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 September 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 ýNo o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes oNo ý

The number of shares of the Registrant’s Common Stock, without par value, outstanding at November 1, 2005 was 692,449,881.

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page
Part I - Financial Information
Item 1.	Financial Statements:
	Consolidated Statement of Income (Unaudited) - Three and Nine Months Ended September 30, 2005 and 2004	3
	Consolidated Balance Sheet - September 30, 2005 (Unaudited) and December 31, 2004	4
	Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) - Nine Months Ended September 30, 2005 and 2004	5
	Consolidated Statement of Cash Flows (Unaudited) - Nine Months Ended September 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	50
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	94
Item 4.	Controls and Procedures	94
Part II - Other Information
Item 1.	Legal Proceedings	94
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	101
Item 3.	Defaults Upon Senior Securities	101
Item 4.	Submission of Matters to a Vote of Security Holders	101
Item 5.	Other Information	101
Item 6.	Exhibits	101
SIGNATURES		102
EXHIBIT INDEX		103

2

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

(in millions, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Revenues
Premiums	$	4,977		$	5,269		$	15,205		$	13,762
Net investment income	812			667			2,352			1,928
Fee income	169			186			505			529
Net realized investment gains (losses)	39			(49		)	(16		)	(36		)
Other revenues	45			56			138			133
Total revenues	6,042			6,129			18,184			16,316
Claims and expenses
Claims and claim adjustment expenses	4,361			4,086			10,685			11,236
Amortization of deferred acquisition costs	830			820			2,423			2,151
General and administrative expenses	789			792			2,391			2,123
Interest expense	70			67			211			166
Total claims and expenses	6,050			5,765			15,710			15,676
Income (loss) from continuing operations before income taxes and minority interest	(8		)	364			2,474			640
Income tax expense (benefit)	(83		)	48			591			36
Minority interest, net of tax	—			5			—			8
Income from continuing operations	75			311			1,883			596
Discontinued operations:
Operating income (loss), net of taxes	2			29			(663		)	56
Gain on disposal, net of taxes	85			—			223			—
Income (loss) from discontinued operations	87			29			(440		)	56
Net income	$	162		$	340		$	1,443		$	652
Basic earnings per common share
Income from continuing operations	$	0.11		$	0.46		$	2.79		$	1.01
Income (loss) from discontinued operations	0.13			0.05			(0.65		)	0.09
Net income	$	0.24		$	0.51		$	2.14		$	1.10
Diluted earnings per common share
Income from continuing operations	$	0.11		$	0.45		$	2.69		$	1.00
Income (loss) from discontinued operations	0.12			0.05			(0.62		)	0.09
Net income	$	0.23		$	0.50		$	2.07		$	1.09
Weighted average number of common shares outstanding
Basic	679.2			665.9			672.3			588.7
Diluted	683.8			707.9			711.3			607.0

See notes to consolidated financial statements (unaudited).

3

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in millions)

	September 30, 2005			December 31, 2004
	(Unaudited)
Assets
Fixed maturities, available for sale at fair value (including $2,536 and $2,603 subject to securities lending and repurchase agreements) (amortized cost $57,707 and $53,017)	$	58,294		$	54,269
Equity securities, at fair value (cost $620 and $687)	675			759
Real estate	738			773
Mortgage loans	147			191
Short-term securities	5,975			4,944
Other investments	2,988			3,432
Total investments	68,817			64,368
Cash	442			262
Investment income accrued	743			671
Premiums receivable	6,149			6,201
Reinsurance recoverables	19,452			19,054
Ceded unearned premiums	1,561			1,565
Deferred acquisition costs	1,558			1,559
Deferred tax asset	1,985			2,198
Contractholder receivables	5,658			5,629
Goodwill	3,452			3,564
Intangible assets	957			1,062
Net assets of discontinued operations	—			2,041
Other assets	2,668			3,072
Total assets	$	113,442		$	111,246
Liabilities
Claims and claim adjustment expense reserves	$	60,586		$	59,070
Unearned premium reserves	11,164			11,310
Contractholder payables	5,658			5,629
Payables for reinsurance premiums	908			896
Debt	5,753			6,313
Other liabilities	6,965			6,827
Total liabilities	91,034			90,045
Shareholders’ equity
Preferred stock:
Stock Ownership Plan – convertible preferred stock (0.5 and 0.6 shares issued and outstanding)	160			193
Guaranteed obligation – Stock Ownership Plan	—			(5		)
Common stock (1,750.0 shares authorized; 693.2 and 670.7 shares issued; 692.2 and 670.3 shares outstanding)	18,119			17,414
Retained earnings	3,733			2,744
Accumulated other changes in equity from nonowner sources	538			952
Treasury stock, at cost (1.0 and 0.4 shares)	(41		)	(14		)
Unearned compensation	(101		)	(83		)
Total shareholders’ equity	22,408			21,201
Total liabilities and shareholders’ equity	$	113,442		$	111,246

See notes to consolidated financial statements (unaudited).

4

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(in millions)

For the nine months ended September 30,	2005			2004
Convertible Preferred Stock - Stock Ownership Plan
Balance, beginning of period	$	193		$	—
Preferred stock assumed at merger	—			219
Redemptions during the period	(33		)	(10		)
Balance, end of period	160			209
Guaranteed obligation – Stock Ownership Plan
Balance, beginning of period	(5		)	—
Obligation assumed at merger	—			(15		)
Principal payment	5			10
Balance, end of period	—			(5		)
Total preferred shareholders’ equity	160			204
Common stock
Balance, beginning of period	17,414			8,715
Shares issued pursuant to maturity of equity unit forward contracts	442			—
Shares issued for merger	—			8,607
Adjustment for treasury stock cancelled and retired at merger	—			(91		)
Net shares issued under employee stock-based compensation plans	232			155
Other	31			(14		)
Balance, end of period	18,119			17,372
Retained earnings
Balance, beginning of period	2,744			2,290
Net income	1,443			652
Dividends	(467		)	(376		)
Minority interest and other	13			13
Balance, end of period	3,733			2,579
Accumulated other changes in equity from nonowner sources
Balance, beginning of period	952			1,086
Change in net unrealized gain on investment securities	(396		)	(202		)
Net change in other	(18		)	(38		)
Balance, end of period	538			846
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	(27		)	(29		)
Balance, end of period	(41		)	(12		)
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	(70		)	(64		)
Equity-based award amortization	52			37
Balance, end of period	(101		)	(100		)
Total common shareholders’ equity	22,248			20,685
Total shareholders’ equity	$	22,408		$	20,889
Common shares outstanding
Balance, beginning of period	670.3			435.8
Common stock issued pursuant to maturity of equity unit forward contracts	15.2			—
Common stock assumed at merger	—			229.3
Net shares issued under employee stock-based compensation plans	6.7			4.1
Balance, end of period	692.2			669.2

See notes to consolidated financial statements (unaudited).

5

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

(in millions)

For the nine months ended September 30,	2005			2004
Cash flows from operating activities
Net income	$	1,443		$	652
Adjustments to reconcile net income to net cash provided by operating activities:
Loss (income) from discontinued operations, net of tax	440			(56		)
Net pretax realized investment losses	16			36
Depreciation and amortization	499			348
Deferred federal income taxes (benefit) on continuing operations	517			(178		)
Amortization of deferred policy acquisition costs	2,423			2,151
Premiums receivable	52			218
Reinsurance recoverables	(398		)	89
Deferred acquisition costs	(2,422		)	(2,178		)
Claim and claim adjustment expense reserves	1,528			3,317
Unearned premium reserves	(146		)	63
Trading account activities	6			19
Other	(846		)	(428		)
Net cash provided by operating activities	3,112			4,053
Cash flows from investing activities
Proceeds from maturities of investments:
Fixed maturities	3,814			4,019
Mortgage loans	49			68
Proceeds from sales of investments:
Fixed maturities	3,433			4,963
Equity securities	281			153
Mortgage loans	—			61
Real estate	39			29
Purchases of investments:
Fixed maturities	(12,163		)	(11,546		)
Equity securities	(37		)	(59		)
Mortgage loans	—			(55		)
Real estate	(29		)	(32		)
Short-term securities purchased, net	(1,030		)	(1,411		)
Other investments, net	630			581
Securities transactions in course of settlement	203			(532		)
Net cash acquired in merger	—			151
Other	(73		)	51
Net cash used by investing activities	(4,883		)	(3,559		)
Cash flows from financing activities
Issuance of debt	—			128
Payment of debt	(522		)	(227		)
Dividends to shareholders	(467		)	(493		)
Issuance of common stock – employee stock options	129			80
Issuance of common stock – maturity of equity unit forward contracts	442			—
Treasury stock acquired – net employee stock-based compensation	(27		)	(20		)
Repurchase of minority interest	—			(76		)
Other	—			22
Net cash used by financing activities	(445		)	(586		)
Effect of exchange rate changes on cash	(3		)	(2		)
Net proceeds from the sale of discontinued operations	2,399			—
Net increase (decrease) in cash	180			(94		)
Cash at beginning of period	262			352
Cash at end of period	$	442		$	258
Supplemental disclosure of cash flow information
Income taxes paid	$	521		$	546
Interest paid	$	261		$	202

See notes to consolidated financial statements (unaudited).

