the Lenders are willing to participate in the requested Commitment Increase. If the aggregate amount by which the Lenders are willing to participate in any requested Commitment Increase on any such Commitment Date is less than the requested Commitment Increase, then the Borrower may extend offers to one or more Eligible Assignees to participate in any portion of the requested Commitment Increase that has not been committed to by the Lenders as of the applicable Commitment Date; provided, however, that the Revolving Credit Commitment of each such Eligible Assignee shall be in an amount of $20,000,000 or an integral multiple of $1,000,000 in excess thereof.

(d)           On each Increase Date, each Eligible Assignee that accepts an offer to participate in a requested Commitment Increase in accordance with Section 2.19(b) (each such Eligible Assignee and each Eligible Assignee that agrees to an extension of the Termination Date in accordance with Section 2.20(c), an “Assuming Lender”) shall become a Lender party to this Agreement as of such Increase Date and the Revolving Credit Commitment of each Increasing Lender for such requested Commitment Increase shall be so increased by such amount (or by the amount allocated to such Lender pursuant to the last sentence of Section 2.19(b)) as of such Increase Date; provided, however, that the Agent shall have received on or before such Increase Date the following, each dated such date:

(i)            (A) certified copies of resolutions of the Board of Directors of the Borrower or the Executive Committee of such Board approving the Commitment Increase and the corresponding modifications to this Agreement and (B) an opinion of counsel for the Borrower (which may be in-house counsel), in substantially the form of Exhibit E hereto;

(ii)           an assumption agreement from each Assuming Lender, if any, in form and substance satisfactory to the Borrower and the Agent (each an “Assumption Agreement”), duly executed by such Eligible Assignee, the Agent and the Borrower; and

(iii)          confirmation from each Increasing Lender of the increase in the amount of its Commitment in a writing satisfactory to the Borrower and the Agent.

On each Increase Date, upon fulfillment of the conditions set forth in the immediately preceding sentence of this Section 2.19(d), the Agent shall notify the Lenders (including, without limitation, each Assuming Lender) and the Borrower, on or before 1:00 P.M. (New York City time), by telecopier, of the occurrence of the Commitment Increase to be effected on such Increase Date and shall record in the Register the relevant information with respect to each Increasing Lender and each Assuming Lender on such date.

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(e)           On the Increase Date, if any Advances are then outstanding, the Borrower shall borrow from all or certain of the Lenders and/or (subject to compliance by the Borrower with Section 8.04(c)) prepay Advances of all or certain of the Lenders such that, after giving effect thereto, the Advances (including, without limitation, the Types and Interest Periods thereof) shall be held by the Lenders (including for such purposes the Increasing Lenders and the Assuming Lenders) ratably in accordance with their respective Revolving Credit Commitments. On and after each Increase Date, the Ratable Share of each Lender’s participation in Letters of Credit and Advances from draws under Letters of Credit shall be calculated after giving effect to each such Commitment Increase.

SECTION 2.20. Extension of Termination Date. (a) At least 60 days but not more than 90 days prior to any anniversary of the Effective Date, the Borrower, by written notice to the Agent, may request an extension of the Termination Date in effect at such time by one year from its then scheduled expiration (which request may be conditioned on a minimum level of Revolving Credit Commitments from Consenting Lenders and Assuming Lenders). The Agent shall promptly notify each Lender of such request, and each Lender shall in turn, in its sole discretion, not later than 30 days prior to such anniversary date, notify the Borrower and the Agent in writing as to whether such Lender will consent to such extension. If any Lender shall fail to notify the Agent and the Borrower in writing of its consent to any such request for extension of the Termination Date at least 30 days prior to the applicable anniversary date, such Lender shall be deemed to be a Non-Consenting Lender with respect to such request. The Agent shall notify the Borrower not later than 25 days prior to the applicable anniversary date of the decision of the Lenders regarding the Borrower’s request for an extension of the Termination Date.

(b)           If all the Lenders consent in writing to any such request in accordance with subsection (a) of this Section 2.20, the Termination Date in effect at such time shall, effective as at the applicable anniversary date (the “Extension Date”), be extended for one year; provided that on each Extension Date the applicable conditions set forth in Section 3.02 shall be satisfied. If less than all of the Lenders consent in writing to any such request in accordance with subsection (a) of this Section 2.20, the Termination Date in effect at such time shall, effective as at the applicable Extension Date and subject to subsection (d) of this Section 2.20, be extended as to those Lenders that so consented (each a “Consenting Lender”) but shall not be extended as to any other Lender (each a “Non-Consenting Lender”). To the extent that the Termination Date is not extended as to any Lender pursuant to this Section 2.20 and the Revolving Credit Commitment of such Lender is not assumed in accordance with subsection (c) of this Section 2.20 on or prior to the applicable Extension Date, the Revolving Credit Commitment of such Non-Consenting Lender shall automatically terminate in whole on such unextended Termination Date without any further notice or other action by the Borrower, such Lender or any other Person; provided that such Non-Consenting Lender’s rights under Sections 2.12, 2.15 and 8.04, and its obligations under Section 7.05, shall survive the Termination Date for such Lender as to matters occurring prior to such date. It is understood and agreed that no Lender shall have any obligation whatsoever to agree to any request made by the Borrower for any requested extension of the Termination Date.

(c)           If less than all of the Lenders consent to any such request pursuant to subsection (a) of this Section 2.20, the Agent shall promptly so notify the Consenting Lenders, and each Consenting Lender may, in its sole discretion, give written notice to the Agent not later than five days prior to the Extension Date of the amount of the Non-Consenting Lenders’ Revolving Credit Commitments for which it is willing to accept an assignment. If the Consenting Lenders notify the Agent that they are willing to accept assignments of Revolving Credit Commitments in an aggregate amount that exceeds the amount of the Revolving Credit Commitments of the Non-Consenting Lenders, such Revolving Credit Commitments shall be allocated among the Consenting Lenders willing to accept such assignments in such amounts as are agreed between the Borrower and the Agent. If after giving effect to the assignments of Revolving Credit Commitments described above there remains any Revolving Credit Commitments of Non-Consenting Lenders, the Borrower may arrange for one or more Consenting Lenders or other Eligible Assignees as Assuming Lenders to assume, effective as of the Extension Date, any Non-Consenting Lender’s Revolving Credit Commitment and all of the obligations of such Non-Consenting Lender under this Agreement thereafter arising, without recourse to or warranty by, or expense to, such Non-Consenting Lender; provided, however, that the amount of the Revolving Credit Commitment of any such Assuming Lender as a result of such substitution shall in no event be less than $20,000,000 unless the amount of the Revolving Credit Commitment of such Non-Consenting Lender is less than $20,000,000, in which case such Assuming Lender shall assume all of such lesser amount; and provided further that:

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(i)            any such Consenting Lender or Assuming Lender shall have paid to such Non-Consenting Lender (A) the aggregate principal amount of, and any interest accrued and unpaid to the effective date of the assignment on, the outstanding Advances, if any, of such Non-Consenting Lender plus (B) any accrued but unpaid facility fees owing to such Non-Consenting Lender as of the effective date of such assignment;

(ii)           all additional costs reimbursements, expense reimbursements and indemnities payable to such Non-Consenting Lender, and all other accrued and unpaid amounts owing to such Non-Consenting Lender hereunder, as of the effective date of such assignment shall have been paid to such Non-Consenting Lender; and

(iii)          with respect to any such Assuming Lender, the applicable processing and recordation fee required under Section 8.07(a) for such assignment shall have been paid;

provided further that such Non-Consenting Lender’s rights under Sections 2.12, 2.15 and 8.04, and its obligations under Section 7.05, shall survive such substitution as to matters occurring prior to the date of substitution. At least five Business Days prior to any Extension Date, (A) each such Assuming Lender, if any, shall have delivered to the Borrower and the Agent an Assumption Agreement, duly executed by such Assuming Lender, such Non-Consenting Lender, the Borrower and the Agent and (B) any such Consenting Lender shall have delivered confirmation in writing satisfactory to the Borrower and the Agent as to the increase in the amount of its Commitment. Upon the payment or prepayment of all amounts referred to in clauses (i), (ii) and (iii) of the immediately preceding sentence, each such Consenting Lender or Assuming Lender, as of the Extension Date, will be substituted for such Non-Consenting Lender under this Agreement and shall be a Lender for all purposes of this Agreement, without any further acknowledgment by or the consent of the other Lenders, and the obligations of each such Non-Consenting Lender hereunder shall, by the provisions hereof, be released and discharged.

(d)           If (after giving effect to any assignments or assumptions pursuant to subsection (c) of this Section 2.20) Lenders having Commitments equal to at least 50% of the Revolving Credit Commitments in effect immediately prior to the Extension Date consent in writing to a requested extension (whether by execution or delivery of an Assumption Agreement or otherwise) not later than one Business Day prior to such Extension Date, the Agent shall so notify the Borrower, and, subject to the satisfaction of the applicable conditions in Section 3.02, the Termination Date then in effect shall be extended for the additional one year period as described in subsection (a) of this Section 2.20, and all references in this Agreement, and in the Notes, if any, to the “Termination Date” shall, with respect to each Consenting Lender and each Assuming Lender for such Extension Date, refer to the Termination Date as so extended. Promptly following each Extension Date, the Agent shall notify the Lenders (including, without limitation, each Assuming Lender) of the extension of the scheduled Termination Date in effect immediately prior thereto and shall thereupon record in the Register the relevant information with respect to each such Consenting Lender and each such Assuming Lender.

SECTION 2.21. Replacement of Lenders. If any Lender requests compensation under Section 2.12 or notifies the Agent under Section 2.13 that the making of Eurodollar Rate Advances would be unlawful, or if the Borrower is required to pay any additional amount to any Lender or any governmental authority for the account of any Lender pursuant to Section 2.15, or if any Lender defaults in its obligation to make Advances hereunder or fails to approve any amendment to this Agreement which is approved by the Required Lenders, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 8.07), all its interests, rights and obligations under this Agreement (other than any outstanding Competitive Bid Advances held by it) to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) if the assignee is not a Lender, the Borrower shall have received the prior written consent of the Agent, which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Advances (other than Competitive Bid Advances), accrued interest thereon, accrued fees and all other amounts then due and payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.12 or payments required to be made pursuant to Section 2.15, such assignment will result in a reduction in such

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compensation or payments at the time of such assignment. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply.

ARTICLE III

CONDITIONS TO EFFECTIVENESS AND LENDING

SECTION 3.01. Conditions Precedent to Effectiveness of Sections 2.01 and 2.04. Sections 2.01 and 2.04 shall become effective on and as of the first date (the “Effective Date”) on which the following conditions precedent have been satisfied:

(a)           Except as disclosed in the Public Filings, there shall have occurred no Material Adverse Change since December 31, 2004.

(b)           There shall exist no action, suit, investigation, litigation or proceeding affecting the Borrower or any of its Subsidiaries pending or threatened before any court, governmental agency or arbitrator that (i) could be reasonably likely to have a Material Adverse Effect other than the matters described on Schedule 3.01(b) hereto (the “Disclosed Litigation”) or (ii) purports to affect the legality, validity or enforceability of this Agreement or any Note or the consummation of the transactions contemplated hereby, and there shall have been no adverse change in the status, or financial effect on the Borrower or any of its Subsidiaries, of the Disclosed Litigation from that described on Schedule 3.01(b) hereto.

(c)           The Borrower shall have notified each Lender and the Agent in writing as to the proposed Effective Date, and the Agent shall have confirmed to the Borrower in writing that the Effective Date has occurred.

(d)           The Borrower shall have paid all accrued fees and expenses of the Agent and the Lenders (including the accrued fees and expenses of counsel to the Agent) that have been invoiced at least two Business Days prior to the proposed Effective Date.

(e)           On the Effective Date, the following statements shall be true and the Agent shall have received for the account of each Lender a certificate signed by a duly authorized officer of the Borrower, dated the Effective Date, stating that:

(i)            The representations and warranties contained in Section 4.01 are correct on and as of the Effective Date, and

(ii)           No event has occurred and is continuing that constitutes a Default.

(f)            The Agent shall have received on or before the Effective Date the following, each dated such day, in form and substance satisfactory to the Agent and (except for the Revolving Credit Notes) in sufficient copies for each Lender:

(i)            The Revolving Credit Notes to the order of the Lenders to the extent requested by any Lender pursuant to Section 2.17.

(ii)           Certified copies of the resolutions of the Board of Directors of the Borrower approving this Agreement and the Notes, and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement and the Notes.

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(iii)          A certificate of the Secretary or an Assistant Secretary of the Borrower certifying the names and true signatures of the officers of the Borrower authorized to sign this Agreement and the Notes and the other documents to be delivered hereunder.

(iv)          A favorable opinion of Bruce A. Backberg, Senior Vice President and Corporate Secretary of the Borrower, substantially in the form of Exhibit D hereto and as to such other matters as any Lender through the Agent may reasonably request.

(v)           A favorable opinion of Shearman & Sterling LLP, counsel for the Agent, in form and substance satisfactory to the Agent.

(g)           The Borrower shall have terminated the commitments, and paid in full all Debt, interest, fees and other amounts then due and payable, under (A) the Five Year Credit Agreement dated as of June 14, 2002, amended and restated as of June 11, 2004, among the Borrower, the lenders and agents parties thereto and Citicorp, as administrative agent, and (B) the $250,000,000 credit facility dated as of April 17, 2003 between an Affiliate of the Borrower and Citibank, N.A., and each of the Lenders that is a party to either such credit facility hereby waives, upon execution of this Agreement the requirement of prior notice under each such credit facility relating to the termination of commitments thereunder.

SECTION 3.02. Conditions Precedent to Each Revolving Credit Borrowing, Issuance, Commitment Increase and Extension of Commitments. The obligation of each Lender to make a Revolving Credit Advance (other than a Revolving Credit Advance made by any Issuing Bank or any Lender pursuant to Section 2.03(c)) on the occasion of each Revolving Credit Borrowing, the obligation or each Issuing Bank to issue a Letter of Credit, each Commitment Increase and each extension of Commitments pursuant to Section 2.20 shall be subject to the conditions precedent that the Effective Date shall have occurred and on the date of such Revolving Credit Borrowing, such Issuance, the applicable Increase Date or the applicable Extension Date the following statements shall be true (and each of the giving of the applicable Notice of Revolving Credit Borrowing, Notice of Issuance, request for Commitment Increase, request for Commitment Extension and the acceptance by the Borrower of the proceeds of such Revolving Credit Borrowing or such Issuance shall constitute a representation and warranty by the Borrower that on the date of such Borrowing, such Issuance, such Increase Date or such Extension Date such statements are true):

(a)           the representations and warranties contained in Section 4.01 (except, in the case of Revolving Credit Borrowings or Issuances, the representations set forth in the last sentence of subsection (e) thereof and in subsection (f) thereof) are correct in all material respects on and as of such date, before and after giving effect to such Revolving Credit Borrowing, such Issuance, such Commitment Increase or such Extension Date and to the application of the proceeds therefrom, as though made on and as of such date, and

(b)           no event has occurred and is continuing, or would result from such Revolving Credit Borrowing, such Issuance, such Commitment Increase or such Extension Date or from the application of the proceeds therefrom, that constitutes a Default.

SECTION 3.03. Conditions Precedent to Each Competitive Bid Borrowing. The obligation of each Lender that is to make a Competitive Bid Advance on the occasion of a Competitive Bid Borrowing to make such Competitive Bid Advance as part of such Competitive Bid Borrowing is subject to the conditions precedent that (i) the Agent shall have received the written confirmatory Notice of Competitive Bid Borrowing with respect thereto,  (ii) on or before the date of such Competitive Bid Borrowing, but prior to such Competitive Bid Borrowing, the Agent shall have received a Competitive Bid Note payable to the order of such Lender for each of the one or more Competitive Bid Advances to be made by such Lender as part of such Competitive Bid Borrowing, in a principal amount equal to the principal amount of the Competitive Bid Advance to be evidenced thereby and otherwise on such terms as were agreed to for such Competitive Bid Advance in accordance with Section 2.04, and (iii) on the date of such Competitive Bid Borrowing the following statements shall be true (and each of the giving of the applicable Notice of Competitive Bid Borrowing and the acceptance by the Borrower of the proceeds of such

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Competitive Bid Borrowing shall constitute a representation and warranty by the Borrower that on the date of such Competitive Bid Borrowing such statements are true):

(a)           the representations and warranties contained in Section 4.01 (except the representations set forth in the last sentence of subsection (e) thereof and in subsection (f) thereof) are correct in all material respects on and as of the date of such Competitive Bid Borrowing, before and after giving effect to such Competitive Bid Borrowing and to the application of the proceeds therefrom, as though made on and as of such date, and

(b)           no event has occurred and is continuing, or would result from such Competitive Bid Borrowing or from the application of the proceeds therefrom, that constitutes a Default.

SECTION 3.04. Determinations Under Section 3.01. For purposes of determining compliance with the conditions specified in Section 3.01, each Lender shall be deemed to have consented to, approved or accepted or to be satisfied with each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to the Lenders unless an officer of the Agent responsible for the transactions contemplated by this Agreement shall have received notice from such Lender prior to the date that the Borrower, by notice to the Lenders, designates as the proposed Effective Date, specifying its objection thereto. The Agent shall promptly notify the Lenders of the occurrence of the Effective Date.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

SECTION 4.01. Representations and Warranties of the Borrower. The Borrower represents and warrants as follows:

(a)           The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota and has all corporate powers and authority and all material licenses, authorizations, consents and approvals required to carry on its business as now conducted and each of the Borrower and each Significant Subsidiary is duly qualified as a foreign corporation, licensed and in good standing in each jurisdiction where qualification or licensing is required by the nature of its business or the character and location of its property, business or customers, where the failure to be so qualified or licensed could reasonably be expected to have a Material Adverse Effect.

(b)           The execution, delivery and performance by the Borrower of this Agreement and the Notes to be delivered by it, and the consummation of the transactions contemplated hereby, are within the Borrower’s corporate powers, have been duly authorized by all necessary corporate action, and do not (i) contravene the Borrower’s charter or by-laws, (ii) violate any law, rule, regulation, order, writ, judgment, decree, determination or award applicable to the Borrower if such violation could reasonably be expected to have a Material Adverse Effect or (iii) violate or constitute a default under any contractual restriction binding on or affecting the Borrower if such violation or default could reasonably be expected to have a Material Adverse Effect or subject the Lenders, the Agent or the lead arranger to liability.

(c)           No authorization or approval or other action by, and no notice to or filing (other than an immaterial authorization, approval, action, notice or filing) with, any governmental authority or regulatory body or any other third party is required for the due execution, delivery and performance by the Borrower of this Agreement or the Notes to be delivered by it, except for those that have been duly obtained, taken, given or made and are in full force and effect.

(d)           This Agreement has been, and each of the Notes to be delivered by it when delivered hereunder will have been, duly executed and delivered by the Borrower. This Agreement is, and each of the Notes when delivered hereunder will be, the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with their respective terms, subject to (i) the effect of any

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applicable bankruptcy, insolvency, reorganization, moratorium or similar law affecting creditors’ rights generally, (ii) the effect of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law and (iii) an implied covenant of good faith and fair dealing.

(e)           Except as disclosed on Schedule 4.01(e), (i) the Consolidated balance sheet of the Borrower and its Subsidiaries as at December 31, 2004, and the related Consolidated statements of income and cash flows of the Borrower and its Subsidiaries for the fiscal year then ended, accompanied by an opinion of KPMG LLP, independent public accountants, and (ii) the Consolidated balance sheet of the Borrower and its Subsidiaries as at March 31, 2005, which set forth the financial condition of the Borrower and is Subsidiaries, and the related Consolidated statements of income and cash flows of the Borrower and its Subsidiaries for the three months then ended, duly certified by the chief financial officer or chief accounting officer of the Borrower, copies of which have been furnished to each Lender, fairly present in all material respects, subject, in the case of said balance sheet as at March 31, 2005, and said statements of income and cash flows for the three months then ended, to year-end audit adjustments and the absence of certain notes, the Consolidated financial condition of the Borrower and its Subsidiaries as at such dates and the Consolidated results of the operations of the Borrower and its Subsidiaries for the periods ended on such dates, all in accordance with generally accepted accounting principles consistently applied. Except as otherwise disclosed in the Public Filings, since December 31, 2004, there has been no Material Adverse Change.

(f)            There is no pending or, to the knowledge of the Borrower, threatened action, suit, investigation, litigation or proceeding, including, without limitation, under any Environmental Law, affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator that (i) except as disclosed in the Public Filings, could be reasonably likely to have a Material Adverse Effect, and there shall have been no additional claim made in respect of any such action, suit, investigation, litigation or proceeding disclosed in the Public Filings that could be reasonably likely to have a Material Adverse Effect or (ii) purports to affect the legality, validity or enforceability of this Agreement or any Note or the consummation of the transactions contemplated hereby.

(g)           The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock in violation of such Regulation U.

(h)           The Borrower is not an “investment company”, or a company “controlled” by an “investment company”, within the meaning of the Investment Company Act of 1940, as amended.

(i)            Neither the Information Memorandum nor any written information distributed at the bank meeting on May 16, 2005 by or on behalf of the Borrower to the Agent or any Lender prior to the date hereof in connection with the negotiation of this Agreement, or delivered hereunder, when furnished and taken as a whole, contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not materially misleading; provided that, with respect to estimated or projected financial information, general industry information or forward looking statements, the Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time and no assurance is given as to whether future events will vary from such information or statements.

ARTICLE V

COVENANTS OF THE BORROWER

SECTION 5.01. Affirmative Covenants. So long as any Advance shall remain unpaid, any Letter of Credit is outstanding or any Lender shall have any Commitment hereunder, the Borrower will:

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(a)           Compliance with Laws, Etc. Comply, and cause each of its Subsidiaries to comply, in all material respects, with all applicable laws, rules, regulations and orders, such compliance to include, without limitation, compliance with ERISA and Environmental Laws, except to the extent that failure to so comply would not reasonably be expected to have a Material Adverse Effect.

(b)           Payment of Taxes, Etc. Pay and discharge, and cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent, (i) all taxes, assessments and governmental charges or levies imposed upon it or upon its property that, if unpaid, might by law become a Lien or charge upon its property and (ii) all lawful claims that, if unpaid, might by law become a Lien upon its property; provided, however, that neither the Borrower nor any of its Subsidiaries shall be required to pay or discharge any such tax, assessment, charge or claim (x) that is being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained or (y) the non-payment of which, either individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect.

(c)           Maintenance of Insurance. Maintain, and cause each of its Subsidiaries to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as the Borrower shall from time to time determine, based on its experience and knowledge of the industry, are of a character usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such Subsidiary operates; provided, however, that the Borrower and its Subsidiaries may self-insure to the extent consistent with prudent business practice.

(d)           Preservation of Corporate Existence, Etc. Preserve and maintain, and cause each of its Significant Subsidiaries to preserve and maintain, its corporate existence, material rights (charter and statutory) and material franchises; provided, however, that the Borrower and its Subsidiaries may consummate any merger or consolidation permitted under Section 5.02(b) and provided further that neither the Borrower nor any of its Subsidiaries shall be required to preserve any right or franchise if the Board of Directors of the Borrower or such Subsidiary shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Borrower or such Subsidiary, as the case may be, and that the loss thereof could not reasonably be expected to have a Material Adverse Effect.

(e)           Visitation Rights. Without limitation of Section 8.08, at any reasonable time and from time to time during normal business hours, permit the Agent at the request of any of the Lenders or any agents or representatives thereof, to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, the Borrower and any of its Subsidiaries, and to discuss the affairs, finances and accounts of the Borrower and any of its Subsidiaries with any of their officers or directors and with their independent certified public accountants.

(f)            Keeping of Books. Except as disclosed on Schedule 4.01(e), keep, and cause each of its Subsidiaries to keep, proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Borrower and each such Subsidiary in accordance with applicable generally accepted accounting principles in effect from time to time.

(g)           Maintenance of Properties, Etc. Maintain and preserve, and cause each of its Subsidiaries to maintain and preserve, all of its properties that are used or useful in the conduct of its business in good working order and condition (ordinary wear and tear excepted) except to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect.

(h)           Transactions with Affiliates. Conduct, and cause each of its Subsidiaries to conduct, all transactions otherwise permitted under this Agreement with any of their Affiliates on terms that are fair and reasonable and no less favorable to the Borrower or such Subsidiary than it would obtain in a comparable arm’s-length transaction with a Person not an Affiliate.

(i)            Reporting Requirements. Furnish to the Lenders:

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(i)            as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Borrower, the Consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such quarter and Consolidated statements of income and cash flows of the Borrower and its Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, duly certified (subject to year-end audit adjustments) by the chief financial officer or chief accounting officer of the Borrower as having been prepared in accordance with generally accepted accounting principles and certificates of the chief financial officer or chief accounting officer of the Borrower as to compliance with the terms of this Agreement and setting forth in reasonable detail the calculations necessary to demonstrate compliance with Section 5.03, provided that in the event of any change in generally accepted accounting principles used in the preparation of such financial statements, the Borrower shall also provide, if necessary for the determination of compliance with Section 5.03, a statement of reconciliation conforming such financial statements to GAAP;

(ii)           as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, a copy of the annual audit report for such year for the Borrower and its Subsidiaries, containing the Consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such fiscal year and Consolidated statements of income and cash flows of the Borrower and its Subsidiaries for such fiscal year, in each case accompanied by an opinion acceptable to the Required Lenders by KPMG LLP or other independent public accountants acceptable to the Required Lenders and, in addition, the Borrower will provide a certificate of its chief financial officer or chief accounting officer setting forth in reasonable detail the calculations necessary to demonstrate compliance with Section 5.03, provided that in the event of any change in generally accepted accounting principles used in the preparation of such financial statements, the Borrower shall also provide, if necessary for the determination of compliance with Section 5.03, a statement of reconciliation conforming such financial statements to GAAP;

(iii)          as soon as possible and in any event within five days after any senior officer becomes aware or should have become aware of the occurrence of each Default continuing on the date of such statement, a statement of the chief financial officer or chief accounting officer of the Borrower setting forth details of such Default and the action that the Borrower has taken and proposes to take with respect thereto;

(iv)          promptly after the sending or filing thereof, copies of all reports that the Borrower sends to any of its securityholders, and copies of all reports and registration statements that the Borrower or any Subsidiary files with the Securities and Exchange Commission or any national securities exchange;

(v)           promptly after the commencement thereof, notice of all actions and proceedings before any court, governmental agency or arbitrator affecting the Borrower or any of its Subsidiaries of the type described in Section 4.01(f); and

(vi)          such other information respecting the Borrower or any of its Subsidiaries as any Lender through the Agent may from time to time reasonably request.

Reports and financial statements required to be delivered by Borrower pursuant to clauses (i), (ii), (iii), (v) and (vi) of this subsection (i) shall be deemed to have been delivered on the date on which the Borrower posts such reports, or reports containing such financial statements, on its website on the Internet at www.stpaultravelers.com, at www.sec.gov or at such other website identified by the Borrower in a notice to the Agent and the Lenders and that is accessible by the Lenders without charge; provided that the Borrower shall deliver paper copies of such information to any Lender promptly upon request of such Lender through the Agent and provided further that the Lenders shall be deemed to have received the information specified in clauses (i) through (vi) of this subsection (i) on the date (x) such information is posted at the website of the Agent identified from time to time by the Agent to the Lenders and the

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Borrower and (y) such posting is notified to the Lenders (it being understood that the Borrower shall have satisfied the timing obligations imposed by those clauses as of the date such information is delivered to the Agent).