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 nine months ended September 30, 2005 reflects the consolidated accounts of SPC and TPC.  The financial information presented herein for the nine months ended September 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 six months ended September 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, and in the third quarter, the Company completed the divestiture.  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.  The Company’s ownership in Nuveen Investments’ assets and liabilities as of 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 Statement of Financial Accounting Standards No. 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 reporting periods ending 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, funds or pools that may invest and trade in many different markets, strategies and instruments (including securities, non-securities and derivatives).  As of September 30, 2005, one hedge fund was determined to be a significant VIE.  The value for all investors combined of the hedge fund that was determined to be a significant VIE was approximately $33 million at September 30, 2005.  The Company’s share of this fund had a carrying value of approximately $11 million at September 30, 2005.  The Company’s involvement with this fund began in the third quarter of 2003.  The Company does not have any unfunded commitments related to this fund.  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), which provides 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 accounting and disclosure guidance on how to apply FASB Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS 109), to the repatriation provision of the AJCA.  Due to the lack of clarification of certain provisions within the AJCA and the timing of its enactment, the FSP allows an enterprise time beyond the financial reporting period of enactment to evaluate the effect of the AJCA on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FAS 109.  The Company continues to analyze the dividend alternatives under the AJCA.  The Company currently expects, however, that if it decides to take advantage of the repatriation provisions of the AJCA, the range of possible qualifying dividend amounts would be between $105 million and $225 million.  The estimated tax impact would be between $7 million and $13 million.  A decision will be made prior to the close of the year ended December 31, 2005 whether, and to what extent, to repatriate earnings under the AJCA.

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. 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 September 30,						Nine Months Ended September 30,
(in millions, except per share data)	2005			2004			2005			2004
Net income as reported	$	162		$	340		$	1,443		$	652
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects (1)	16			13			47			32
Deduct: Stock-based employee compensation expense determined under fair value based method, net of related tax effects (2)	(19		)	(19		)	(56		)	(51		)
Net income, pro forma	$	159		$	334		$	1,434		$	633
Earnings per share (3)
Basic – as reported	$	0.24		$	0.51		$	2.14		$	1.10
Diluted – as reported	0.23			0.50			2.07			1.09
Basic – pro forma	0.23			0.50			2.13			1.07
Diluted – pro forma	0.23			0.49			2.06			1.06

(1)Represents compensation expense on all restricted stock and stock option awards granted after January 1, 2003.  Data for the three months and nine months ended September 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 earnings per share is calculated.

Accounting Standards 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.

SOP 05-1 – Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts

In September 2005, the Accounting Standards Executive Committee (AcSEC) issued SOP 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts.  SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs (DAC) on internal replacements of insurance and investment contracts other than those specifically described in FAS 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments.  SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract.

SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged.  The Company does not expect the impact of adopting SOP 05-1 will 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.

Pro Forma Results

The following unaudited pro forma information presents the combined results of operations of TPC and SPC for the nine months ended September 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 third quarter of 2005, the Company completed its divestiture of 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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	Nine months ended September 30,
(in millions, except per share data)	2004
Revenue	$	18,825
Net income	$	785
Net income per share – basic	$	1.17
Net income per share – diluted	$	1.15

4.INTANGIBLE ASSETS AND GOODWILL

Intangible Assets

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

At September 30, 2005 (in millions)	Gross Carrying Amount		Accumulated Amortization			Net
Intangibles subject to amortization
Customer-related	$	1,036	$	365		$	671
Marketing-related	20		15			5
Fair value adjustment on claims and claim adjustment expense reserves and reinsurance recoverables	191		(70		)(1)	261
Total intangible assets subject to amortization	1,247		310			937
Intangible assets not subject to amortization
Contract-based	20		—			20
Total intangible assets not subject to amortization	20		—			20
Total intangible assets	$	1,267	$	310		$	957

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 intangible 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.

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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 nine months ended September 30, 2005 and 2004:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2005			2004			2005			2004
Customer-related	$	37		$	39		$	114		$	91
Marketing-related	2			3			7			5
Fair value adjustment on claims and claim adjustment expense reserves and reinsurance recoverables	(1		)	(12		)	(12		)	(47		)
Total amortization expense	$	38		$	30		$	109		$	49

Intangible asset amortization expense is estimated to be $40 million for the remainder of 2005, $153 million in 2006, $145 million in 2007, $126 million in 2008, $100 million in 2009 and $86 million in 2010.

Goodwill

The carrying amount of the Company’s goodwill at September 30, 2005 and December 31, 2004 was $3.45 billion and $3.56 billion (excluding Nuveen Investments as described below), respectively, included in the Company’s business segments as follows:

(in millions)	September 30, 2005		December 31, 2004
Commercial	$	1,865	$	1,893
Specialty	867		900
Personal	613		613
Other	107		158
Total	$	3,452	$	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.  The divestiture was completed through a series of transactions in the second and third quarters of 2005, resulting in net pretax cash proceeds of $2.40 billion, including net pretax proceeds of $532 million in the third quarter of 2005.

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In conjunction with these transactions, the Company recorded a pretax gain on disposal of $343 million ($223 million after-tax) for the nine months ended September 30, 2005, including a pretax gain on disposal of $131 million ($85 million after-tax) for the quarter ended September 30, 2005.  Additionally, the Company recorded a net operating loss from discontinued operations of $663 million for the nine months ended September 30, 2005, consisting primarily of $710 million of 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 nine months ended September 30, 2005.  The Company recorded net operating income from discontinued operations of $2 million for the quarter ended September 30, 2005.

The assets and liabilities related to Nuveen Investments were removed from the respective lines of the Company’s consolidated balance sheet and reported under the caption “Net assets of discontinued operations” in the consolidated balance sheet at December 31, 2004.  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.

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 nine months ended September 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.

The specific business segment attributes are as follows:

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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 the following three marketing and underwriting groups, each of which focuses on a particular client base and which collectively comprise Commercial’s core operations:

•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 captive reinsurers.

Commercial also includes the Special Liability Group (which manages the Company’s asbestos and environmental liabilities); the assumed 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.

•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.

In August 2005, the Company announced that it had reached a definitive agreement to sell its Personal Catastrophe Risk business.  The transaction closed on November 1, 2005.  In accordance with terms of the agreement, the Company retained responsibility for the pre-sale loss and loss adjustment expense reserves related to this business.  The impact of this transaction will not be material to the Company’s ongoing operations.

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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 September 30, in millions)	Commercial			Specialty		Personal			Total Reportable Segments
2005 Revenues
Premiums	$	2,078		$	1,388	$	1,511		$	4,977
Net investment income	483			204		112			799
Fee income	160			9		—			169
Other revenues	19			2		24			45
Total operating revenues(1)	$	2,740		$	1,603	$	1,647		$	5,990
Operating income (loss) (1)	$	(14	)	$	130	$	(25	)	$	91
Assets	$	73,730		$	25,196	$	12,098		$	111,024
2004 Revenues
Premiums	$	2,364		$	1,466	$	1,439		$	5,269
Net investment income	424			149		92			665
Fee income	178			8		—			186
Other revenues	23			7		22			52
Total operating revenues(1)	$	2,989		$	1,630	$	1,553		$	6,172
Operating income (1)	$	224		$	38	$	127		$	389
Assets	$	69,999		$	22,956	$	11,553		$	104,508

(at and for the nine months ended September 30, in millions)	Commercial		Specialty			Personal		Total Reportable Segments
2005 Revenues
Premiums	$	6,446	$	4,293		$	4,466	$	15,205
Net investment income	1,461		547			337		2,345
Fee income	479		26			—		505
Other revenues	47		22			71		140
Total operating revenues(1)	$	8,433	$	4,888		$	4,874	$	18,195
Operating income (1)	$	964	$	524		$	526	$	2,014
Assets	$	73,730	$	25,196		$	12,098	$	111,024
2004 Revenues
Premiums	$	6,506	$	3,152		$	4,104	$	13,762
Net investment income	1,266		329			330		1,925
Fee income	510		19			—		529
Other revenues	49		12			66		127
Total operating revenues(1)	$	8,331	$	3,512		$	4,500	$	16,343
Operating income (loss)(1)	$	970	$	(780	)	$	561	$	751
Assets	$	69,999	$	22,956		$	11,553	$	104,508

(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 September 30,					Nine Months Ended September 30,
(in millions)	2005		2004			2005			2004
Revenue reconciliation
Earned premiums
Commercial:
Commercial multi-peril	$	684	$	640		$	2,044		$	1,813
Workers’ compensation	372		424			1,203			1,128
Commercial automobile	440		446			1,314			1,255
Property	332		458			1,062			1,232
General liability	233		361			772			965
Other	17		35			51			113
Total Commercial	2,078		2,364			6,446			6,506
Specialty:
General liability	521		473			1,469			1,017
Fidelity and surety	244		272			800			597
Workers’ compensation	103		123			339			282
Commercial automobile	102		104			328			236
Property	117		156			334			298
Commercial multi-peril	46		34			167			111
International	255		304			856			611
Total Specialty	1,388		1,466			4,293			3,152
Personal:
Automobile	864		851			2,555			2,458
Homeowners and other	647		588			1,911			1,646
Total Personal	1,511		1,439			4,466			4,104
Total earned premiums	4,977		5,269			15,205			13,762
Net investment income	799		665			2,345			1,925
Fee income	169		186			505			529
Other revenues	45		52			140			127
Total operating revenues for reportable segments	5,990		6,172			18,195			16,343
Interest expense and other	13		6			5			9
Net realized investment gains (losses)	39		(49		)	(16		)	(36		)
Total revenues from continuing operations	$	6,042	$	6,129		$	18,184		$	16,316

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	At and For The Three Months Ended September 30,						At and For The Nine Months Ended September 30,
(in millions)	2005			2004			2005			2004
Income reconciliation, net of tax and minority interest
Total operating income for reportable segments	$	91		$	389		$	2,014		$	751
Interest expense and other	(41		)	(46		)	(139		)	(131		)
Total operating income from continuing operations	50			343			1,875			620
Net realized investment gains (losses)	25			(32		)	8			(24		)
Total income from continuing operations	75			311			1,883			596
Discontinued operations	87			29			(440		)	56
Total net income	$	162		$	340		$	1,443		$	652
Asset reconciliation
Total assets for reportable segments	$	111,024		$	104,508		$	111,024		$	104,508
Net assets of discontinued operations	—			2,009			—			2,009
Other assets(1)	2,418			2,584			2,418			2,584
Total consolidated assets	$	113,442		$	109,101		$	113,442		$	109,101

(1)  The primary components of other assets were invested assets and deferred taxes. 