SECTION 5.02. Negative Covenants. So long as any Advance shall remain unpaid, any Letter of Credit is outstanding or any Lender shall have any Commitment hereunder, the Borrower will not:

(a)           Liens, Etc. Create or suffer to exist, or permit any of its Subsidiaries to create or suffer to exist, any Lien on or with respect to any of its properties, whether now owned or hereafter acquired, other than:

(i)            Permitted Liens,

(ii)           purchase money Liens upon or in any real property or equipment acquired or held by the Borrower or any Subsidiary in the ordinary course of business to secure the purchase price of such property or equipment or to secure Debt incurred solely for the purpose of financing the acquisition of such property or equipment, or Liens existing on such property or equipment at the time of its acquisition (other than any such Liens created in contemplation of such acquisition that were not incurred to finance the acquisition of such property) or extensions, renewals or replacements of any of the foregoing for the same or a lesser amount, provided, however, that no such Lien shall extend to or cover any properties of any character other than the real property or equipment being acquired, and no such extension, renewal or replacement shall extend to or cover any properties not theretofore subject to the Lien being extended, renewed or replaced,

(iii)          the Liens existing on the Effective Date and described on Schedule 5.02(a) hereto,

(iv)          Liens on property of a Person existing at the time such Person is merged into or consolidated with the Borrower or any Subsidiary of the Borrower or becomes a Subsidiary of the Borrower; provided that such Liens were not created in contemplation of such merger, consolidation or acquisition and do not extend to any assets other than those of the Person so merged into or consolidated with the Borrower or such Subsidiary or acquired by the Borrower or such Subsidiary,

(v)           Liens arising in connection with capital lease obligations; provided, however, that no such Lien shall extend to or cover any property or assets other than the property and assets subject to such capital lease obligations,

(vi)          Liens arising in connection with repurchase agreements, reverse purchase agreements and other similar agreements for the purchase, sale or loan of securities, in each case in the ordinary course of business; providedthat no such Lien shall extend to or cover any property or assets other than the securities subject thereto,

(vii)         Liens on accounts or notes receivable (whether such accounts or notes receivable constitute accounts, instruments, chattel paper or general intangibles) and other related assets, and sales or discounts on the foregoing, arising solely in connection with the securitization thereof (whether in one transaction or in a series of transactions); provided that no such Lien shall extend to or cover any property or assets other than the receivables and related assets subject to such securitization,

(viii)        Liens on Invested Assets pursuant to trust, letter of credit or other security arrangements in connection with Reinsurance Agreements or Primary Policies;

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(ix)           other Liens securing Debt and other obligations in an aggregate principal amount, which, together with, without duplication, all other Liens permitted by clauses (iv) through (viii) above and this clause (ix), secures Debt in an aggregate principal amount at the time such Debt or other obligations are incurred not to exceed 15% of the Net Worth of the Borrower and its Subsidiaries on a consolidated basis as of the last day of the immediately preceding fiscal period for which financial statements have been delivered,

(x)            the replacement, extension or renewal of any Lien permitted by clause (iii) or (iv) above upon or in the same property theretofore subject thereto or the replacement, extension or renewal (without increase in the amount or change in any direct or contingent obligor) of the Debt secured thereby, and

(xi)           any Lien on any asset of St. Paul Fire securing a reimbursement obligation arising from the issuance of a letter of credit for the account of St. Paul Fire (or one of its Affiliates) in the ordinary course of business.

(b)           Mergers, Etc. Merge or consolidate with or into, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to, any Person, except that the Borrower may merge with any other Person so long as the Borrower is the surviving corporation, provided that no Default shall have occurred and be continuing at the time of such proposed transaction or would result therefrom.

(c)           Accounting Changes. Make or permit, or permit any of its Subsidiaries to make or permit, any change in accounting policies or reporting practices, except as required or permitted by generally accepted accounting principles.

(d)           Change in Nature of Business. Engage, or permit any Significant Subsidiaries to engage, in any business other than businesses engaged in on the date hereof and businesses incidental, ancillary or complementary thereto.

SECTION 5.03. Financial Covenants. So long as any Advance shall remain unpaid, any Letter of Credit is outstanding or any Lender shall have any Commitment hereunder, the Borrower will:

(a)           Tangible Net Worth. Maintain an excess of Consolidated Net Worth over goodwill and other intangible assets of not less than $10,000,000,000 at all times.

(b)           Leverage Ratio. Maintain a ratio of Total Consolidated Debt to the sum of Total Consolidated Debt plus Consolidated Net Worth of not greater than 0.40 to 1.00.

ARTICLE VI

EVENTS OF DEFAULT

SECTION 6.01. Events of Default. If any of the following events (“Events of Default”) shall occur and be continuing:

(a)           The Borrower shall fail to pay any principal of any Advance when the same becomes due and payable; or the Borrower shall fail to pay any interest on any Advance or make any other payment of fees or other amounts payable under this Agreement or any Note within three Business Days after the same becomes due and payable; or

(b)           Any representation or warranty made by the Borrower herein or by the Borrower (or any of its officers) in connection with this Agreement shall prove to have been incorrect in any material respect when made or deemed made; or

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(c)           (i) The Borrower shall fail to perform or observe any term, covenant or agreement contained in Section 5.01(d), (e), (h) or (i)(iii), 5.02 or 5.03, or (ii) the Borrower shall fail to perform or observe any other term, covenant or agreement contained in this Agreement on its part to be performed or observed if such failure shall remain unremedied for 30 days after written notice thereof shall have been given to the Borrower by the Agent or any Lender, provided that it shall not be an Event of Default for a failure to provide a notice of Default under Section 5.01(i)(iii) with respect a Default under clause (ii) of this Section until the day which is 30 days after any senior officer becomes aware or should have become aware of the occurrence of such Default at which time the failure to provide such notice shall be an Event of Default; or

(d)           The Borrower or any of its Subsidiaries shall fail to pay any principal of or premium or interest on any Debt that is outstanding in a principal amount or, in the case of a Hedge Agreement, net amount, of at least $75,000,000 in the aggregate (but excluding Debt outstanding hereunder) of the Borrower or such Subsidiary (as the case may be), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Debt and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate the maturity of such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid or redeemed (other than by a regularly scheduled required prepayment or redemption), purchased or defeased, or an offer to prepay, redeem, purchase or defease such Debt shall be required to be made, in each case prior to the stated maturity thereof; or

(e)           The Borrower or any of its Significant Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any of its Significant Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of 60 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property) shall occur; or the Borrower or any of its Significant Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (e); or

(f)            Judgments or orders for the payment of money in excess of $75,000,000 in the aggregate shall be rendered against the Borrower or any of its Subsidiaries and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment following a failure of the Borrower or any of its Subsidiaries to pay the amount of such order and such proceedings shall remain unstayed for 10 consecutive Business Days or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; provided, however, that any such judgment or order shall not be an Event of Default under this Section 6.01(f) if and for so long as (i) the amount of such judgment or order is covered by a valid and binding policy of insurance between the defendant and the insurer covering payment thereof and (ii) such insurer, which shall be rated at least “A” by A.M. Best Company, has been notified of, and has not disputed the claim made for payment of, the amount of such judgment or order; or

(g)           (i) Any Person or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934), directly or indirectly, of Voting Stock of the Borrower (or other securities convertible into such Voting Stock) representing 35% or more of the combined voting power of

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all Voting Stock of the Borrower; or (ii) during any period of up to 24 consecutive months, commencing before or after the date of this Agreement, individuals who at the beginning of such 24-month period were directors of the Borrower shall cease for any reason (other than due to death or disability) to constitute a majority of the board of directors of the Borrower (except to the extent that individuals who at the beginning of such 24-month period were replaced by individuals (x) elected by a majority of the remaining members of the board of directors of the Borrower or (y) nominated for election by a majority of the remaining members of the board of directors of the Borrower and thereafter elected as directors by the shareholders of the Borrower); or

(h)           The Borrower or any of its ERISA Affiliates shall incur, or shall be reasonably likely to incur liability in excess of $75,000,000 in the aggregate as a result of one or more of the following:  (i) the occurrence of any ERISA Event; (ii) the partial or complete withdrawal of the Borrower or any of its ERISA Affiliates from a Multiemployer Plan within the meaning of Part 1 of Subtitle E of Title IV of ERISA; or (iii) the reorganization (within the meaning of Section 4241 of ERISA) or the termination of a Multiemployer Plan pursuant to Section 4041A or 4042 of ERISA; or

(i)            (i)  any insurance commissioner or any other state insurance regulatory official shall intervene through legal proceedings and assume control of any material portion of the business of any Significant Subsidiary or (ii) any insurance commissioner or any State insurance regulatory official shall initiate any legal proceeding not dismissed or stayed within 90 days with a view toward so intervening, in the control of a material portion of the business of any Significant Subsidiary, or the Borrower or any Significant Subsidiary shall intentionally facilitate or take any affirmative action toward facilitating such intervention, excluding from the above normal regulatory practices including the review and approval of rates and forms, market conduct examinations and other normal examinations;

then, and in any such event, the Agent (i) shall at the request, or may with the consent, of the Required Lenders, by notice to the Borrower, declare the obligation of each Lender to make Advances (other than Advances to be made by an Issuing Bank or a Lender pursuant to Section 2.03(c)) and of the Issuing Banks to issue Letters of Credit to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Required Lenders, by notice to the Borrower, declare the Advances, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Advances, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Borrower under the Federal Bankruptcy Code, (A) the obligation of each Lender to make Advances (other than Advances to be made by an Issuing Bank or a Lender pursuant to Section 2.03(c)) and of the Issuing Banks to issue Letters of Credit shall automatically be terminated and (B) the Advances, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower.

SECTION 6.02. Actions in Respect of the Letters of Credit upon Default. If any Event of Default shall have occurred and be continuing, the Agent may with the consent, or shall at the request, of the Required Lenders, irrespective of whether it is taking any of the actions described in Section 6.01 or otherwise, make demand upon the Borrower to, and forthwith upon such demand the Borrower will, (a) pay to the Agent on behalf of the Lenders in same day funds at the Agent’s office designated in such demand, for deposit in the L/C Securities Account, an amount equal to the aggregate Available Amount of all Letters of Credit (other than Secured Letters of Credit) then outstanding or (b) make such other arrangements in respect of the outstanding Letters of Credit as shall be acceptable to the Required Lenders and not more disadvantageous to the Borrower than clause (a); provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Borrower under the Federal Bankruptcy Code, an amount equal to the aggregate Available Amount of all outstanding Letters of Credit (other than Secured Letters of Credit) shall be immediately due and payable to the Agent for the account of the Lenders without notice to or demand upon the Borrower, which are expressly waived by the Borrower, to be held in the L/C Securities Account. If at any time thereafter the Agent determines that the funds held in the L/C Securities Account are less than the aggregate Available Amount of all Letters of Credit, the Borrower will, forthwith upon demand by the Agent, pay to the Agent, as additional funds to be deposited and held in the L/C Securities Account,

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an amount equal to the excess of (a) such aggregate Available Amount over (b) the total amount of funds, if any, then held in the L/C Securities Account that the Agent determines to be free and clear of any such right and claim. Upon the drawing of any Letter of Credit thereafter, to the extent funds are on deposit in the L/C Securities Account, such funds shall be applied to reimburse the Issuing Banks to the extent permitted by applicable law. After all such Letters of Credit shall have expired or been fully drawn upon and all other obligations of the Borrower hereunder and under the Notes shall have been paid in full, the balance, if any, in such L/C Securities Account shall be returned to the Borrower.

ARTICLE VII

THE AGENT

SECTION 7.01. Authorization and Action. Each Lender (in its capacities as a Lender and Issuing Bank, as applicable) hereby appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement as are delegated to the Agent by the terms hereof, together with such powers and discretion as are reasonably incidental thereto. As to any matters not expressly provided for by this Agreement (including, without limitation, enforcement or collection of the Notes), the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Lenders, and such instructions shall be binding upon all Lenders and all holders of Notes; provided, however, that the Agent shall not be required to take any action that exposes the Agent to personal liability or that is contrary to this Agreement or applicable law. The Agent agrees to give to each Lender prompt notice of each notice given to it by the Borrower pursuant to the terms of this Agreement.

SECTION 7.02. Agent’s Reliance, Etc. Neither the Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Agent:  (i) may treat the Lender that made any Advance as the holder of the Debt resulting therefrom until the Agent receives and accepts an Assumption Agreement entered into by an Assuming Lender as provided in Section 2.19 or 2.20, as the case may be, or an Assignment and Acceptance entered into by such Lender, as assignor, and an Eligible Assignee, as assignee, as provided in Section 8.07; (ii) may consult with legal counsel (including counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iii) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations (whether written or oral) made in or in connection with this Agreement; (iv) shall not have any duty to ascertain or to inquire as to the performance, observance or satisfaction of any of the terms, covenants or conditions of this Agreement on the part of the Borrower or the existence at any time of any Default or to inspect the property (including the books and records) of the Borrower; (v) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any lien or security interest created or purported to be created under or in connection with, this Agreement or any other instrument or document furnished pursuant hereto; and (vi) shall incur no liability under or in respect of this Agreement by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopier or telegram) believed by it to be genuine and signed or sent by the proper party or parties.

SECTION 7.03. Citicorp and Affiliates. With respect to its Commitment, the Advances made by it and the Note issued to it, Citicorp shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the Agent; and the term “Lender” or “Lenders” shall, unless otherwise expressly indicated, include Citicorp in its individual capacity. Citicorp and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, accept investment banking engagements from and generally engage in any kind of business with, the Borrower, any of its Subsidiaries and any Person who may do business with or own securities of the Borrower or any such Subsidiary, all as if Citicorp were not the Agent and without any duty to account therefor to the Lenders. The Agent shall have no duty to disclose information obtained or received by it or any of its Affiliates relating to the Borrower or its Subsidiaries to the extent such information was obtained or received in any capacity other than as Agent.

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SECTION 7.04. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender and based on the financial statements referred to in Section 4.01 and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement.

SECTION 7.05. Indemnification. (a)  The Lenders agree to indemnify the Agent (to the extent not reimbursed by the Borrower), ratably according to the respective principal amounts of the Revolving Credit Advances then owed to each of them (or if no Revolving Credit Advances are at the time outstanding, ratably according to the respective amounts of their Revolving Credit Commitments), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement or any action taken or omitted by the Agent under this Agreement (collectively, the “Indemnified Costs”), provided that no Lender shall be liable for any portion of the Indemnified Costs resulting from the Agent’s gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse the Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including reasonable counsel fees) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, to the extent that the Agent is not reimbursed for such expenses by the Borrower. In the case of any investigation, litigation or proceeding giving rise to any Indemnified Costs, this Section 7.05 applies whether any such investigation, litigation or proceeding is brought by the Agent, any Lender or a third party.

(b)           Each Lender severally agrees to indemnify the Issuing Banks (to the extent not promptly reimbursed by the Borrower) from and against such Lender’s Ratable Share of any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against any such Issuing Bank in any way relating to or arising out of the Loan Documents or any action taken or omitted by such Issuing Bank hereunder or in connection herewith; provided, however, that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Issuing Bank’s gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse any such Issuing Bank promptly upon demand for its Ratable Share of any costs and expenses (including, without limitation, fees and expenses of counsel) payable by the Borrower under Section 8.04, to the extent that such Issuing Bank is not promptly reimbursed for such costs and expenses by the Borrower.

(c)           The failure of any Lender to reimburse the Agent or any Issuing Bank promptly upon demand for its Ratable Share of any amount required to be paid by the Lenders to the Agent as provided herein shall not relieve any other Lender of its obligation hereunder to reimburse the Agent or any Issuing Bank for its Ratable Share of such amount, but no Lender shall be responsible for the failure of any other Lender to reimburse the Agent or any Issuing Bank for such other Lender’s Ratable Share of such amount. Without prejudice to the survival of any other agreement of any Lender hereunder, the agreement and obligations of each Lender contained in this Section 7.05 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under the Notes. Each of the Agent and each Issuing Bank agrees to return to the Lenders their respective Ratable Shares of any amounts paid under this Section 7.05 that are subsequently reimbursed by the Borrower.

SECTION 7.06. Successor Agent. The Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower and may be removed at any time with or without cause by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint a successor Agent with the consent, if no Event of Default has occurred and is continuing, of the Borrower, which consent shall not be unreasonably withheld or delayed. If no successor Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the retiring Agent’s giving of notice of resignation or the Required Lenders’ removal of the retiring Agent, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000. Upon the

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acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, discretion, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent’s resignation or removal hereunder as Agent, the provisions of this Article VII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement.

SECTION 7.07. Other Agents. Each Lender hereby acknowledges that no documentation agent or any other Lender designated as any “Agent” on the signature pages hereof (other than Citicorp in its capacity as Agent) has any liability hereunder other than in its capacity as a Lender.

ARTICLE VIII

MISCELLANEOUS

SECTION 8.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement or the Revolving Credit Notes, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Required Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all the Lenders, do any of the following:  (a) waive any of the conditions specified in Section 3.01, (b) increase the Revolving Credit Commitments of the Lenders other than as provided in Section 2.19, (c) reduce the principal of, or interest on, the Revolving Credit Advances or any fees or other amounts payable hereunder, (d) postpone any date fixed for any payment of principal of, or interest on, the Revolving Credit Advances or any fees or other amounts payable hereunder, (e) change the percentage of the Revolving Credit Commitments or of the aggregate unpaid principal amount of the Revolving Credit Advances, or the number of Lenders, that shall be required for the Lenders or any of them to take any action hereunder, (f) release any of the collateral in the L/C Securities Account other than in accordance with the terms hereof or (g) amend this Section 8.01; and provided further that (x) no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Lenders required above to take such action, affect the rights or duties of the Agent under this Agreement or any Note and (y) no amendment, waiver or consent shall, unless in writing and signed by each Issuing Bank adversely affected thereby in addition to the Lenders required above to take such action, affect the rights or obligations of such Issuing Bank in its capacity as such under this Agreement.

SECTION 8.02. Notices, Etc. (a)  All notices and other communications provided for hereunder shall be either (x) in writing (including telecopier or telegraphic communication) and mailed, telecopied, telegraphed or delivered or (y) as and to the extent set forth in Section 8.02(b) and in the proviso to this Section 8.02(a), if to the Borrower, at its address at 385 Washington Street, St. Paul, Minnesota 55102 (with a copy to One Tower Square, Hartford, Connecticut 06183), Attention:  Senior Vice President and Treasurer, with a copy to Corporate Secretary, if to any Initial Lender, at its Domestic Lending Office specified opposite its name on Schedule I hereto; if to any other Lender, at its Domestic Lending Office specified in the Assumption Agreement or the Assignment and Acceptance pursuant to which it became a Lender; and if to the Agent, at its address at Two Penns Way, New Castle, Delaware 19720, Attention: Bank Loan Syndications Department; or, as to the Borrower or the Agent, at such other address as shall be designated by such party in a written notice to the other parties and, as to each other party, at such other address as shall be designated by such party in a written notice to the Borrower and the Agent, provided that materials required to be delivered pursuant to Section 5.01(i)(i), (ii), (iii) or (iv) shall be delivered to the Agent as specified in Section 8.02(b) or as otherwise specified to the Borrower by the Agent. All such notices and communications shall, when mailed, telecopied, telegraphed or e-mailed, be effective when deposited in the mails, telecopied, delivered to the telegraph company or confirmed by e-mail, respectively, except that notices and communications to the Agent pursuant to Article II, III or VII shall not be effective until received by the Agent. Delivery by telecopier of an executed counterpart of any amendment or waiver of any provision of this Agreement or the Notes or of any Exhibit hereto to be executed and delivered hereunder shall be effective as delivery of a manually executed counterpart thereof.

(b)           If the Borrower and the Agent agree that an electronic medium may be used for the distribution of material, so long as Citicorp or any of its Affiliates is the Agent, materials required to be delivered pursuant to Section 5.01(i)(i), (ii), (iii) and (iv) may be delivered to the Agent in an electronic medium in a format acceptable to the Agent and the Lenders by e-mail at oploanswebadmin@citigroup.com. The Borrower agrees that

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the Agent may make such materials, as well as any other written information, documents, instruments and other material relating to the Borrower, any of its Subsidiaries or any other materials or matters relating to this Agreement, the Notes or any of the transactions contemplated hereby (collectively, the “Communications”) available to the Lenders by posting such notices on Intralinks or a substantially similar electronic system (the “Platform”).

(c)           Each Lender agrees that notice to it (as provided in the next sentence) (a “Notice”) specifying that any Communications have been posted to the Platform shall constitute effective delivery of such information, documents or other materials to such Lender for purposes of this Agreement; provided that if requested by any Lender the Agent shall deliver a copy of the Communications to such Lender by email or telecopier. Each Lender agrees (i) to notify the Agent in writing of such Lender’s
e-mail address to which a Notice may be sent by electronic transmission (including by electronic communication) on or before the date such Lender becomes a party to this Agreement (and from time to time thereafter to ensure that the Agent has on record an effective e-mail address for such Lender) and (ii) that any Notice may be sent to such e-mail address.

SECTION 8.03. No Waiver; Remedies. No failure on the part of any Lender or the Agent to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.

SECTION 8.04. Costs and Expenses. (a)  The Borrower agrees to pay on demand all reasonable costs and expenses of the Agent in connection with the preparation, execution, delivery, administration, modification and amendment of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, (A) all due diligence, syndication (including printing, distribution and bank meetings), transportation, computer and duplication expenses and (B) the reasonable fees and expenses of counsel for the Agent with respect thereto and with respect to advising the Agent as to its rights and responsibilities under this Agreement. The Borrower further agrees to pay on demand all costs and expenses of the Agent and the Lenders, if any (including, without limitation, reasonable counsel fees and expenses), in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, reasonable fees and expenses of counsel for the Agent and each Lender in connection with the enforcement of rights under this Section 8.04(a).

(b)           The Borrower agrees to indemnify and hold harmless the Agent and each Lender and each of their Affiliates and their officers, directors, employees, agents and advisors (each, an “Indemnified Party”) from and against any and all claims, damages, losses, liabilities and expenses (including, without limitation, reasonable fees and expenses of counsel) incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of (including, without limitation, in connection with any investigation, litigation or proceeding or preparation of a defense in connection therewith) the Notes, this Agreement, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Advances or Letters of Credit, except to the extent such claim, damage, loss, liability or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party’s gross negligence or willful misconduct. In the case of an investigation, litigation or other proceeding to which the indemnity in this Section 8.04(b) applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by the Borrower, its directors, equityholders or creditors or an Indemnified Party or any other Person, whether or not any Indemnified Party is otherwise a party thereto and whether or not the transactions contemplated hereby are consummated. The Borrower also agrees not to assert any claim for special, indirect, consequential or punitive damages against the Agent, any Lender, any of their Affiliates, or any of their respective directors, officers, employees, attorneys and agents, on any theory of liability, arising out of or otherwise relating to the Notes, this Agreement, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Advances.

(c)           If any payment of principal of, or Conversion of, any Eurodollar Rate Advance or LIBO Rate Advance is made by the Borrower to or for the account of a Lender other than on the last day of the Interest Period for such Advance, as a result of a payment or Conversion pursuant to Section 2.09(d) or (e), 2.11 or 2.13, acceleration of the maturity of the Notes pursuant to Section 6.01 or for any other reason, or by an Eligible Assignee to a Lender other than on the last day of the Interest Period for such Advance upon an assignment of rights and obligations under this Agreement pursuant to Section 8.07 as a result of a demand by the Borrower pursuant to

42

Section 8.07(a), the Borrower shall, upon demand by such Lender (with a copy of such demand to the Agent), pay to the Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses that it may reasonably incur as a result of such payment or Conversion, including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Advance.

(d)           Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in Sections 2.12, 2.15 and 8.04 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under the Notes.

SECTION 8.05. Right of Set-off. Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Agent to declare the Advances due and payable pursuant to the provisions of Section 6.01, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender or such Affiliate to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement and any Note held by such Lender which are then due and payable. Each Lender agrees promptly to notify the Borrower after any such set-off and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender and its Affiliates under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Lender and its Affiliates may have.

SECTION 8.06. Binding Effect. This Agreement shall become effective (other than Sections 2.01 and 2.04, which shall only become effective upon satisfaction of the conditions precedent set forth in Section 3.01) when it shall have been executed by the Borrower and the Agent and when the Agent shall have been notified by each Initial Lender that such Initial Lender has executed it and thereafter shall be binding upon and inure to the benefit of the Borrower, the Agent and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lenders.

SECTION 8.07. Assignments and Participations. (a)  Each Lender may and, if demanded by the Borrower in accordance with Section 2.21, upon at least five Business Days’ notice to such Lender and the Agent, will assign to one or more Persons all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Revolving Credit Commitment, the Advances owing to it, its participations in Letters of Credit and the Note or Notes held by it); provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all rights and obligations under this Agreement (other than any right to make Competitive Bid Advances, Competitive Bid Advances owing to it and Competitive Bid Notes), (ii) except in the case of an assignment to a Person that, immediately prior to such assignment, was a Lender or an assignment of all of a Lender’s rights and obligations under this Agreement, the amount of the Revolving Credit Commitment of the assigning Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $10,000,000 or an integral multiple of $1,000,000 in excess thereof, unless the Borrower and the Agent otherwise agree, (iii) each such assignment shall be to an Eligible Assignee, (iv) each such assignment made as a result of a demand by the Borrower pursuant to this Section 8.07(a) shall be arranged by the Borrower after consultation with the Agent and shall be either an assignment of all of the rights and obligations of the assigning Lender under this Agreement or an assignment of a portion of such rights and obligations made concurrently with another such assignment or other such assignments that together cover all of the rights and obligations of the assigning Lender under this Agreement, (v) no Lender shall be obligated to make any such assignment as a result of a demand by the Borrower pursuant to this Section 8.07(a) unless and until such Lender shall have received one or more payments from either the Borrower or one or more Eligible Assignees in an aggregate amount at least equal to the aggregate outstanding principal amount of the Advances owing to such Lender, together with accrued interest thereon to the date of payment of such principal amount and all other amounts payable to such Lender under this Agreement, and (vi) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with any Revolving Credit Note subject to such assignment and a processing and recordation fee of $3,500 payable by the assignor or the Eligible Assignee, as applicable, provided, however,

43

that in the case of each assignment made as a result of a demand by the Borrower, such recordation fee shall be payable by the Borrower except that no such recordation fee shall be payable in the case of an assignment made at the request of the Borrower to an Eligible Assignee that is an existing Lender, and (vii) any Lender may, without the approval of the Borrower and the Agent, assign all or a portion of its rights to any of its Affiliates. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (other than its rights under Section 2.12, 2.15 and 8.04 to the extent any claim thereunder relates to an event arising prior such assignment) and be released from its obligations (other than its obligations under Section 8.05 to the extent any claim thereunder relates to an event arising prior to such assignment) under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto).

(b)           By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows:  (i) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any lien or security interest created or purported to be created under or in connection with, this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement as are delegated to the Agent by the terms hereof, together with such powers and discretion as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as a Lender.

(c)           Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, together with any Revolving Credit Note or Notes subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit C hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower.

(d)           The Agent shall maintain at its address referred to in Section 8.02 a copy of each Assumption Agreement and each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Advances owing to, each Lender from time to time (the “Register”). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice.