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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 September 30, 2005, in millions)	Cost		Gains		Losses		Value
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	$	7,511	$	72	$	88	$	7,495
U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities	3,644		21		33		3,632
Obligations of states, municipalities and political subdivisions	30,346		657		121		30,882
Debt securities issued by foreign governments	1,699		15		2		1,712
All other corporate bonds	14,373		240		187		14,426
Redeemable preferred stock	134		13		—		147
Total	$	57,707	$	1,018	$	431	$	58,294

(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 September 30, 2005, in millions)	Cost		Gains		Losses			Value
Common stock	$	144	$	27	$	3		$		168
Non-redeemable preferred stock	476		34		3			507
Total	$	620	$	61	$	6		$		675
(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 venture capital investments, which are reported as part of other investments in the Company’s consolidated balance sheet, were as follows:

			Gross Unrealized
(at September 30, 2005, in millions)	Cost		Gains		Losses		Fair Value
Venture capital	$	415	$	62	$	1	$	476
(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 September 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 September 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	$	3,398	$	41	$	1,638	$	47	$	5,036	$	88
U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities	2,536		19		554		14		3,090		33
Obligations of states, municipalities and political subdivisions	8,792		77		2,229		44		11,021		121
Debt securities issued by foreign governments	378		2		211		—		589		2
All other corporate bonds	4,800		82		3,563		105		8,363		187
Redeemable preferred stock	6		—		8		—		14		—
Total fixed maturities	19,910		221		8,203		210		28,113		431
Equity securities
Common stock	8		1		14		2		22		3
Nonredeemable preferred stock	70		3		6		—		76		3
Total equity securities	78		4		20		2		98		6
Venture capital	16		1		2		—		18		1
Total	$	20,004	$	226	$	8,225	$	212	$	28,229	$	438

	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 nine months ended September 30, 2005 and 2004 were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2005		2004		2005		2004
Fixed maturities	$	5	$	9	$	10	$	23
Equity securities	—		2		—		5
Venture capital	29		12		75		26
Real estate and other	—		5		—		8
Total	$	34	$	28	$	85	$	62

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 $1.31 billion at September 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 September 30,					Nine Months Ended September 30,
(in millions, after-tax)	2005			2004		2005			2004
Net income	$	162		$	340	$	1,443		$	652
Change in net unrealized gain on investment securities	(490		)	718		(396		)	(202		)
Other changes	4			2		(18		)	(38		)
Total changes in equity from nonowner sources	$	(324	)	$	1,060	$	1,029		$	412

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 from continuing operations 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.

Income from continuing operations per diluted share for the three months ended September 30, 2005 excluded the weighted average effects of the following securities convertible into the Company’s common shares: equity units (7.6 million common shares); outstanding convertible preferred stock (4.1 million common shares); zero coupon convertible notes (2.3 million common shares); and the convertible junior subordinated notes referred to above (16.7 million common shares).  Income from continuing operations per diluted share for the nine months ended September 30, 2004 excluded the weighted average impact of the convertible junior subordinated notes referred to above (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 for these periods because their effect was anti-dilutive.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions, except per share amounts)	2005			2004			2005			2004
Basic
Income from continuing operations, as reported	$	75		$	311		$	1,883		$	596
Preferred stock dividends, net of taxes	(1		)	(2		)	(5		)	(4		)
Income from continuing operations available to common shareholders – basic	$	74		$	309		$	1,878		$	592
Diluted
Income from continuing operations available to common shareholders – basic	$	74		$	309		$	1,878		$	592
Effect of dilutive securities:
Equity unit stock purchase contracts	—			4			9			8
Convertible preferred stock	—			1			4			3
Zero coupon convertible notes	—			1			3			1
Convertible junior subordinated notes	—			7			20			—
Income from continuing operations available to common shareholders – diluted	$	74		$	322		$	1,914		$	604
Common Shares
Basic
Weighted average shares outstanding	679.2			665.9			672.3			588.7
Diluted
Weighted average shares outstanding	679.2			665.9			672.3			588.7
Weighted average effects of dilutive securities:
Stock options and other incentive plans	4.6			2.6			3.0			3.0
Equity unit stock purchase contracts	—			15.2			12.7			10.2
Convertible preferred stock	—			5.1			4.2			3.5
Zero coupon convertible notes	—			2.4			2.4			1.6
Convertible junior subordinated notes	—			16.7			16.7			—
Total	683.8			707.9			711.3			607.0
Income from Continuing Operations Per Common Share
Basic	$	0.11		$	0.46		$	2.79		$	1.01
Diluted	$	0.11		$	0.45		$	2.69		$	1.00

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10.  CAPITAL AND DEBT

Debt outstanding was as follows:

(in millions)	September 30, 2005			December 31, 2004
Short-term:
Commercial paper	$	397		$	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	—			99
Total short-term debt	397			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	121			117
8.125% Senior notes due April 15, 2010	250			250
7.81% Private placement notes due on various dates through 2011	16			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	5,198			5,198
Total debt principal	5,595			6,113
Unamortized fair value adjustment	195			239
Unamortized debt issuance costs	(37		)	(39		)
Total debt	$	5,753		$	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. 

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, which

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matured in August 2005, and an unsecured $50 senior note of the Company (maturing in 2007).  Total annual distributions on the equity units 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%.  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 forward purchase contract required 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 purchased was determined based on a formula that considered 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.  On the August 16, 2005 settlement date, the Company issued 15.2 million common shares and received total proceeds of $442 million. 

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 $11 million and $45 million for the three months and nine months ended September 30, 2005, respectively, and by $18 million and $37 million, respectively, for the same periods of 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
(in millions)	Issue Rate		Maturity Date	September 30, 2005		December 31, 2004		Effective Interest Rate to Maturity
Senior notes	7.875	%	Apr. 2005	$	—	$	5	1.645	%
	7.125	%	Jun. 2005	—		2		1.881	%
	5.750	%	Mar. 2007	22		33		2.625	%
	5.250	%	Aug. 2007	—		11		1.389	%
	8.125	%	Apr. 2010	40		45		4.257	%
Medium-term notes	6.4%-7.4	%	Through 2010	24		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	%	Mar. 2009	2		2		4.175	%
Total				$	195	$	239

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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 September 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 September 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 nine 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 September 30,						Nine Months Ended September 30,
(in millions)	2005			2004			2005			2004
Service cost	$	15		$	14		$	46		$	35
Interest cost on benefit obligation	26			26			77			63
Expected return on plan assets	(35		)	(35		)	(105		)	(82		)
Amortization of unrecognized:
Prior service cost	(1		)	(1		)	(4		)	(4		)
Net actuarial loss	—			2			1			6
Net benefit expense	$	5		$	6		$	15		$	18

Postretirement Benefit Plans

	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2005		2004		2005			2004
Service cost	$	1	$	1	$	3		$	2
Interest cost on benefit obligation	4		4		14			9
Expected return on plan assets	—		—		(1		)	(1		)
Amortization of unrecognized:
Prior service cost	—		—		—			—
Net actuarial loss	—		—		—			—
Net benefit expense	$	5	$	5	$	16		$	10

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 the 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.  Before court approval of the settlement, additional shareholder litigation was commenced, as described below.  On September 12, 2005, plaintiffs voluntarily withdrew their complaints without prejudice.

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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.  On August 23, 2005, the Company and the other defendants in In re St. Paul Travelers Securities Litigation I moved to dismiss the amended consolidated complaint.

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.  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 an amended consolidated complaint. The amended consolidated complaint alleges 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, the Company’s alleged involvement in a conspiracy to rig bids and the Company’s alleged involvement in the purchase and sale of finite reinsurance.  The consolidated action will be coordinated with In re St. Paul Travelers Securities Litigation I for pretrial purposes.  On September 26, 2005, the Company and the other defendants in In re St. Paul Travelers Securities Litigation II moved to dismiss the amended consolidated complaint.  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.  On June 10, 2005, the Company and the other defendants in Rowe moved to dismiss the complaint.  Oral argument on the motion to dismiss was presented on September 19, 2005.

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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.

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.

The Company’s Gulf operation 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 and authorities.  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,” branding requirements for salvage automobiles and the reporting of workers’ compensation premiums.   On August 26, 2005, the State of New York Office of the Attorney General informed the Company that its investigation relating to lawyer liability insurance has been closed with no action taken against the Company.  The Company or its affiliates have received subpoenas or written requests for information, in each case with respect to one or more of the areas described above, 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;

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(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 Hampshire Insurance Department; (xviii) State of New York Office of the Attorney General; (xix) State of New York Insurance Department; (xx) State of North Carolina Department of Insurance; (xxi) State of Ohio Office of the Attorney General; (xxii) State of Ohio Department of Insurance; (xxiii) Commonwealth of Pennsylvania Office of the Attorney General; (xxiv) State of Texas Department of Insurance; (xxv) State of Washington Office of the Insurance Commissioner; (xxvi) State of West Virginia Office of Attorney General; (xxvii) the United States Attorney for the Southern District of New York; and (xxviii) the United States Securities and Exchange Commission.  The Company and its affiliates may receive additional subpoenas and requests for information with respect to the areas described above from other agencies or authorities.

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 two individual actions have been brought against a number of insurance brokers and insurers, including the Company and certain of its affiliates, by plaintiffs who allegedly purchased insurance products through one or more of the defendant brokers.  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.  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

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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, lead plaintiffs filed an amended consolidated complaint.  The complaint includes causes of action under the Sherman Act, the Racketeer Influenced and Corrupt Organizations Act, state common law and the laws of the various states prohibiting antitrust violations.  Plaintiffs seek monetary damages, including punitive damages and trebled damages, permanent injunctive relief, restitution, including disgorgement of profits, interest and costs, including attorneys’ fees.  One other putative class action, Bensley Construction, Inc. v. Marsh & McLennan Companies, Inc., et al. (Mass. Super. Ct. May 16, 2005), and the two individual actions, Office Depot, Inc. v. Marsh & McLennan Companies, Inc., et al. (Fla. Cir. Ct. June 22, 2005) and Delta Pride Catfish, Inc. v. Marsh USA, Inc., et al. (D. Miss. Sept. 13, 2005), assert claims that are similar to those asserted in In re Insurance Brokerage Antitrust Litigation, but have not been consolidated with 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 plaintiffs in Bensley Construction have moved to remand it to state court.  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 material to the Company’s results of operations in a future period, in the opinion of the Company’s management none would likely have a material adverse effect 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 September 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 September 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

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investments were $141 million at September 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 $768 million and $483 million at September 30, 2005 and December 31, 2004, respectively.

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 September 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 September 30, 2005 was $180 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 September 30, 2005 was $54 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.  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 $796 million and $751 million at September 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 nine months ended September 30, 2005 and 2004 were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2005			2004			2005			2004
Premiums written
Direct	$	5,704		$	5,850		$	17,056		$	15,678
Assumed	326			279			803			603
Ceded	(934		)	(975		)	(2,767		)	(2,471		)
Net premiums written	$	5,096		$	5,154		$	15,092		$	13,810
Premiums earned
Direct	$	5,680		$	5,971		$	17,132		$	15,638
Assumed	289			264			815			698
Ceded	(992		)	(966		)	(2,742		)	(2,574		)
Net premiums earned	$	4,977		$	5,269		$	15,205		$	13,762
Claims and claim adjustment expenses
Direct	$	5,464		$	4,403		$	12,338		$	11,837
Assumed	699			470			1,145			745
Ceded	(1,796		)	(794		)	(2,805		)	(1,349		)
Policyholder dividends	(6		)	7			7			3
Net claims and claim adjustment expenses	$	4,361		$	4,086		$	10,685		$	11,236

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The significant increase in ceded loss and loss adjustment expenses in the three months and nine months ended September 30, 2005 over the respective 2004 periods primarily reflected cessions related to hurricane losses in the third quarter of 2005.  The Company 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 that were less than the total reinsurance balances due of approximately $1.26 billion. 

14.  CATASTROPHES

The Company’s pretax cost of catastrophes, net of reinsurance and including reinstatement premiums, totaled $1.52 billion ($1.01 billion after-tax) in the third quarter of 2005, all of which resulted from Hurricanes Katrina and Rita.  Hurricane Katrina made landfall in Florida, Louisiana, Mississippi and Alabama in August 2005, and Hurricane Rita made landfall in Texas and Louisiana in September 2005.  In the third quarter of 2004, the pretax cost of catastrophes, net of reinsurance, totaled $612 million ($402 million after-tax), all of which resulted from four hurricanes – Charley, Frances, Ivan and Jeanne – that also made landfall in the southeastern United States.  The cost of catastrophes was included in the Company’s business segments in the respective periods as follows:

	Three Months Ended September 30, 2005				Three Months Ended September 30, 2004
(in millions)	Pretax		After-tax		Pretax		After-tax
Commercial	$	867	$	563	$	286	$	185
Specialty	169		129		184		125
Personal	488		317		142		92
Total (net of reinsurance)	$	1,524	$	1,009	$	612	$	402

Hurricane Katrina accounted for $1.22 billion of the net pretax cost of catastrophes recorded in the third quarter of 2005 ($803 million after-tax), and Hurricane Rita accounted for the remaining $309 million of pretax cost of catastrophes ($206 million after-tax).  The following table provides additional information regarding the components of the estimated loss recorded related to Hurricane Katrina in the three months ended September 30, 2005. 

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(in millions)	Hurricane Katrina
Gross loss and loss adjustment expenses	$	2,545
Reinstatement premiums	112
Reinsurance recoverables	(1,442		)
Total estimated pretax loss	1,215
Income tax benefit	(412		)
Total estimated after-tax loss	$	803

The Company’s estimate of losses related to Hurricane Katrina was developed through an analysis of claims reported and anticipated to be reported, the values of properties in the affected areas, damage projections estimated by wind force and the presence of other perils, anticipated costs for demand surge and other factors of considerable judgment.  The reinsurance recoverable portion of the estimate assumes utilization of the Company’s corporate catastrophe treaty and recoverability under its property and other physical damage treaties and facultative contracts.  Due to the unprecedented nature of this event, including the complexity of factors contributing to the losses (for example, whether damage was caused by flooding versus wind) and the legal and regulatory uncertainties associated with this event (for example, litigation and regulatory initiatives seeking judicial expansion of policy coverage), there can be no assurance that the Company’s costs associated with Hurricane Katrina will not materially differ from the current recorded estimates.  Because of the uncertainties set forth above, additional liabilities may arise for amounts in excess of the current related reserves.  These additional liabilities or increase in estimates, or a range of either, cannot now be reasonably estimated.  A change in these estimates, as well as a change in the estimated losses resulting from Hurricane Rita, could be material to the Company’s results of operations in a future period; however, in the opinion of the Company’s management, such changes would not likely have a material adverse effect on the Company’s financial condition or liquidity. 

Reinstatement premiums represent additional premiums payable to reinsurers to maintain coverage limits for certain excess-of-loss reinsurance treaties.  In addition to the $112 million of reinstatement premiums related to Hurricane Katrina, the Company recorded additional reinstatement premiums of $7 million related to Hurricane Rita.  After payment of these reinstatement premiums, the Company has coverage for one additional limit under its corporate catastrophe treaty and continuing protection under most of its other treaties. 

For the nine months ended September 30, 2005, the pretax cost of catastrophes (net of reinsurance) totaled $1.57 billion ($1.04 billion after-tax), compared with pretax cost of catastrophes of $656 million ($431 million after-tax) in the same period of 2004. 

In October 2005, Hurricane Wilma made landfall in Florida, causing significant property damage and resulting in fourth quarter 2005 catastrophe losses for the Company.  Given the recent timing of Hurricane Wilma, the Company has not yet completed its normal procedures for developing a reliable estimate of losses related to this event.  These procedures include, among others, contacting policyholders who have reported claims, accessing areas to inspect damaged properties, and completing a comprehensive actuarial analysis of expected losses based on the timing, nature and location of the event.

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15.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 Accrued		2004						Balance at Dec. 31,		2005						Balance at September 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	$	(20	)	$	5		$	10
Costs to exit leases	4		(1		)	5			8		(2		)	(1		)	5
Other exit costs	4		(2		)	—			2		(2		)	—			—
Total included in the allocation of purchase price	79		(46		)	2			35		(24		)	4			15
Employee termination costs included in general and administrative expenses:
Commercial	33		(4		)	(9		)	20		(14		)	8			14
Specialty	2		(1		)	—			1		(5		)	5			1
Personal	4		—			(1		)	3		(3		)	2			2
Total included in general and administrative expenses	39		(5		)	(10		)	24		(22		)	15			17
Total restructuring costs	$	118	$	(51	)	$	(8	)	$	59	$	(46	)	$	19		$	32

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.  Adjustments recorded in the nine months ended September 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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16.INCOME TAXES

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

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2005			2004			2005			2004
Income tax expense (benefit) on continuing operations:
Federal:
Current	$	90		$	80		$	(28	)	$	174
Deferred	(218		)	(63		)	517			(187		)
Total federal income tax expense (benefit)	(128		)	17			489			(13		)
Foreign	39			28			86			42
State	6			3			16			7
Total income tax expense (benefit) on continuing operations	$	(83	)	$	48		$	591		$	36

17.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 September 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.