(e)           Each Lender may sell participations to one or more banks or other entities (other than the Borrower or any of its Affiliates) in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it and any Note or Notes held by it); provided, however, that (i) such Lender’s obligations under this Agreement (including, without limitation, its Commitment to the Borrower hereunder) shall remain unchanged, (ii) such Lender shall remain solely

44

responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Note for all purposes of this Agreement, (iv) the Borrower, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement and (v) no participant under any such participation shall have any right to approve any amendment or waiver of any provision of this Agreement or any Note, or any consent to any departure by the Borrower therefrom, except to the extent that such amendment, waiver or consent would reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder, in each case to the extent subject to such participation, or postpone any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder, in each case to the extent subject to such participation.

(f)            Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.07, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any Confidential Information relating to the Borrower received by it from such Lender.

(g)           Notwithstanding any other provision set forth in this Agreement, any Lender may at any time create a security interest in all or any portion of its rights under this Agreement (including, without limitation, the Advances owing to it and any Note or Notes held by it) in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System.

SECTION 8.08. Confidentiality. Neither the Agent nor any Lender shall disclose any Confidential Information to any other Person without the consent of the Borrower, other than (a) to the Agent’s or such Lender’s Affiliates and their officers, directors, employees, agents and advisors in connection with the performance of this Agreement with the Agent or such Lender being responsible for compliance by the Agent’s or such Lender’s Affiliates and their officers, directors, employees, agents and advisors with the provisions of this Section 8.08 and, as contemplated by Section 8.07(f), to actual or prospective assignees and participants, and then only on a confidential basis, (b) as required by any law, rule or regulation or judicial process, (c) as requested or required by any state, federal or foreign authority or examiner regulating banks, banking or other financial institutions or self-regulatory body and (d) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder.

SECTION 8.09. Governing Law. This Agreement and the Notes shall be governed by, and construed in accordance with, the laws of the State of New York.

SECTION 8.10. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Agreement.

SECTION 8.11. Jurisdiction, Etc. (a)  Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the Notes, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the extent permitted by law, in such federal court. The Borrower hereby irrevocably consents to the service of process in any action or proceeding in such courts by the mailing thereof by any parties hereto by registered or certified mail, postage prepaid, to the Borrower at its address specified pursuant to Section 8.02. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement or the Notes in the courts of any jurisdiction.

45

(b)           Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the Notes in any New York State or federal court.  Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

SECTION 8.12.  No Liability of the Issuing Banks.  Subject to the next sentence, the Borrower assumes all risks of the acts or omissions of any beneficiary or transferee of any Letter of Credit with respect to its use of such Letter of Credit.  Neither an Issuing Bank nor any of its officers or directors shall be liable or responsible for:  (a) the use that may be made of any Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith; (b) the validity, sufficiency or genuineness of documents, or of any endorsement thereon, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent or forged; (c) payment by such Issuing Bank against presentation of documents that do not comply with the terms of a Letter of Credit, including failure of any documents to bear any reference or adequate reference to the Letter of Credit; or (d) any other circumstances whatsoever in making or failing to make payment under any Letter of Credit, except that the Borrower shall have a claim against such Issuing Bank, and such Issuing Bank shall be liable to the Borrower, to the extent of any direct, but not consequential, damages suffered by the Borrower that the Borrower proves were caused by such Issuing Bank’s willful misconduct or gross negligence when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof.  In furtherance and not in limitation of the foregoing, such Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary; provided that nothing herein shall be deemed to excuse such Issuing Bank if it acts with gross negligence or willful misconduct in accepting such documents.

SECTION 8.13.  Patriot Act.  Each Lender hereby notifies the Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Act”), it is required to obtain, verify and record information that identifies each borrower, guarantor or grantor (the “Loan Parties”), which information includes the name and address of each Loan Party and other information that will allow such Lender to identify such Loan Party in accordance with the Act.

46

SECTION 8.14.  Waiver of Jury Trial.  Each of the Borrower, the Agent and the Lenders hereby irrevocably waives all right to trial by jury in any action, proceeding or counterclaim (whether based on contract, tort or otherwise) arising out of or relating to this Agreement or the Notes or the actions of the Agent or any Lender in the negotiation, administration, performance or enforcement thereof.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.

	THE ST. PAUL TRAVELERS COMPANIES, INC.
	By
		Title:
	CITICORP USA, INC.,
		as Agent
	By
		Title:
Initial Lenders
Commitment
$125,000,000	CITICORP USA, INC.
	By
		Title:
$125,000,000	JPMORGAN CHASE BANK, N.A.
	By
		Title:
$75,000,000	BANK OF AMERICA, N.A.
	By
		Title:
$75,000,000	THE BANK OF NEW YORK
	By
		Title:
$75,000,000	WELLS FARGO BANK, NATIONAL
	ASSOCIATION
	By
		Title:
	By
		Title:

47

$75,000,000		THE ROYAL BANK OF SCOTLAND PLC
		By
			Title:
$60,000,000		DEUTSCHE BANK AG NEW YORK BRANCH
		By
			Title:
		By
			Title:
$60,000,000		LEHMAN BROTHERS BANK, FSB
		By
			Title:
$60,000,000		MERRILL LYNCH BANK USA
		By
			Title:
$60,000,000		MORGAN STANLEY BANK
		By
			Title:
$60,000,000		WACHOVIA BANK, NATIONAL ASSOCIATION
		By
			Title:
$60,000,000		WILLIAM STREET COMMITMENT
		CORPORATION
		By
			Title:
$30,000,000		HSBC BANK USA, N.A.
		By
			Title:
$30,000,000		ROYAL BANK OF CANADA
		By
			Title:
$30,000,000		U.S. BANK, NATIONAL ASSOCIATION
		By
			Title:
$1,000,000,000	Total of the Revolving Credit Commitments

48

Initial Issuing Banks
Letter of Credit Commitment
$125,000,000		CITICORP USA, INC.
		By
			Title:
$125,000,000		JPMORGAN CHASE BANK, N.A.
		By
			Title:
$250,000,000	Total of the Letter of Credit Commitments

49

SCHEDULE I

THE ST. PAUL TRAVELERS COMPANIES, INC.

FIVE YEAR CREDIT AGREEMENT

APPLICABLE LENDING OFFICES

Name of Initial Lender	Domestic Lending Office	Eurodollar Lending Office
Citicorp USA, Inc.	2 Penns Way	2 Penns Way
	New Castle, DE 19720	New Castle, DE 19720
	Attn: Bank Loans Syndication	Attn: Bank Loans Syndication
	T: 302 894-	T: 302 894-
	F: 302 894-6120	F: 302 894-6120
The Bank of New York	One Wall Street	One Wall Street
	New York, NY 10286	New York, NY 10286
	Annette Harewood	Annette Harewood
	T: 212 635-6379	T: 212 635-6379
	F: 212 809-9520	F: 212 809-9520
Bank of America, N.A.	1850 Gateway Blvd.	1850 Gateway Blvd.
	Concord, CA 94520	Concord, CA 94520
	Attn: Tina Obcena	Attn: Tina Obcena
	T: 925 675-8768	T: 925 675-8768
	F: 888 969-9246	F: 888 969-9246
Deutsche Bank AG New York Branch
HSBC Bank USA, N.A.
JPMorgan Chase Bank, N.A.	1 Chase Manhattan Plaza,	1 Chase Manhattan Plaza,
	8th Floor	8th Floor
	New York, NY 10081	New York, NY 10081
	Attn: Laura Rebecca	Attn: Laura Rebecca
	T: 212 552-7253	T: 212 552-7253
	F: 212 552-7490	F: 212 552-7490
Lehman Brothers Bank, FSB
Merrill Lynch Bank USA
Morgan Stanley Bank
Royal Bank of Canada	One Liberty Plaza, 4th Floor	One Liberty Plaza, 4th Floor
	New York, NY 10006	New York, NY 10006
	Attn: Linda Joannou	Attn: Linda Joannou
	T: 212 428-6212	T: 212 428-6212
	F: 212 428-2372	F: 212 428-2372
The Royal Bank of Scotland plc
Wachovia Bank, National Association
Wells Fargo Bank, National Association	6th Street and Marquette Avenue	6th Street and Marquette Avenue
	Minneapolis, MN 55479	Minneapolis, MN 55479
	Attn: Jari Norris	Attn: Jari Norris
	T: 612 667-9107	T: 612 667-9107
	F: 612 667-7251	F: 612 667-7251
William Street Commitment Corporation

50

U.S. Bank, National Association	601 Second Avenue South	601 Second Avenue South
	Minneapolis, MN 55402	Minneapolis, MN 55402
	Attn: Timothy Gallaher	Attn: Timothy Gallaher
	T: 612 973-3897	T: 612 973-3897
	F: 612 973-0825	F: 612 973-0825

51

Schedule 2.01(b) – Existing Letters of Credit

None.

Schedule 3.01(b) - Disclosed Litigation

Please see the Public Filings listed below:

•1Q 2005 Form 10-Q

•2004 Annual Report

•Current Reports on Form 8-K filed February 3, 2005, February 4, 2005, March 18, 2005, March 25, 2005, March 30, 2005, April 1, 2005, April 11, 2005, April 12, 2005, April 18, 2005, May 5, 2005, May 9, 2005 and May 13, 2005

2

Schedule 4.01(e) - Accounting Matters

On July 23, 2004, the Borrower announced that it was seeking guidance from the staff of the Division of Corporation Finance of the Securities and Exchange Commission with respect to the appropriate purchase accounting treatment for certain second quarter 2004 adjustments totaling $1.63 billion ($1.07 billion after-tax).  The Borrower recorded these adjustments as charges in its income statement in the second quarter of 2004.  Through an informal comment process, the staff of the Division of Corporation Finance has subsequently asked for further information relating to these adjustments, and the dialogue is ongoing.  Specifically, the staff has asked for information concerning the Borrower’s adjustments to certain of SPC’s insurance reserves and reserves for reinsurance recoverables and premiums due from policyholders, and how those adjustments may relate to SPC’s reserves for periods prior to the merger.  After reviewing the staff’s questions and comments, the Borrower continues to believe that its accounting treatment for these adjustments is appropriate.  If, however, the staff disagrees, some or all of the adjustments being discussed may not be recorded as charges in the Borrower’s income statement, thereby increasing net income for the second quarter and full year 2004 and increasing shareholders’ equity at December 31, 2004 and March 31, 2005, in each case by the approximate after-tax amount of the charge.  The effect on tangible shareholders’ equity at December 31, 2004 and March 31, 2005 would not be material.  Additionally, if such adjustments were made, there would be changes to the amounts recorded for the affected items in purchase accounting and, accordingly, the Borrower’s balance sheet as of April 1, 2004 would reflect those changes.

3

Schedule 5.02(a) - Existing Liens

None.

4

EXHIBIT A-1 - FORM OF

REVOLVING CREDIT

PROMISSORY NOTE

U.S.$ Dated:                     , 200   

FOR VALUE RECEIVED, the undersigned, THE ST. PAUL TRAVELERS COMPANIES, INC., a Minnesota corporation (the “Borrower”), HEREBY PROMISES TO PAY to the order of                               (the “Lender”) for the account of its Applicable Lending Office on the later of the Termination Date and the date designated pursuant to Section 2.07 of the Credit Agreement (each as defined in the Credit Agreement referred to below) the principal sum of U.S.$[amount of the Lender’s Commitment in figures] or, if less, the aggregate principal amount of the Revolving Credit Advances made by the Lender to the Borrower pursuant to the Five Year Credit Agreement dated as of June 10, 2005 among the Borrower, the Lender and certain other lenders parties thereto, JPMorgan Chase Bank, N.A., as syndication agent, Bank of America, N.A., The Bank of New York and Wells Fargo Bank, National Association, as documentation agents, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as joint lead arrangers, and Citicorp USA, Inc. as Agent for the Lender and such other lenders (as amended or modified from time to time, the “Credit Agreement”; the terms defined therein being used herein as therein defined) outstanding on such date.

The Borrower promises to pay interest on the unpaid principal amount of each Revolving Credit Advance from the date of such Revolving Credit Advance until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Credit Agreement.

Both principal and interest are payable in lawful money of the United States of America to Citicorp, as Agent, at 388 Greenwich Street, New York, New York 10013, in same day funds.  Each Revolving Credit Advance owing to the Lender by the Borrower pursuant to the Credit Agreement, and all payments made on account of principal thereof, shall be recorded by the Lender and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Promissory Note.

This Promissory Note is one of the Revolving Credit Notes referred to in, and is entitled to the benefits of, the Credit Agreement.  The Credit Agreement, among other things, (i) provides for the making of Revolving Credit Advances by the Lender to the Borrower from time to time in an aggregate amount not to exceed at any time outstanding the U.S. dollar amount first above mentioned, the indebtedness of the Borrower resulting from each such Revolving Credit Advance being evidenced by this Promissory Note and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified.

THE ST. PAUL TRAVELERS COMPANIES, INC.
By
	Title:

ADVANCES AND PAYMENTS OF PRINCIPAL

Date Amount of
Advance Amount of
Principal Paid
or Prepaid Unpaid Principal
Balance Notation
Made By

2

EXHIBIT A-2 - FORM OF

COMPETITIVE BID

PROMISSORY NOTE

U.S.$ Dated:                     , 200   

FOR VALUE RECEIVED, the undersigned, THE ST. PAUL TRAVELERS COMPANIES, INC., a Minnesota corporation (the “Borrower”), HEREBY PROMISES TO PAY to the order of                                 (the “Lender”) for the account of its Applicable Lending Office (as defined in the Five Year Credit Agreement dated as of June 10, 2005 among the Borrower, the Lender and certain other lenders parties thereto, JPMorgan Chase Bank, N.A., as syndication agent, Bank of America, N.A., The Bank of New York and Wells Fargo Bank, National Association, as documentation agents, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as joint lead arrangers, and Citicorp USA, Inc., as Agent for the Lender and such other lenders (as amended or modified from time to time, the “Credit Agreement”; the terms defined therein being used herein as therein defined)), on                                , 200  , the principal amount of U.S.$                               ].

The Borrower promises to pay interest on the unpaid principal amount hereof from the date hereof until such principal amount is paid in full, at the interest rate and payable on the interest payment date or dates provided below:

Interest Rate:                  % per annum (calculated on the basis of a year of                   days for the actual number of days elapsed).

Both principal and interest are payable in lawful money of the United States of America to Citicorp, as agent, for the account of the Lender at the office of Citicorp, at Two Penns Way, New Castle, Delaware 19720 in same day funds.

This Promissory Note is one of the Competitive Bid Notes referred to in, and is entitled to the benefits of, the Credit Agreement.  The Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events.

The Borrower hereby waives presentment, demand, protest and notice of any kind.  No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights.

This Promissory Note shall be governed by, and construed in accordance with, the laws of the State of New York.

THE ST. PAUL TRAVELERS COMPANIES, INC.
By
	Title:

EXHIBIT B-1 - FORM OF NOTICE OF

REVOLVING CREDIT BORROWING

Citicorp USA, Inc., as Agent
for the Lenders parties
to the Credit Agreement
referred to below
Two Penns Way
New Castle, Delaware 19720

[Date]

Attention: Bank Loan Syndications Department

Ladies and Gentlemen:

The undersigned, The St. Paul Travelers Companies, Inc., refers to the Five Year Credit Agreement, dated as of June 10, 2005 (as amended or modified from time to time, the “Credit Agreement”, the terms defined therein being used herein as therein defined), among the undersigned, certain Lenders parties thereto, JPMorgan Chase Bank, N.A., as syndication agent, Bank of America, N.A., The Bank of New York and Wells Fargo Bank, National Association, as documentation agents, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as joint lead arrangers, and Citicorp USA, Inc., as Agent for said Lenders, and hereby gives you notice, irrevocably, pursuant to Section 2.02 of the Credit Agreement that the undersigned hereby requests a Revolving Credit Borrowing under the Credit Agreement, and in that connection sets forth below the information relating to such Revolving Credit Borrowing (the “Proposed Revolving Credit Borrowing”) as required by Section 2.02(a) of the Credit Agreement:

(i)            The Business Day of the Proposed Revolving Credit Borrowing is                        , 200  .

(ii)           The Type of Advances comprising the Proposed Revolving Credit Borrowing is [Base Rate Advances] [Eurodollar Rate Advances].

(iii)          The aggregate amount of the Proposed Revolving Credit Borrowing is $                                  .

[(iv)         The initial Interest Period for each Eurodollar Rate Advance made as part of the Proposed Revolving Credit Borrowing is            month[s].]

The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Revolving Credit Borrowing:

(A)          the representations and warranties contained in Section 4.01 of the Credit Agreement (except the representations set forth in the last sentence of subsection (e) thereof and in subsection (f) thereof) are correct, before and after giving effect to the Proposed Revolving Credit Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; and

(B)           no event has occurred and is continuing, or would result from such Proposed Revolving Credit Borrowing or from the application of the proceeds therefrom, that constitutes a Default.

Very truly yours,
THE ST. PAUL TRAVELERS COMPANIES, INC.
By
	Title:.

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EXHIBIT B-2 - FORM OF NOTICE OF

COMPETITIVE BID BORROWING

Citicorp USA, Inc., as Agent
for the Lenders parties
to the Credit Agreement
referred to below
Two Penns Way
New Castle, Delaware 19720

[Date]

Attention: Bank Loan Syndications Department

Ladies and Gentlemen:

The undersigned, The St. Paul Travelers Companies, Inc., refers to the Five Year Credit Agreement, dated as of June 10, 2005 (as amended or modified from time to time, the “Credit Agreement”, the terms defined therein being used herein as therein defined), among the undersigned, certain Lenders parties thereto, JPMorgan Chase Bank, N.A., as syndication agent, Bank of America, N.A., The Bank of New York and Wells Fargo Bank, National Association, as documentation agents, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as joint lead arrangers, and Citicorp USA, Inc., as Agent for said Lenders, and hereby gives you notice, irrevocably, pursuant to Section 2.04 of the Credit Agreement that the undersigned hereby requests a Competitive Bid Borrowing under the Credit Agreement, and in that connection sets forth the terms on which such Competitive Bid Borrowing (the “Proposed Competitive Bid Borrowing”) is requested to be made:

(A)	Date of Competitive Bid Borrowing
(B)	Amount of Competitive Bid Borrowing
(C)	[Maturity Date] [Interest Period]
(D)	Interest Rate Basis
(E)	Interest Payment Date(s)
(F)

The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Competitive Bid Borrowing:

(a)           the representations and warranties contained in Section 4.01 of the Credit Agreement (except the representations set forth in the last sentence of subsection (e) thereof and in subsection (f) thereof) are correct, before and after giving effect to the Proposed Competitive Bid Borrowing and to the application of the proceeds therefrom, as though made on and as of such date;

(b)           no event has occurred and is continuing, or would result from the Proposed Competitive Bid Borrowing or from the application of the proceeds therefrom, that constitutes a Default; and

(c)           the aggregate amount of the Proposed Competitive Bid Borrowing and all other Borrowings to be made on the same day under the Credit Agreement is within the aggregate amount of the unused Commitments of the Lenders.

The undersigned hereby confirms that the Proposed Competitive Bid Borrowing is to be made available to it in accordance with Section 2.04(a)(v) of the Credit Agreement.

Very truly yours,
THE ST. PAUL TRAVELERS COMPANIES, INC.
By
	Title:

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EXHIBIT C - FORM OF

ASSIGNMENT AND ACCEPTANCE

Reference is made to the Five Year Credit Agreement dated as of June 10, 2005 (as amended or modified from time to time, the “Credit Agreement”) among The St. Paul Travelers Companies, Inc., a Minnesota corporation (the “Borrower”), the Lenders (as defined in the Credit Agreement), JPMorgan Chase Bank, N.A., as syndication agent, Bank of America, N.A., The Bank of New York and Wells Fargo Bank, National Association, as documentation agents, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as joint lead arrangers, and Citicorp USA, Inc., as agent for the Lenders (the “Agent”).  Terms defined in the Credit Agreement are used herein with the same meaning.

The “Assignor” and the “Assignee” referred to on Schedule I hereto agree as follows:

1.             The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, an interest in and to the Assignor’s rights and obligations under the Credit Agreement as of the date hereof (other than in respect of Competitive Bid Advances and Competitive Bid Notes) equal to the percentage interest specified on Schedule 1 hereto of all outstanding rights and obligations under the Credit Agreement (other than in respect of Competitive Bid Advances and Competitive Bid Notes) together with participations in Letters of Credit held by the Assignor on the date hereof.  After giving effect to such sale and assignment, the Assignee’s Revolving Credit Commitment and the amount of the Revolving Credit Advances owing to the Assignee will be as set forth on Schedule 1 hereto.

2.             The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any lien or security interest created or purported to be created under or in connection with, the Credit Agreement or any other instrument or document furnished pursuant thereto; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto; and (iv) attaches the Revolving Credit Note[, if any] held by the Assignor [and requests that the Agent exchange such Revolving Credit Note for a new Revolving Credit Note payable to the order of [the Assignee in an amount equal to the Revolving Credit Commitment assumed by the Assignee pursuant hereto or new Revolving Credit Notes payable to the order of the Assignee in an amount equal to the Revolving Credit Commitment assumed by the Assignee pursuant hereto and] the Assignor in an amount equal to the Revolving Credit Commitment retained by the Assignor under the Credit Agreement, [respectively,] as specified on Schedule 1 hereto.

3.             The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.01 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Credit Agreement as are delegated to the Agent by the terms thereof, together with such powers and discretion as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations that by the terms of the Credit Agreement are required to be performed by it as a Lender; and (vi) attaches any U.S. Internal Revenue Service forms required under Section 2.15 of the Credit Agreement.

4.             Following the execution of this Assignment and Acceptance, it will be delivered to the Agent for acceptance and recording by the Agent.  The effective date for this Assignment and Acceptance (the

“Effective Date”) shall be the date of acceptance hereof by the Agent, unless otherwise specified on Schedule 1 hereto.

5.             Upon such acceptance and recording by the Agent, as of the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement.

6.             Upon such acceptance and recording by the Agent, from and after the Effective Date, the Agent shall make all payments under the Credit Agreement and the Revolving Credit Notes in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and facility fees with respect thereto) to the Assignee.  The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Revolving Credit Notes for periods prior to the Effective Date directly between themselves.

7.             This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of New York.

8.             This Assignment and Acceptance may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.  Delivery of an executed counterpart of Schedule 1 to this Assignment and Acceptance by telecopier shall be effective as delivery of a manually executed counterpart of this Assignment and Acceptance.

IN WITNESS WHEREOF, the Assignor and the Assignee have caused Schedule 1 to this Assignment and Acceptance to be executed by their officers thereunto duly authorized as of the date specified thereon.

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Schedule 1

to

Assignment and Acceptance

Percentage interest assigned:	%
Assignee’s Revolving Credit Commitment:	$
Aggregate outstanding principal amount of Revolving Credit Advances assigned:	$
Principal amount of Revolving Credit Note payable to Assignee:	$
Principal amount of Revolving Credit Note payable to Assignor:	$
Effective Date*:                         , 200

[NAME OF ASSIGNOR], as Assignor

By

Title:

Dated:                     , 200  

[NAME OF ASSIGNEE], as Assignee

By

Title:

Dated:                          , 200  

Domestic Lending Office:

[Address]

Eurodollar Lending Office:

[Address]

*This date should be no earlier than five Business Days after the delivery of this Assignment and Acceptance to the Agent.

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Accepted [and Approved]** this
day of                               , 200
CITICORP USA, INC., as Agent
By
Title:
[Approved this                   day
of                            , 200
THE ST. PAUL TRAVELERS COMPANIES, INC.
By	]*
Title:

**Required if the Assignee is an Eligible Assignee solely by reason of clause (iii) of the definition of “Eligible Assignee”.

*Required if the Assignee is an Eligible Assignee solely by reason of clause (iii) of the definition of “Eligible Assignee”.

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EXHIBIT D - FORM OF

OPINION OF COUNSEL

FOR THE BORROWER

EX-10.2

Exhibit 10.2

THE ST. PAUL TRAVELERS COMPANIES, INC.

2004 STOCK INCENTIVE PLAN

1.Purpose.  The purposes of The St. Paul Travelers Companies, Inc. 2004 Stock Incentive Plan (the “Plan”) are (i) to attract and retain Employees by providing competitive compensation opportunities, (ii) to provide Employees with incentive-based compensation in the form of Company Common Stock, (iii) to attract and compensate non-employee directors for service as Board and committee members, (iv) to encourage decision making based upon long-term goals, and (v) to align the interest of Employees and non-employee directors with that of the Company’s shareholders by encouraging such persons to acquire a greater ownership position in the Company.

2.  Definitions.  Wherever used herein, the following terms shall have the respective meanings set forth below:

“Award” means an award to a Participant made in accordance with the terms of the Plan.

“Board” means the Board of Directors of the Company.

“Code” means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto.

“Company” means The St. Paul Travelers Companies, Inc.

“Committee” means the Compensation Committee of the Board, or a subcommittee of that committee, consisting of no less than two directors, all of whom shall qualify as “independent directors” within the meaning of Rule 303A of the New York Stock Exchange, as “outside directors” within the meaning of Section 162(m) of the Code, and as “non-employee directors” within the meaning of Rule 16b-3 under the Exchange Act.

“Common Stock” means the common stock of the Company.

“Change of Control” means the first to occur of (i) any “person” within the meaning of Section 14(d) of the Exchange Act, other than the Company, a subsidiary or any employee benefit plan(s) sponsored by the Company or any subsidiary, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of fifty percent (50%) or more of the then-outstanding Common Stock, other than pursuant to a purchase of Common Stock from the Company; (ii) individuals who constitute the Board on the effective date of this Plan, cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the effective date of this Plan, whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least three quarters of the directors comprising the Board on the effective date of this Plan (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this clause (ii), considered as though such person were a member of the Board on the effective date of this Plan; (iii) any plan or proposal for the liquidation of the Company is adopted by the shareholders of the Company; (iv) all or substantially all of the assets of the Company are sold, liquidated or distributed (in one or a series of related transactions); or (v) there occurs a reorganization, merger, consolidation or other corporate transaction involving the Company (a “Transaction”), in each case, with respect to which the shareholders of the Company immediately prior to such Transaction do not, immediately after the Transaction, own more than fifty percent (50%) of the combined voting power of the Company or other entity resulting from such Transaction in substantially the same proportion as their ownership of the voting power of the Company immediately prior to such Transaction.

“Employee” means an employee, including non-employee directors, as defined in General Instruction A to the Registration Statement on Form S-8 promulgated under the Securities Act of 1933, as amended, or any successor form or statute, as determined by the Committee.

“Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto.

“Fair Market Value” means, as of a specified date, one of the following as determined by the Committee, each of which shall be based on trading prices of a share of Common Stock on the New York Stock Exchange or on any national securities exchange on which the shares of Common Stock are then listed, or if the shares were not traded on such date, then on the next preceding date on which such shares of Common Stock were traded, all as reported by such

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source as the Committee may select: (i) the average of the high and low trading prices on such date, (ii) the closing price on such date or (iii) the closing price on the next preceding day.

“ISO” means an incentive stock option as defined in Section 422 of the Code.

“Option Proceeds” means the cash actually received by the Company for the exercise price in connection with the exercise of a stock option granted under the Plan or the Prior Plans that is exercised after the effective date of the Plan plus the tax benefit that could be realized by the Company as a result of such stock option exercise, which tax benefit shall be determined by multiplying (a) the amount that is deductible for federal income tax purposes as a result of such stock option exercise (currently, equal to the amount upon which the Participant’s withholding tax obligation is calculated) times (b) the maximum federal corporate income tax rate for the year of exercise. To the extent a Participant pays the exercise price and/or withholding taxes with shares of Common Stock, Option Proceeds shall not be calculated with respect to the amounts so paid with shares.