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THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 CONSOLIDATING STATEMENT OF INCOME (Unaudited)

For the three months ended September 30, 2005

(in millions)

	TPC			Other Subsidiaries			St. Paul Travelers (1)			Eliminations			Consolidated
Revenues
Premiums	$	3,015		$	1,962		$	—		$	—		$	4,977
Net investment income	549			251			12			—			812
Fee income	171			(2		)	—			—			169
Net realized investment gains (losses)	59			(19		)	(1		)	—			39
Other revenues	62			(17		)	3			(3		)	45
Total revenues	3,856			2,175			14			(3		)	6,042
Claims and expenses
Claims and claim adjustment expenses	2,976			1,385			—			—			4,361
Amortization of deferred acquisition costs	335			495			—			—			830
General and administrative expenses	416			355			21			(3		)	789
Interest expense	35			(1		)	36			—			70
Total claims and expenses	3,762			2,234			57			(3		)	6,050
Income (loss) from continuing operations before income taxes	94			(59		)	(43		)	—			(8		)
Income tax benefit	(28		)	(50		)	(5		)	—			(83		)
Equity in earnings of subsidiaries, net of tax	—			—			114			(114		)	—
Income (loss) from continuing operations	122			(9		)	76			(114		)	75
Discontinued operations:
Operating income, net of taxes	—			—			2			—			2
Gain on disposal, net of taxes	—			1			84			—			85
Income from discontinued operations	—			1			86			—			87
Net income (loss)	$	122		$	(8	)	$	162		$	(114	)	$	162

(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 nine months ended September 30, 2005

(in millions)

	TPC		Other Subsidiaries			St. Paul Travelers (1)			Eliminations			Consolidated
Revenues
Premiums	$	10,116	$	5,089		$	—		$	—		$	15,205
Net investment income	1,630		718			4			—			2,352
Fee income	502		3			—			—			505
Net realized investment gains (losses)	31		(41		)	(6		)	—			(16		)
Other revenues	132		5			9			(8		)	138
Total revenues	12,411		5,774			7			(8		)	18,184
Claims and expenses
Claims and claim adjustment expenses	7,229		3,456			—			—			10,685
Amortization of deferred acquisition costs	1,489		934			—			—			2,423
General and administrative expenses	1,608		742			49			(8		)	2,391
Interest expense	106		(2		)	107			—			211
Total claims and expenses	10,432		5,130			156			(8		)	15,710
Income (loss) from continuing operations before income taxes	1,979		644			(149		)	—			2,474
Income tax expense (benefit)	513		261			(183		)	—			591
Equity in earnings of subsidiaries, net of tax	—		—			1,887			(1,887		)	—
Income from continuing operations	1,466		383			1,921			(1,887		)	1,883
Discontinued operations:
Operating loss, net of taxes	—		(82		)	(581		)	—			(663		)
Gain on disposal, net of taxes	—		120			103			—			223
Income (loss) from discontinued operations	—		38			(478		)	—			(440		)
Net income	$	1,466	$	421		$	1,443		$	(1,887	)	$	1,443

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

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THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEET (Unaudited)

At September 30, 2005

(in millions)	TPC			Other Subsidiaries		St. Paul Travelers (1)			Eliminations			Consolidated
Assets
Fixed maturities, available for sale at fair value (including $2,536 subject to securities lending and repurchase agreements) (amortized cost $57,707)	$	36,589		$	21,325	$	380		$	—		$	58,294
Equity securities, at fair value (cost $620)	520			98		57			—			675
Real estate	7			731		—			—			738
Mortgage loans	109			38		—			—			147
Short-term securities	3,761			1,160		1,054			—			5,975
Other investments	1,690			1,219		79			—			2,988
Total investments	42,676			24,571		1,570			—			68,817
Cash	193			245		4			—			442
Investment income accrued	444			297		12			(10		)	743
Premiums receivable	3,889			2,260		—			—			6,149
Reinsurance recoverables	13,977			5,475		—			—			19,452
Ceded unearned premiums	1,103			458		—			—			1,561
Deferred acquisition costs	1,209			349		—			—			1,558
Deferred tax asset	1,208			762		15			—			1,985
Contractholder receivables	4,398			1,260		—			—			5,658
Goodwill	2,412			1,040		—			—			3,452
Intangible assets	327			630		—			—			957
Investment in subsidiaries	—			—		23,869			(23,869		)	—
Other assets	1,786			723		408			(249		)	2,668
Total assets	$	73,622		$	38,070	$	25,878		$	(24,128	)	$	113,442
Liabilities
Claims and claim adjustment expense reserves	$	40,316		$	20,270	$	—		$	—		$	60,586
Unearned premium reserves	7,497			3,667		—			—			11,164
Contractholder payables	4,398			1,260		—			—			5,658
Payables for reinsurance premiums	390			518		—			—			908
Debt	2,622			203		3,175			(247		)	5,753
Other liabilities	4,478			2,202		295			(10		)	6,965
Total liabilities	59,701			28,120		3,470			(257		)	91,034
Shareholders’ equity
Preferred stock:
Stock Ownership Plan – convertible preferred stock (0.5 shares issued and outstanding)	—			—		160			—			160
Common stock (1,750.0 shares authorized; 693.2 shares issued; 692.2 shares outstanding)	—			745		18,119			(745		)	18,119
Additional paid-in-capital	9,916			7,723		—			(17,639		)	—
Retained earnings	3,531			1,452		3,733			(4,983		)	3,733
Accumulated other changes in equity from nonowner sources	506			30		538			(536		)	538
Treasury stock, at cost (1.0 shares)	—			—		(41		)	—			(41		)
Unearned compensation	(32		)	—		(101		)	32			(101		)
Total shareholders’ equity	13,921			9,950		22,408			(23,871		)	22,408
Total liabilities and shareholders’ equity	$	73,622		$	38,070	$	25,878		$	(24,128	)	$	113,442

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

47

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.

48

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

For the nine months ended September 30, 2005

(in millions)	TPC			Other Subsidiaries			St. Paul Travelers (1)			Eliminations			Consolidated
Cash flows from operating activities
Net income	$	1,466		$	421		$	1,443		$	(1,887	)	$	1,443
Net adjustments to reconcile net income to net cash provided by operating activities	970			30			(1,218		)	1,887			1,669
Net cash provided by operating activities	2,436			451			225			—			3,112
Cash flows from investing activities
Proceeds from maturities of investments
Fixed maturities	2,302			1,507			5			—			3,814
Mortgage loans	36			13			—			—			49
Proceeds from sales of investments
Fixed maturities	2,277			985			171			—			3,433
Equity securities	250			31			—			—			281
Real estate	—			39			—			—			39
Purchases of investments
Fixed maturities	(6,797		)	(4,443		)	(923		)	—			(12,163		)
Equity securities	(2		)	(35		)	—			—			(37		)
Real estate	(7		)	(22		)	—			—			(29		)
Short-term securities (purchased) sold, net	(1,067		)	964			(927		)	—			(1,030		)
Other investments, net	507			123			—			—			630
Securities transactions in course of settlement	230			(27		)	—			—			203
Other	(98		)	9			16			—			(73		)
Net cash used by investing activities	(2,369		)	(856		)	(1,658		)	—			(4,883		)
Cash flows from financing activities
Payment of debt	(4		)	—			(518		)	—			(522		)
Dividends to shareholders	—			—			(467		)	—			(467		)
Issuance of common stock-employee stock options	—			—			129			—			129
Issuance of common stock-maturity of equity unit forward contracts	—			—			442			—			442
Treasury stock acquired – net employee stock-based compensation	—			—			(27		)	—			(27		)
Intercompany dividends	(860		)	133			727			—			—
Capital contributions and loans between subsidiaries	824			36			(860		)	—			—
Net cash provided (used) by financing activities	(40		)	169			(574		)	—			(445		)
Effect of exchange rate changes on cash	—			(3		)	—			—			(3		)
Net proceeds from sale of discontinued operations	—			405			1,994			—			2,399
Net increase (decrease) in cash	27			166			(13		)	—			180
Cash at beginning of period	166			79			17			—			262
Cash at end of period	$	193		$	245		$	4		$	—		$	442
Supplemental disclosure of cash flow information
Income taxes (received) paid	$	509		$	307		$	(295	)	$	—		$	521
Interest paid	$	115		$	—		$	146		$	—		$	261

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

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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 nine months ended September 30, 2005 reflects the consolidated accounts of SPC and TPC.  The financial information presented herein for the nine months ended September 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 six months ended September 30, 2004. 

In the third quarter of 2005, the Company completed the divestiture of its 78% equity interest in Nuveen Investments, which is described in more detail later in this discussion.  The Company’s share of Nuveen Investments’ operating results in 2005 prior to divestiture was classified as discontinued operations, and the Company’s prior year results were reclassified to conform to the 2005 presentation. 

EXECUTIVE SUMMARY

2005 Third Quarter Consolidated Results of Operations

•Income from continuing operations of $75 million, or $0.11 per share basic and diluted

•Net income of $162 million, or $0.24 per share basic and $0.23 per share diluted, including income from discontinued operations of $87 million, or $0.13 per share basic and $0.12 per share diluted

•Discontinued operations include $85 million after-tax gain on divestiture of 27.5 million shares of Nuveen Investments

•Total cost of catastrophes of $1.52 billion pretax (net of reinsurance) and $1.01 billion after-tax from Hurricanes Katrina and Rita

•Gross written premiums of $6.03 billion and net written premiums of $5.10 billion; net written premiums reduced by $119 million of reinstatement premiums related to catastrophes

•GAAP combined ratio of 116.2%; catastrophes account for 30.3 points of combined ratio

•Net investment income of $625 million, after-tax 

•Strong retention across all three business segments

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

2005 Third Quarter Consolidated Financial Condition

•Total assets of $113.44 billion, up $2.20 billion from December 31, 2004

•Total investments of $68.82 billion, up $4.45 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 $5.75 billion, down $560 million from December 31, 2004

•Shareholders’ equity of $22.41 billion, up $1.21 billion from December 31, 2004

50

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. 