“Participant” means an Employee who is selected by the Committee to participate in the Plan.

“Performance Conditions” may, for purposes of Awards under the Plan, include one or more of: earnings per share, earnings before interest and tax, net income, adjusted net income, operating income, stock price, total shareholder return, market share, return on equity, cash return on equity, achievement of profit, loss and/or expense ratio, revenue targets, cash flows, book value, return on assets or return on capital. Such Performance Conditions may be based on the attainment of levels set for such financial measures with respect to the Company or any subsidiary, division, business unit, or any combination thereof and may be set as an absolute measure or relative to a designated peer group or index of comparable companies. Such Performance Conditions shall be set and defined by the Committee within the time period prescribed by Section 162(m) of the Code. Unless specifically determined by the Committee at the time a Performance Condition is set, the satisfaction of any Performance Condition shall be determined without regard to any change in accounting rules which becomes effective following the time such Performance Condition is set.

“Prior Plans” means The St. Paul Companies, Inc. Amended and Restated 1994 Stock Incentive Plan and the Travelers Property Casualty Corp. 2002 Stock Incentive Plan (including the Travelers Property Casualty Corp. Compensation Plan for Non-Employee Directors).

3.  Shares Subject to the Plan.  Subject to adjustment as provided in Section 20, the number of shares of Common Stock which shall be available and reserved for grant of Awards under the Plan shall be 35,000,000. The shares of Common Stock issued under the Plan may come from authorized and unissued shares or shares purchased in the open market. No Participant may, in any consecutive thirty-six (36) month period, be granted Awards of stock options and stock appreciation rights under Sections 7 and 8 of the Plan, respectively, with respect to more than 3,000,000 shares of Common Stock or more than 1,000,000 shares of restricted stock under Section 9 of the Plan, each of which numbers shall be subject to adjustment as provided in Section 20.

Shares of Common Stock subject to an Award that expires unexercised, that is forfeited, terminated or canceled, that is settled in cash or other forms of property, or otherwise does not result in the issuance of shares of Common Stock, in whole or in part, shall thereafter again be available for grant under the Plan. If the exercise price of any stock option is satisfied by delivering shares of Common Stock to the Company (by tender of such shares or attestation) or by authorizing the Company to retain shares of Common Stock, only the number of shares of Common Stock delivered to the Participant net of shares of Common Stock delivered to the Company (by tender or attestation) or retained by the Company shall be deemed delivered for purposes of determining the maximum number of shares of Common Stock available for grant under the Plan. To the extent any shares of Common Stock subject to an Award are not delivered to a Participant because such shares are used to satisfy an applicable tax or other withholding obligations, such shares shall not be deemed to have been delivered for purposes of determining the maximum number of shares of Common Stock available for grant under the Plan. Shares of Common Stock purchased by the Company on the open market using Option Proceeds shall also be available for grant under the Plan; provided, however, that the increase in the number of shares of Common Stock available for grant pursuant to such market purchases shall not be greater than the number that could be repurchased at Fair Market Value on the date of exercise of the stock option giving rise to such Option Proceeds. Except as otherwise provided by the Committee, the provisions of this paragraph shall also apply to any awards granted under the Prior Plans that are outstanding on the effective date of the Plan. In addition, the number of shares of Common Stock available for grant under the Plan shall not be reduced by shares subject to Awards granted upon the assumption of or in substitution for awards granted by a business or entity that is merged into or acquired by (or whose assets are acquired by) the Company.

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4.  Administration.

4.1  Committee Authority.  The Committee shall have full and exclusive power to administer and interpret the Plan, to grant Awards and to adopt such administrative rules, regulations, procedures and guidelines governing the Plan and the Awards as it may deem necessary in its discretion, from time to time. The Committee’s authority shall include, but not be limited to, the authority to:

(i)determine the type and timing of Awards to be granted under the Plan;

(ii)select Award recipients and determine the extent of their participation; and

(iii)establish all other terms, conditions, restrictions and limitations applicable to Awards and the shares of Common Stock issued pursuant to Awards, including, but not limited to, those relating to a Participant’s retirement, death, disability, leave of absence or termination of employment.

The Committee’s right to make any decision, interpretation or determination under the Plan shall be in its sole and absolute discretion.

4.2  Administration of the Plan.  The administration of the Plan shall be managed by the Committee. The Committee shall have the power to prescribe and modify, as necessary, the form of Award document, to correct any defect, supply any omission or clarify any inconsistency in the Plan and/or in any Award document and to take such actions and make such administrative determinations that the Committee deems appropriate in its discretion. Any decision of the Committee in the administration and interpretation of the Plan, as described herein, shall be final, binding and conclusive on all parties concerned, including the Company, its shareholders and subsidiaries and all Participants.

4.3  Delegation of Authority.  The Committee may at any time delegate to a committee of the Board or one or more officers of the Company some or all of its authority over the administration of the Plan, with respect to persons who are not subject to the reporting requirements of Section 16(a) of the Exchange Act or “covered employees” described in Section 162(m) of the Code.

5.  Eligibility.  The Committee shall determine which Employees shall be eligible to receive Awards. No Employee shall have at any time the right to receive an Award, or having been selected for an Award, to receive any further Awards.

The Committee may also grant stock options, stock appreciation rights, restricted stock, performance awards or other Awards under the Plan in substitution for, or in connection with the assumption of, existing options, stock appreciation rights, restricted stock, performance awards or other awards granted, awarded or issued by another entity and assumed or otherwise agreed to be provided for by the Company pursuant to or by reason of a transaction involving a merger, consolidation, plan of exchange, acquisition of property or stock, separation, reorganization or liquidation to which the Company or any subsidiary is a party. The terms and conditions of the substitute Awards may vary from the terms and conditions set forth in the Plan to the extent the Committee at the time of the grant may deem appropriate to conform, in whole or in part, to the provisions of the awards in substitution for which they are granted.

6.  Awards.  Awards under the Plan may consist of: non-qualified stock options, ISOs, stock appreciation rights, restricted stock, performance awards and any other stock-based awards, including deferred stock units.

7.  Stock Options.

7.1  Types of Options.  Stock options granted under the Plan may be non-qualified stock options, ISOs or any other type of stock option permitted under the Code, as determined by the Committee and evidenced by the document governing the Award.

7.2  ISOs.  The terms and conditions of any ISO shall be subject to the provisions of Section 422 of the Code and the terms, conditions, limitations and administrative procedures established by the Committee. At the discretion of the Committee, ISOs may be granted to any employee of the Company and its subsidiaries, as such term is defined in Section 424(f) of the Code (each, a “Subsidiary”). No ISO may be granted to any Participant who, at the time of such grant, owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any Subsidiary, unless (i) the exercise price for such ISO is at least one-hundred and ten percent (110%) of the Fair Market Value of a share of Common Stock on the date the ISO is granted, and (ii) the date on which such ISO terminates is a date not later than the day preceding the fifth anniversary of the date on which the ISO is granted. Any Participant who disposes of shares acquired upon the exercise of an ISO either within two years after the date of grant of such ISO or within one year after the transfer of such shares to the

3

Participant, shall notify the Company of such disposition and of the amount realized upon such disposition. The maximum number of shares of Common Stock available under the Plan for issuance as ISOs shall be 35,000,000.

All stock options granted under the Plan are intended to be nonqualified stock options, unless the applicable Award document expressly states that the stock option is intended to be an ISO. If a stock option is intended to be an ISO, and if for any reason such stock option (or portion thereof) shall not qualify as an ISO, then, to the extent of such nonqualification, such stock option (or portion thereof) shall be regarded as a nonqualified stock option granted under the Plan; provided that such stock option (or portion thereof) otherwise complies with the Plan’s requirements relating to nonqualified stock options.

7.3  Exercise Price and Period.  The Committee shall establish the exercise price, which price (other than for substitute options pursuant to Section 5) shall be no less than the Fair Market Value of a share of the Common Stock on the date of grant. Each stock option may be exercised in whole or in part on the terms provided in the Award document. The Committee also shall establish the period during which a stock option is exercisable, provided that in no event may a stock option be exercisable for a period of more than ten (10) years from the date of grant, and in no event may a stock option become exercisable earlier than one year after the date of grant, except in the case of:

(i)a Change of Control if so provided by the Committee;

(ii)an earlier date specifically approved by the Committee to attract a key executive to join the Company; or

(iii)a stock option issued as a substitute option pursuant to Section 5.

When a stock option is no longer exercisable, it shall be deemed to have lapsed or expired.

7.4  Manner of Exercise.  The exercise price of each share as to which a stock option is exercised and, if requested, the amount of any federal, state, local or foreign withholding taxes, shall be paid in full at the time of such exercise. The exercise of any stock option shall be contingent on and subject to such payment of the exercise price and withholding taxes, or the arrangement for the satisfaction of such payments in a manner satisfactory to the Committee. Such payment shall be made in any of the following forms:

(i)in cash (including check, bank draft or money order),

(ii)by delivery of shares of Common Stock owned by the Participant (by tender of such shares or by attestation) having a Fair Market Value as of the date of exercise equal to the exercise price for the total number of shares as to which the option is exercised, plus applicable taxes, if requested, subject to (A) the shares so delivered being “mature shares” for purposes of the applicable accounting rules then in effect, or otherwise having such characteristics as are required, if necessary, in order to avoid adverse accounting consequences to the Company on account of use of such shares to pay the exercise price and (B) such other guidelines for the tender of Common Stock as the Committee may establish,

(iii)if approved by the Committee in the related Award document or other action by the Committee, authorization of the Company to retain from the total number of shares of Common Stock as to which the option is exercised that number of shares of Common Stock having a Fair Market Value as of the date of exercise equal to the exercise price for the total number of shares as to which the option is exercised, plus applicable taxes, if requested, and

(iv)such other consideration as the Committee deems appropriate, or by a combination of cash, shares of Common Stock, retention of shares and such other consideration.

The Committee may, with the consent of the Participant, cancel any outstanding stock option in consideration of a cash payment in an amount not greater than the excess, if any, of the aggregate Fair Market Value (on the date of such cancellation) of the shares subject to the stock option over the aggregate exercise price of such stock option; provided, however, that the Participant’s consent is not required for such a cancellation pursuant to Section 13 hereof.

8.  Stock Appreciation Rights.  An Award of a stock appreciation right shall entitle the Participant, subject to terms and conditions determined by the Committee, to receive upon exercise of the stock appreciation right all or a portion of the excess of the Fair Market Value of a specified number of shares of Common Stock as of the date of exercise of the stock appreciation right over a specified strike price, which price shall be no less than the Fair Market Value of a share of the Common

4

Stock on the date of grant of the stock appreciation right or the date of grant of a previously granted related stock option, as determined by the Committee in its discretion. A stock appreciation right may be granted in connection with a previously or contemporaneously granted stock option, or independent of any stock option. If issued in connection with a stock option, the Committee may impose a condition that the exercise of a stock appreciation right cancels the stock option with which it is connected and exercise of the connected stock option cancels the stock appreciation right. Each stock appreciation right may be exercised in whole or in part on the terms provided in the Award document. Stock appreciation rights granted independent of any stock option shall be exercisable for such period as specified by the Committee, but in no event may stock appreciation rights become exercisable less than one year after the date of grant, except in the case of:

(i)a Change of Control if so provided by the Committee;

(ii)an earlier date specifically approved by the Committee to attract a key executive to join the Company; or

(iii)a stock appreciation right issued as a substitute stock appreciation right pursuant to Section 5.

In addition, in no event may a stock appreciation right be exercisable for a period of more than ten (10) years. When a stock appreciation right is no longer exercisable, it shall be deemed to have lapsed or terminated. Except as otherwise provided in the applicable agreement, upon exercise of a stock appreciation right, payment to the Participant shall be made in the form of cash, shares of Common Stock or a combination of cash and shares of Common Stock as promptly as practicable after such exercise. The Award document may provide for a limitation upon the amount or percentage of the total appreciation on which payment (whether in cash and/or shares of Common Stock) may be made in the event of the exercise of a stock appreciation right. The Committee may, with the consent of the Participant, cancel any outstanding stock appreciation right in consideration of a cash payment in an amount not in excess of the difference between the aggregate Fair Market Value (on the date of such cancellation) of any shares subject to the stock appreciation right and the aggregate strike price of such Shares; provided, however, that the Participant’s consent is not required for such a cancellation in connection with the purchase of such stock appreciation right pursuant to Section 13 hereof.

9.  Restricted Stock.  Restricted stock may be granted in the form of actual shares of Common Stock, which shall be evidenced by a certificate with an appropriate legend, or in uncertificated direct registration form, registered in the name of the Participant but held by the Company until the end of the restricted period, or share units, as determined by the Committee. As a condition to the receipt of an award of restricted stock in the form of actual shares of Common Stock, a Participant may be required to execute any stock powers, escrow agreements or other documents as may be determined by the Committee. Any conditions, limitations, restrictions, vesting and forfeiture provisions shall be established by the Committee in its discretion. No portion of an Award of restricted stock may vest as to any of the shares subject to the Award earlier than one year from the date of grant, except in the case of:

(i)a Change of Control if so provided by the Committee;

(ii)death, retirement or disability if so provided by the Committee; or

(iii)restricted stock issued as a substitute Award pursuant to Section 5.

The Committee may, on behalf of the Company, approve the purchase by the Company of any shares subject to an Award of restricted stock, to the extent vested, for an amount equal to the aggregate Fair Market Value of such shares on the date of purchase. Awards of restricted stock may provide the Participant with dividends or dividend equivalents (pursuant to Section 17) and voting rights, if in the form of actual shares, prior to vesting. With respect to Awards of restricted stock intended to qualify as “performance-based compensation” under Section 162(m) of the Code, the Committee shall establish and administer Performance Conditions in the manner described in Section 162(m) and Treasury Regulations promulgated thereunder as an additional condition to the vesting or payment, as applicable, of such Awards.

10.  Performance Awards.  Performance awards may be in the form of performance shares valued with reference to a share of Common Stock or performance units valued with reference to an amount of property (including cash) other than shares of Common Stock. Performance awards may also be granted in the form of any other stock-based Award. Performance awards shall entitle a Participant to future payments based upon the attainment of Performance Conditions established in writing by the Committee. Payment shall be made in cash, shares of Common Stock or any combination thereof, as determined by the Committee. The Award document establishing a performance award may establish that a portion of a Participant’s Award will be paid for performance that exceeds the minimum target but falls below the maximum target available to the Award. With respect to Awards of restricted stock intended to qualify as “performance-based compensation” under Section 162(m) of the Code, the

5

Committee shall establish and administer Performance Conditions in the manner described in Section 162(m) and Treasury Regulations promulgated thereunder as an additional condition to the vesting or payment, as applicable, of such performance awards. The Award document shall also provide for the timing of payment, which shall not be earlier than one year from date of grant, except in the case of:

(i)a Change of Control if so provided by the Committee;

(ii)an earlier date specifically approved by the Committee to attract a key executive to join the Company; or

(ii)a performance award issued as a substitute Award pursuant to Section 5.

Following the conclusion or acceleration of the period of time designated for attainment of the Performance Conditions, the Committee shall determine the extent to which the Performance Conditions have been attained and shall then cause to be delivered to the Participant (i) a number of shares of Common Stock equal to the number of performance shares or the value of such performance units determined by the Committee to have been earned, and/or (ii) cash equal to the Fair Market Value of such number of performance shares or the value of performance units, as the Committee shall elect or as shall have been stated in the applicable Award document. In no event may performance awards be granted to a single Participant in any 12-month period (i) in respect of more than 250,000 shares of Common Stock (if the Award is denominated in shares of Common Stock) or (ii) having a maximum payment with a value greater than $10,000,000 (if the Award is denominated in other than shares of Common Stock).

11.  Other Stock-Based Awards.  The Committee may issue unrestricted shares of Common Stock, or other awards denominated in Common Stock (including but not limited to phantom stock and deferred stock units), to Participants, alone or in tandem with other Awards, in such amounts and subject to such terms and conditions as the Committee shall from time to time in its sole discretion determine. With respect to such Awards intended to qualify as “performance-based compensation” under Section 162(m) of the Code, the Committee shall establish and administer Performance Conditions in the manner described in Section 162(m) and Treasury Regulations promulgated thereunder as an additional condition to the vesting and payment of such Awards. In no event may other stock-based Awards described in this Section 11 be granted to a single Participant in respect of more than 250,000 shares of Common Stock in any 12-month period. The terms and conditions of any such other stock-based Awards subject to time-based restrictions on vesting will be limited as specified in Section 9 for Awards of restricted stock.

12.  Award Documents.  Each Award under the Plan shall be evidenced by an Award document (which may consist of a term sheet or an agreement, and may be provided in electronic form) setting forth the terms and conditions, as determined by the Committee, which shall apply to such Award, in addition to the terms and conditions specified in the Plan. The Committee may, in its discretion, place terms in the Award documents that provide for the acceleration of any time periods relating to the exercise or realization of any Awards so that such Awards may be exercised or realized in full on or before a date fixed by the Committee, in connection with a Change of Control.

13.  Change of Control.  The Committee may, in its discretion, at the time an Award is made hereunder or at any time prior to, coincident with or after the time of a Change of Control:

(i)provide for the purchase of such Awards, upon the Participant’s consent, for an amount of cash equal to the amount which could have been obtained upon the exercise or realization of such rights had such Awards been currently exercisable or payable, provided that the Participant’s consent shall not be required if the Committee takes such action in connection with the consummation of a Change of Control;

(ii)make such adjustment to the Awards then outstanding as the Committee deems appropriate to reflect such transaction or change; and/or

(iii)cause the Awards then outstanding to be assumed, or new rights substituted therefore, by the surviving corporation in such Change of Control.

The Committee may, in its discretion, include such further provisions and limitations in any Award document as it may deem equitable and in the best interests of the Company.

14.  Withholding.  The Company and its subsidiaries shall have the right to deduct from any payment to be made pursuant to the Plan, or to require prior to the issuance or delivery of any shares of Common Stock or the payment of cash under the Plan, any taxes (whether federal, state, local or foreign) to be withheld therefrom. The Committee may, in its discretion,

6

permit a Participant to elect to satisfy such withholding obligation by any of the methods pursuant to which the exercise price of a stock option may be paid pursuant to Section 7. Any satisfaction of tax obligations through the withholding of shares may only be up to the statutory minimum tax rate. Any fraction of a share of Common Stock required to satisfy such obligation shall be disregarded and the amount due shall instead be paid in cash to the Participant.

15.  Transferability.  Except as provided in this Section, during the lifetime of a Participant to whom an Award is granted, only that Participant (or that Participant’s legal representative in the case of disability) may exercise a stock option or stock appreciation right, or receive payment with respect to restricted stock, a performance award or any other Award. The Committee may permit (on such terms, conditions and limitations as it determines), an Award of restricted stock, stock options, stock appreciation rights, performance shares or performance units or other Awards to be transferred or transferable to the extent permissible by law and, in the case of an ISO, to the extent permissible under Section 422 of the Code. Other than as stated in the preceding sentence, no Award may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant otherwise than by will or by the laws of descent and distribution, and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company.

16.  Deferrals and Settlements.  The Committee may require or permit Participants to elect to defer the issuance of shares or the settlement of Awards in cash under such rules and procedures as it may establish under the Plan. It may also provide that deferred settlements include the payment or crediting of interest or dividend equivalents on the deferral amounts.

17.  Dividends and Dividend Equivalents.  An Award (including without limitation a stock option or stock appreciation right) may, if so determined by the Committee, provide the Participant with the right to receive dividend payments or dividend equivalent payments with respect to Common Stock subject to the Award (both before and after the Common Stock subject to the Award is earned, vested or acquired), which payments may be either made currently or credited to an account for the Participant, and may be settled in cash or Common Stock, as determined by the Committee. Any such settlements, and any such crediting of dividends or dividend equivalents or reinvestment in shares of Common Stock, may be subject to such conditions, restrictions and contingencies as the Committee shall establish, including the reinvestment of such credited amounts in Common Stock equivalents.

18.  No Right to Awards or Employment.  No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continue in the employ of the Company or its subsidiaries. Further, the Company and its subsidiaries expressly reserve the right at any time to dismiss a Participant without any liability, or any claim under the Plan, except as expressly provided herein or in any Award document entered into hereunder.

19.  Rights as a Shareholder.  Unless the Committee determines otherwise, a Participant shall not have any rights as a shareholder with respect to shares of Common Stock covered by an Award until the date the Participant becomes the holder of record with respect to such shares. No adjustment will be made for dividends or other rights for which the record date is prior to such date, except as provided in Section 17.

20.  Adjustment of and Changes in Common Stock.  In the event of any stock dividend or split, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other change in the corporate structure or shares of stock of the Company, or any distributions to common shareholders other than cash dividends, the Committee may make such substitution or adjustment, if any, as it deems to be equitable, as to the number and kind of shares of Common Stock or other securities issued or reserved for issuance pursuant to the Plan and to outstanding Awards (including but not limited to the number and kind of shares of Common Stock or other securities to which such Awards are subject, and the exercise or strike price of such Awards).

21.  Amendment; Repricing.  The Board may amend, suspend or terminate the Plan or any portion thereof at any time, provided that (i) no amendment shall be made without shareholder approval if such approval is necessary in order for the Plan to continue to comply with the rules of the New York Stock Exchange or if such approval is necessary in order for the Company to avoid being denied a tax deduction under Section 162(m) of the Code, and (ii) no amendment, suspension or termination may adversely affect any outstanding Award without the consent of the Participant to whom such Award was made. Except for adjustments pursuant to Section 20, in no event may any stock option or stock appreciation right granted under the Plan be amended to decrease the exercise price or strike price thereof, as the case may be, or be cancelled in conjunction with the grant of any new stock option or stock appreciation right with a lower exercise price or strike price, as the case may be, or otherwise be subject to any action that would be treated, for accounting purposes or under the rules of the New York Stock Exchange, as a “repricing” of such stock option or stock appreciation right, unless such amendment, cancellation or action is approved by the Company’s shareholders in accordance with applicable law and rules of the New York Stock Exchange.

22.  Government and Other Regulations.  The obligation of the Company to settle Awards in Common Stock shall

7

be subject to all applicable laws, rules, and regulations, and to such approvals by governmental agencies as may be required. Notwithstanding any terms or conditions of any Award to the contrary, the Company shall be under no obligation to offer to sell or to sell and shall be prohibited from offering to sell or selling any shares of Common Stock pursuant to an Award unless such shares have been properly registered for sale pursuant to the Securities Act of 1933 with the Securities and Exchange Commission or unless the Company has received an opinion of counsel, satisfactory to the Company, that such shares may be offered or sold without such registration pursuant to an available exemption therefrom and the terms and conditions of such exemption have been fully complied with. The Company shall be under no obligation to register for sale under the Securities Act of 1933 any of the shares of Common Stock to be offered or sold under the Plan. If the shares of Common Stock offered for sale or sold under the Plan are offered or sold pursuant to an exemption from registration under the Securities Act of 1933, the Company may restrict the transfer of such shares and may legend the Common Stock certificates representing such shares in such manner as it deems advisable to ensure the availability of any such exemption.

23.  Relationship to Other Benefits.  No payment under the Plan shall be taken into account in determining any benefits under any pension, retirement, profit sharing, group insurance or other benefit plan of the Company or any subsidiary or affiliate of the Company except as otherwise specifically provided in such other plan.

24.  Governing Law.  The Plan shall be construed and its provisions enforced and administered in accordance with the laws of the State of Minnesota applicable to contracts made and performed wholly within such state by residents thereof.

25.  Effective Date.  The Plan shall be effective as of the date of approval by the Company’s shareholders in a manner intended to comply with the shareholder approval requirements of the New York Stock Exchange and Section 162(m) of the Code. Subject to earlier termination pursuant to Section 21, the Plan shall have a term of ten (10) years from its effective date.

26.  Foreign Employees.  Awards may be granted to Participants who are foreign nationals or employed outside the United States, or both, on such terms and conditions different from those applicable to Awards to Participants employed in the United States as may, in the judgment of the Committee, be necessary or desirable in order to recognize differences in local law or tax policy. The Committee also may impose conditions on the exercise or vesting of Awards in order to minimize the Company’s obligation with respect to tax equalization for Employees on assignments outside their home country.

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EX-12.1

EXHIBIT 12.1

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

	Three Months Ended June 30,					Six Months Ended June 30,
(in millions, except ratios)	2005		2004			2005		2004
Income (loss) from continuing operations before income taxes and minority interest	$	1,294	$	(541	)	$	2,482	$	276
Interest	70		63			141		99
Portion of rentals deemed to be interest	15		15			30		24
Income (loss) available for fixed charges	$	1,379	$	(463	)	$	2,653	$	399
Fixed charges:
Interest	$	70	$	63		$	141	$	99
Portion of rentals deemed to be interest	15		15			30		24
Total fixed charges	85		78			171		123
Preferred stock dividend requirements	2		3			5		3
Total fixed charges and preferred stock dividend requirements	$	87	$	81		$	176	$	126
Ratio of earnings to fixed charges (1)	16.22		—			15.51		3.24
Ratio of earnings to combined fixed charges and preferred dividend requirements (1)	15.85		—			15.07		3.17

(1)   The second-quarter 2004 loss from continuing operations was inadequate to cover “fixed charges” by $541 million and “combined fixed charges and preferred stock dividends” by $544 million.

The data included in this exhibit for the three months and six months ended June 30, 2005 reflect information for the Company for those periods.  Data for the three months and six months ended June 20, 2004 reflect information for TPC for both periods, and information for SPC since the merger date of April 1, 2004. 

The ratio of earnings to fixed charges is computed by dividing income before federal income taxes and minority interest and fixed charges by the fixed charges.  For purposes of this ratio, fixed charges consist of that portion of rentals deemed representative of the appropriate interest factor. 

EX-31.1

EXHIBIT 31.1

Certification

I, Jay S. Fishman, Chief Executive Officer and President, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 of The St. Paul Travelers Companies, Inc. (the Company);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4.The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5.The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors:

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date:	August 8, 2005	By:	/s/	Jay S. Fishman
				Jay S. Fishman
				Chief Executive Officer and President

EX-31.2

EXHIBIT 31.2

Certification

I, Jay S. Benet, Vice Chairman and Chief Financial Officer, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 of The St. Paul Travelers Companies, Inc. (the Company);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4.The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5.The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors:

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date:	August 8, 2005	By:	/s/	Jay S. Benet
			Jay S. Benet
			Vice Chairman and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

THE ST. PAUL TRAVELERS COMPANIES, INC.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and 18 U.S.C. Section 1350, the undersigned officer of The St. Paul Travelers Companies, Inc. (the “Company”), hereby certifies that the Company’s Quarterly Report on Form 
10-Q for the quarter ended June 30, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:	August 8, 2005	By:	/s/	Jay S. Fishman
		Name:		Jay S. Fishman
		Title:		Chief Executive Officer and President

EX-32.2

EXHIBIT 32.2

THE ST. PAUL TRAVELERS COMPANIES, INC.

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and 18 U.S.C. Section 1350, the undersigned officer of The St. Paul Travelers Companies, Inc. (the “Company”), hereby certifies that the Company’s Quarterly Report on Form 
10-Q for the quarter ended June 30, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:	August 8, 2005	By:	/s/	Jay S. Benet
		Name:		Jay S. Benet
		Title:		Vice Chairman and
				Chief Financial Officer