	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions, except per share amounts)	2005		2004		2005			2004
Income from continuing operations	$	75	$	311	$	1,883		$	596
Income (loss) from discontinued operations	87		29		(440		)	56
Net income	$	162	$	340	$	1,443		$	652
Basic earnings (loss) per share:
Income from continuing operations	$	0.11	$	0.46	$	2.79		$	1.01
Income (loss) from discontinued operations	0.13		0.05		(0.65		)	0.09
Net income	$	0.24	$	0.51	$	2.14		$	1.10
Diluted earnings (loss) per share:
Income from continuing operations	$	0.11	$	0.45	$	2.69		$	1.00
Income (loss) from discontinued operations	0.12		0.05		(0.62		)	0.09
Net income	$	0.23	$	0.50	$	2.07		$	1.09
Weighted average number of common shares outstanding:
Basic	679.2		665.9		672.3			588.7
Diluted	683.8		707.9		711.3			607.0

The Company’s discussions related to all items, other than net income, income from continuing operations, income (loss) from discontinued operations, and segment operating income (loss), are presented on a pretax basis, unless otherwise noted.  The weighted average number of common shares used in the diluted earnings per share calculation for the three months ended September 30, 2005 did not include the potentially dilutive effects of the Company’s convertible preferred stock, zero coupon convertible notes, convertible junior subordinated notes or equity unit stock purchase contracts, because their effect was anti-dilutive.  In addition, the diluted earnings per share calculation for the nine months ended September 30, 2004 excluded the potentially dilutive effect of the Company’s convertible junior subordinated notes because their effect was anti-dilutive. 

Income from continuing operations in the third quarter of 2005 totaled $75 million, or $0.11 per share diluted, compared with income from continuing operations of $311 million, or $0.45 per share diluted, in the third quarter of 2004.  For the nine months ended September 30, 2005, income from continuing operations totaled $1.88 billion, or $2.69 per share diluted, compared with income from continuing operations of $596 million, or $1.00 per share diluted, in the same 2004 period.  The after-tax cost of catastrophes in the three months and nine months ended September 30, 2005 totaled $1.01 billion and $1.04 billion respectively, compared with the after-tax cost of catastrophes of $402 million and $431 million in the respective periods of 2004.  Net after-tax favorable prior year reserve development in the three months and nine months ended September 30, 2005 totaled $70 million and $156 million, respectively, compared with net after-tax unfavorable prior year reserve development of $55 million and $1.01 billion in the respective periods of 2004.  Through the first nine months of 2005, net income included a net loss from discontinued operations of $440 million, primarily consisting of $710 million of tax expense related to the Company’s equity ownership in Nuveen Investments, partially offset by the $223 million gain on the divestiture (of which $85 million was recognized in the third quarter of 2005) and the Company’s share of Nuveen Investments’ 2005 net income prior to the divestiture.

51

Impact of Catastrophes

The Company’s pretax cost of catastrophes, net of reinsurance and including reinstatement premiums, totaled $1.52 billion ($1.01 billion after-tax) in the third quarter of 2005, all of which resulted from Hurricanes Katrina and Rita.  Hurricane Katrina made landfall in Florida, Louisiana, Mississippi and Alabama in August 2005, and Hurricane Rita made landfall in Texas and Louisiana in September 2005.  In the third quarter of 2004, the pretax cost of catastrophes, net of reinsurance, totaled $612 million ($402 million after-tax), all of which resulted from four hurricanes – Charley, Frances, Ivan and Jeanne – that also made landfall in the southeastern United States.  The cost of catastrophes was included in the Company’s business segments in the respective periods as follows:

	Three Months Ended September 30, 2005				Three Months Ended September 30, 2004
(in millions)	Pretax		After-tax		Pretax		After-tax
Commercial	$	867	$	563	$	286	$	185
Specialty	169		129		184		125
Personal	488		317		142		92
Total (net of reinsurance)	$	1,524	$	1,009	$	612	$	402

Hurricane Katrina accounted for $1.22 billion of the net pretax cost of catastrophes recorded in the third quarter of 2005 ($803 million after-tax), and Hurricane Rita accounted for the remaining $309 million of the pretax cost of catastrophes ($206 million after-tax).  The following table provides additional information regarding the components of the estimated loss recorded related to Hurricane Katrina in the three months ended September 30, 2005. 

(in millions)	Hurricane Katrina
Gross loss and loss adjustment expenses	$	2,545
Reinstatement premiums	112
Reinsurance recoverables	(1,442		)
Total estimated pretax loss	1,215
Income tax benefit	(412		)
Total estimated after-tax loss	$	803

The Company’s estimate of losses related to Hurricane Katrina was developed through an analysis of claims reported and anticipated to be reported, the values of properties in the affected areas, damage projections estimated by wind force and the presence of other perils, anticipated costs for demand surge and other factors of considerable judgment.  The reinsurance recoverable portion of the estimate assumes utilization of the Company’s corporate catastrophe treaty and recoverability under its property and other physical damage treaties and facultative contracts.  Due to the unprecedented nature of this event, including the complexity of factors contributing to the losses (for example, whether damage was caused by flooding versus wind) and the legal and regulatory uncertainties associated with this event (for example, litigation and regulatory initiatives seeking judicial expansion of policy coverage), there can be no assurance that the Company’s costs associated with Hurricane Katrina will not materially differ from the current recorded estimates.  Because of the uncertainties set forth above, additional liabilities may arise for amounts in excess of the current related reserves.  These additional liabilities or increase in estimates, or a range of either, cannot now be reasonably estimated.  A change in these estimates, as well as a change in the estimated losses resulting from Hurricane Rita, could be material to the Company’s results of operations in a future period; however, in the opinion of the Company’s management, such changes would not likely have a material adverse effect on the Company’s financial condition or liquidity. 

52

Reinstatement premiums represent additional premiums payable to reinsurers to maintain coverage limits for certain excess-of-loss reinsurance treaties.  In addition to the $112 million of reinstatement premiums related to Hurricane Katrina, the Company recorded additional reinstatement premiums of $7 million related to Hurricane Rita.  After payment of these reinstatement premiums, the Company has coverage for one additional limit under its corporate catastrophe treaty and continuing protection under most of its other treaties.

For the nine months ended September 30, 2005, catastrophe losses (net of reinsurance) totaled $1.57 billion ($1.04 billion after-tax), compared with catastrophe losses of $656 million ($431 million after-tax) in the same period of 2004.

In October 2005, Hurricane Wilma made landfall in Florida, causing significant property damage and resulting in fourth quarter 2005 catastrophe losses for the Company.  Given the recent timing of Hurricane Wilma, the Company has not yet completed its normal procedures for developing a reliable estimate of losses related to this event.  These procedures include, among others, contacting policyholders who have reported claims, accessing areas to inspect damaged properties, and completing a comprehensive actuarial analysis of expected losses based on the timing, nature and location of the event.

In part as a result of the severity and frequency of storms since the end of the second quarter of 2005, the Company expects the cost of reinsurance to increase, and there may be reduced availability of reinsurance coverage.  To the extent that the Company is not able to reflect the increased costs in its pricing, total revenues will be adversely impacted.  In particular, in the Personal segment, the Company expects a delay in its ability to increase pricing to offset the increased cost of reinsurance as the Company seeks to have increased rates approved by the relevant state regulatory authorities.  Given the increased severity and frequency of storms, the Company is reassessing its definition of and exposure to coastal risks.

Consolidated Results of Operations

Consolidated revenues from continuing operations were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2005			2004			2005			2004
Earned premiums	$		4,977	$	5,269		$	15,205		$	13,762
Net investment income	812			667			2,352			1,928
Fee income	169			186			505			529
Realized investment gains (losses)	39			(49		)	(16		)	(36		)
Other	45			56			138			133
Total revenues	$	6,042		$	6,129		$	18,184		$	16,316

The $292 million decline in earned premiums in the third quarter of 2005 compared with the same 2004 period reflected the $119 million of reinstatement premiums described in the “Consolidated Overview” section herein, the planned non-renewal of business in runoff included in the Commercial segment, and a reduction in earned premium volume in ongoing Commercial operations due to lower levels of written premiums in the last half of 2004 and the first half of 2005.  For the first nine months of 2005, the $1.44 billion increase in earned premiums over the same period of 2004 primarily reflected the impact of the merger, partly offset by the impact of reinstatement premiums and runoff and ongoing Commercial business described above.

Net investment income of $812 million in the third quarter of 2005 grew $145 million, or 22%, over the same period in 2004, driven by the increase in invested assets over the last twelve months, higher short-term interest rates, and 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 the $2.40 billion in proceeds from the divestiture of the Company’s equity interest in Nuveen Investments.  The $424 million increase in net investment income for the first nine months of 2005 over the same 2004 period reflected these factors, as well as the impact of

53

the merger.  Net investment income in the first nine months of 2004 included $107 million of income from 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 nine 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 nine months of 2005 when compared with the same 2004 period.

Fee income in the third quarter and first nine months of 2005 declined 9% and 5% when compared with the respective 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 gains in the third quarter of 2005 totaled $39 million, compared with net pretax realized investment losses of $49 million in the same 2004 period.  Gains in the 2005 third quarter were driven by $33 million of gains related to U.S. Treasury futures, which are settled daily and are used to shorten the duration of the fixed maturity portfolio.  In addition, the Company realized a pretax gain of $15 million in the third quarter of 2005 from the sale of one real estate property.  These gains, and additional gains related to venture capital and common stock holdings, were partially offset by impairment losses of $34 million in the third quarter, the majority of which related to venture capital holdings.  Net pretax realized losses in the third quarter of 2004 were driven by impairment losses of $28 million, which were also centered in the venture capital portfolio.  For the nine months ended September 30, 2005, impairment losses totaled $85 million, which were substantially offset by realized gains related to the sale of venture capital holdings.  Net pretax realized investment losses of $36 million in the first nine months of 2004 were driven by impairment losses totaling $62 million, which were partially offset by gains generated primarily by the fixed maturity portfolio.

Consolidated gross and net written premiums were as follows:

	Three Months Ended September 30,
	2005					2004
(in millions)	Gross			Net		Gross		Net
Commercial	$		2,644	$	1,989	$	2,854	$	2,131
Specialty	1,654			1,480		1,640		1,451
Personal	1,732			1,627		1,635		1,572
Total	$	6,030		$	5,096	$	6,129	$	5,154

	Nine Months Ended September 30,
	2005					2004
(in millions)	Gross			Net		Gross		Net
Commercial	$		7,876	$	6,228	$	7,866	$	6,130
Specialty	5,103			4,179		3,781		3,183
Personal	4,880			4,685		4,634		4,497
Total	$	17,859		$	15,092	$	16,281	$	13,810

54

For the three months ended September 30, 2005, gross written premiums decreased 2% 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 planned non-renewal of business in runoff included in that segment.  The impact of the decline in premium volume in the runoff operations was partially offset by strong retention levels throughout the Company’s operations, and growth in new business levels in many of the Company’s underwriting businesses.  Rates, however, continued to moderate in the third quarter of 2005, reflecting increased competition and more aggressive pricing in the marketplace, particularly for new business.  Net written premiums in the third quarter and first nine months of 2005 were also reduced by the $119 million of reinstatement premiums discussed above.  For the nine months ended September 30, 2005, gross and net written premiums increased 10% and 9%, 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 nine months of 2005 when compared with the same period 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.

Consolidated claims and expenses were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2005		2004		2005		2004
Claims and claim adjustment expenses	$	4,361	$	4,086	$	10,685	$	11,236
Amortization of deferred acquisition costs	830		820		2,423		2,151
General and administrative expenses	789		792		2,391		2,123
Interest expense	70		67		211		166
Total claims and expenses	$	6,050	$	5,765	$	15,710	$	15,676

Claims and claim adjustment expenses in the third quarter of 2005 included $1.41 billion of catastrophe losses, compared with $612 million of catastrophe losses in the same period of 2004.  Claims and claim adjustment expenses in the third quarter of 2005 also included $102 million of net favorable prior year reserve development, compared with $83 million of net unfavorable prior year reserve development in the same period of 2004.  The net favorable prior year reserve development in 2005 was concentrated in the Personal segment.  Claims and claim adjustment expenses in the third quarter of 2005 also reflected $34 million of additional improvement in current accident year non-catastrophe related loss experience as compared with the same period of 2004.  Catastrophe losses included in claims and expenses through the first nine months of 2005 totaled $1.45 billion, compared with $652 million in the same 2004 period.  Through the first nine months of 2005, net favorable prior year reserve development totaled $232 million, compared with net unfavorable prior year reserve development of $1.52 billion in the same 2004 period.

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The net unfavorable prior year reserve development in the first nine months of 2004 primarily consisted of provisions recorded in the second quarter of the year 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.

Through the first nine months of 2005, the amortization of deferred acquisition costs was $272 million higher than in the same 2004 period, consistent with the increase in earned premiums and also reflecting the impact of the merger.

The $268 million increase in general and administrative expenses in the first nine months of 2005 compared with the same 2004 period primarily reflected the impact of the merger.  In addition, the 2005 nine-month total reflected investments made for process re-engineering and to support business growth and product development, primarily in the Personal segment, which were partially offset by the benefit of expense efficiencies achieved since the merger date.  The year-to-date 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 first nine months of 2004 also included $40 million of restructuring charges related to the merger.  Included in the 2005 and 2004 nine-month totals were $121 million and $96 million, respectively, of amortization expense related to finite-lived intangible assets acquired in the merger, and a benefit of $12 million and $47 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 nine months ended September 30, 2005 over the same period of 2004 primarily 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 September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Loss and loss adjustment expense ratio	86.3	%	75.8	%	68.8	%	79.9	%
Underwriting expense ratio	29.9		28.0		29.1		28.1
GAAP combined ratio	116.2	%	103.8	%	97.9	%	108.0	%

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Catastrophe losses accounted for 29.6 points and 10.0 points of the third quarter and year-to-date 2005 loss and loss adjustment expense ratios, respectively.  Catastrophe losses accounted for 11.6 points and 4.8 points of the loss and loss and loss adjustment expense ratios in the respective periods of 2004.  The loss and loss adjustment expense ratio for the third quarter of 2005 included a 2.0 point impact of net favorable prior year reserve development, whereas the third quarter 2004 ratio included a 1.6 point impact of net unfavorable prior year reserve development.  In addition, the third quarter 2005 loss and loss adjustment expense ratio reflected a 1.4 point impact of favorable current accident year non-catastrophe loss experience, compared with a 0.7 point favorable impact of such experience in the same period of 2004.  Through the first nine months of 2005, the loss and loss adjustment expense ratio included a 1.6 point impact of net favorable prior year reserve development, whereas the loss and loss adjustment expense ratio for the same period of 2004 included an 11.1 point impact from net unfavorable prior year reserve development.  The 1.9 point increase in the third quarter 2005 underwriting expense ratio compared with the same 2004 period reflected the impact of reinstatement premiums, earned premium declines primarily associated with runoff operations in the Commercial segment, increased commission expenses in the Personal segment and the impact of investments made for process re-engineering and to support business growth and product development, primarily in the Personal segment.  These factors were partially offset by expense efficiencies realized since the completion of the merger.  The 1.0 point increase in the year-to-date 2005 underwriting expense ratio over the same 2004 period primarily reflected the impact of the same factors described above.

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.  The divestiture was completed through a series of transactions in the second and third quarters of 2005, resulting in net pretax cash proceeds of $2.40 billion, including net pretax proceeds of $532 million in the third quarter of 2005.

In conjunction with these transactions, the Company recorded a pretax gain on disposal of $343 million ($223 million after-tax) for the nine months ended September 30, 2005, including a pretax gain on disposal of $131 million ($85 million after-tax) for the quarter ended September 30, 2005.  Additionally, the Company recorded a net operating loss from discontinued operations of $663 million for the nine months ended September 30, 2005, consisting primarily of $710 million of 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 nine months ended September 30, 2005.  The Company recorded net operating income from discontinued operations of $2 million for the three months ended September 30, 2005.

The assets and liabilities related to Nuveen Investments were removed from the respective lines of the Company’s consolidated balance sheet and reported under the caption “Net assets of discontinued operations” in the consolidated balance sheet at December 31, 2004.  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.

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 the following three marketing and underwriting groups, each of which focuses on a particular client base and which collectively comprise Commercial’s core operations:

•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 captive reinsurers.  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 assumed 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 September 30,						Nine Months Ended September 30,
(in millions)	2005			2004			2005			2004
Revenues:
Earned premiums	$	2,078		$	2,364		$	6,446		$	6,506
Net investment income	483			424			1,461			1,266
Fee income	160			178			479			510
Other revenues	19			23			47			49
Total revenues	$	2,740		$	2,989		$	8,433		$	8,331
Total claims and expenses	$	2,851		$	2,736		$	7,210		$	7,056
Operating income (loss)	$	(14	)	$	224		$	964		$	970
Loss and loss adjustment expense ratio	98.7		%	80.4		%	74.9		%	72.9		%
Underwriting expense ratio	31.0			27.5			29.3			27.6
GAAP combined ratio	129.7		%	107.9		%	104.2		%	100.5		%

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The operating loss of $14 million for the third quarter of 2005 was $238 million lower than operating income of $224 million in the same 2004 period, driven by the significant hurricane losses described in the “Consolidated Overview” section herein.  The third quarter of 2005 included $563 million of after-tax cost of catastrophes, compared with after-tax cost of catastrophes of $185 million in the same period of 2004.  Through the first nine months of 2005, operating income of $964 million was slightly lower than in the same 2004 period.  Non-catastrophe current accident year loss trends in the Commercial segment in the third quarter and first nine months of 2005 remained favorable when compared with the respective prior year periods.  The after-tax cost of catastrophes through the first nine months of 2005 and 2004 were the same as the respective third quarters of each year, as there were no catastrophe losses incurred in the first six months of either year.

The $286 million decline in earned premiums in the third quarter of 2005 compared with the same 2004 period included a significant decline in runoff operations, where business is intentionally being non-renewed.  In addition, the reinstatement premiums described in the “Consolidated Overview” section herein reduced net earned premium volume in the third quarter of 2005 by $52 million.  Although net written premium volume in the third quarter of 2005 excluding the impact of reinstatement premiums was comparable with the same 2004 period, the remainder of the earned premium decline in the third quarter of 2005 reflected lower levels of net written premiums in the last half of 2004 and the first half of 2005.  Earned premium volume through the first nine months of 2005 was $60 million below the comparable total in the same period of 2004, reflecting the same factors influencing the decline in third quarter 2005 earned premiums, which were partially offset by the impact of the merger.

Net investment income in the third quarter of 2005 increased $59 million over the same 2004 period, primarily due to the increase in invested assets resulting from strong consolidated operational cash flows since the merger, an increase in short-term interest rates and strong returns from partnership investments.  Through the first nine months of 2005, the $195 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 nine months ended September 30, 2004 included $67 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 decline in fee income in the third quarter and first nine months of 2005 compared with the same 2004 periods was primarily due to increased competition, including the loss of several large customers in 2005.

Claims and expenses for the third quarter of 2005 included $815 million of catastrophe losses (net of reinsurance), compared with net catastrophe losses of $286 million in the same 2004 period.  Net favorable prior year reserve development in the Commercial segment totaled $6 million in the third quarter of 2005, primarily due to unfavorable development related to the assumed reinsurance business in runoff being more than offset by favorable development in the Commercial Accounts and Select Accounts operations.  Net unfavorable prior year reserve development totaled $117 million in the same 2004 period.  Through the first nine months of 2005, net favorable prior year reserve development was $10 million, compared with net unfavorable prior year reserve development of $324 million in the same period of 2004.  Claims and expenses in the first nine months 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 $156 million.  Partially offsetting the impact of these reserve increases in 2004 was favorable prior year loss development of $225 million related to fewer than expected claims from the September 11, 2001 terrorist attack.

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The loss and loss adjustment expense ratio in the third quarter of 2005 included a 40.7 point impact from catastrophe losses, compared with a 12.1 point impact from catastrophe losses in the same 2004 period.  For the third quarter of 2005 and 2004, the impact of prior year reserve development on the loss and loss adjustment expense ratio was 0.3 points favorable and 4.9 points unfavorable, respectively. The loss and loss adjustment expense ratio for the first nine months of 2005 included a 13.1 point impact from catastrophe losses, compared with a 4.4 point impact from catastrophe losses in the same 2004 period.  For the first nine 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.

The underwriting expense ratio in the third quarter of 2005 was 3.5 points higher than the same quarter of 2004, primarily reflecting the earned premium declines associated with Gulf and other business in runoff and the 0.7 point impact of the $52 million in reinstatement premiums described in the “Consolidated Overview” section herein.  Through the first nine months of 2005, the underwriting expense ratio was 1.7 points higher than the comparable 2004 ratio, primarily reflecting the same factors influencing the third quarter ratio, which were partially offset by the favorable impact of expense management initiatives and personnel reductions in the Commercial Other sector.  The 2004 year-to-date underwriting expense ratio included the impact of merger-related restructuring charges and an increase in the allowance for uncollectible amounts due from policyholders.

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

	Three Months Ended September 30,
	2005				2004
(in millions)	Gross		Net		Gross		Net
Commercial Accounts	$	1,247	$	1,022	$	1,257	$	1,075
Select Accounts	685		652		677		653
National Accounts	693		298		711		290
Total Commercial Core	2,625		1,972		2,645		2,018
Commercial Other	19		17		209		113
Total Commercial	$	2,644	$	1,989	$	2,854	$	2,131

	Nine Months Ended September 30,
	2005				2004
(in millions)	Gross		Net		Gross		Net
Commercial Accounts	$	3,610	$	3,217	$	3,380	$	3,039
Select Accounts	2,120		2,055		1,956		1,893
National Accounts	2,009		877		1,729		771
Total Commercial Core	7,739		6,149		7,065		5,703
Commercial Other	137		79		801		427
Total Commercial	$	7,876	$	6,228	$	7,866	$	6,130

Gross and net written premiums in the third quarter of 2005 declined 7% compared with the same period of 2004, with the decline concentrated in the runoff operations comprising Commercial Other, which was planned. In addition, 2005 net written premiums for Commercial Core operations was reduced by the $52 million of reinstatement premiums described in the “Consolidated Overview” section herein. In the Commercial Accounts

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market, business retention levels in the third quarter of 2005 improved over the same period of 2004, and were consistent with the first half of 2005. New business levels in the third quarter grew over the same period of 2004 and were consistent with the first half of 2005. Renewal price changes in Commercial Accounts were slightly lower than the same 2004 period and consistent with the last several quarters. In the Select Accounts market, business retention levels in the third quarter of 2005 remained very strong and grew over the first half of 2005 and the third quarter of 2004. Renewal price changes in Select Accounts remained positive in the third quarter of 2005, but were below renewal price changes in the first half of 2005. New business levels in Select Accounts grew slightly over the third quarter of 2004 and were slightly higher than in the first half of 2005. In National Accounts, gross written premiums in the third quarter of 2005 declined 3% compared with the same period of 2004, reflecting increasingly competitive pricing conditions. Net written premiums, however, increased 3% over the third quarter of 2004, reflecting a decline in reinsurance purchased. Through the first nine 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 third quarter and first nine months of 2005 compared with the same periods of 2004 was primarily due to intentional non-renewals in the runoff operations comprising this category.

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.

•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.

In August 2005, the Company announced that it had reached a definitive agreement to sell its Personal Catastrophe Risk business. The transaction closed on November 1, 2005, and accordingly, the Company will report a net pretax realized gain of approximately $20 million in the fourth quarter of 2005. In accordance with terms of the agreement, the Company retained responsibility for the pre-sale loss and loss adjustment expense reserves related to this business. The impact of this transaction will not be material to the Company’s ongoing operations.

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.

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	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2005			2004			2005			2004
Revenues:
Earned premiums	$	1,388		$	1,466		$	4,293		$	3,152
Net investment income	204			149			547			329
Fee income	9			8			26			19
Other revenues	2			7			22			12
Total revenues	$	1,603		$	1,630		$	4,888		$	3,512
Total claims and expenses	$	1,419		$	1,578		$	4,157		$	4,734
Operating income (loss)	$	130		$	38		$	524		$	(780	)
Loss and loss adjustment expense ratio	69.7		%	74.5		%	64.5		%	115.3		%
Underwriting expense ratio	31.7			32.2			31.6			34.0
GAAP combined ratio	101.4		%	106.7		%	96.1		%	149.3		%

Operating income of $130 million in the third quarter of 2005 was $92 million higher than operating income in the third quarter of 2004. The significant increase over 2004 was primarily due to strong net investment income, improved current accident year results in several domestic businesses (particularly Bond) and lower commission rates in certain business units. Operating results in the third quarter of 2005 included $129 million of after-tax cost of catastrophes (including reinstatement premiums), compared with after-tax cost of catastrophes of $125 million in the same 2004 period. Through the first nine months of 2005, operating income was $1.30 billion higher than in the same period of 2004, reflecting improved non-catastrophe related loss experience throughout the Specialty segment in 2005 and the impact in the 2004 year-to-date period of $931 million of net after-tax unfavorable prior year reserve development, and other charges that are discussed in more detail below.

Earned premiums in the third quarter of 2005 declined $78 million from the same 2004 period, primarily reflecting the impact of $46 million in reinstatement premiums related to the hurricane losses described in the “Consolidated Overview” section herein. Earned premium volume excluding the reinstatement premium impact was also down from the third quarter of 2004, driven by declines in Construction and Bond, which were partially offset by an increase in Financial and Professional Services. The Construction decline primarily reflected the impact of the now-completed process of aligning the Construction underwriting profile of the two predecessor companies, whereas the Bond decline primarily reflected a change in the structure of reinsurance in that operation. The increase in Financial and Professional Services earned premiums reflected the impact of new business, and business previously written in the Company’s Gulf operation. International earned premiums were also down when compared with the third quarter of 2004, driven by the planned non-renewal of certain classes of personal insurance business at Lloyd’s. Domestic earned premiums totaled $1.13 billion in the third quarter of 2005, compared with $1.16 billion in the same period of 2004. International earned premiums for the same periods were $255 million and $304 million, respectively. For the nine months ended September 30, 2005, earned premium growth of $1.14 billion in the Specialty segment over the same period of 2004 primarily reflected the impact of the merger.

Third quarter 2005 net investment income of $204 million grew $55 million over the same period of 2004, primarily driven by the increase in invested assets over the last twelve months resulting from strong consolidated operational cash flows and an increase in short-term interest rates. For the first nine months of 2005, the $218 million increase in net investment income over the same period of 2004 reflected the increase in invested assets, as well as the impact of the merger.

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Claims and expenses in the third quarter of 2005 included $123 million of catastrophe losses, compared with catastrophe losses of $179 million in the same 2004 period. Catastrophe losses in both periods were driven by the hurricanes described in the “Consolidated Overview” section herein. Catastrophe losses included in claims and expenses for the first nine months of 2005 and 2004 totaled $142 million and $179 million, respectively. Net favorable prior year reserve development in the third quarter of 2005 totaled $13 million, compared with net unfavorable development of $3 million in the same 2004 period. Through the first nine months of 2005, net unfavorable prior year reserve development totaled $56 million. In the first nine months of 2004, claims and expenses included $1.44 billion 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 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.

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 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.

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Also on April 1, 2004, the Company began 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.

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.

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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.  In the second quarter of 2005, the Company reached a settlement with the 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 the 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. 

Year-to-date results in 2004 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 third quarter of 2005 included a 10.9 point impact from catastrophe losses, whereas the comparable 2004 ratio included a 12.4 point impact from catastrophe losses.  Through the first nine months of 2005, catastrophe losses accounted for 4.0 points of the loss and loss adjustment expense ratio, compared with 5.8 points in the same 2004 period.  The loss and loss adjustment expense ratio for the third quarter of 2005 also included a 0.9 point benefit from favorable prior year reserve development, whereas the comparable 2004 ratio impact from unfavorable prior year reserve development was minimal.  Through the first nine months of 2005 and 2004, net unfavorable prior year reserve development accounted for 1.3 points and 45.7 points, respectively, of the loss and loss adjustment expense ratios. 

The 2005 third quarter and year-to-date underwriting expense ratios improved 0.5 points and 2.4 points, respectively, over the same periods of 2004.  The reinstatement premiums described in the “Consolidated Overview” section herein had a negative impact of 1.0 point on the third quarter 2005 underwriting expense ratio, whereas the impact on the 2005 year-to-date underwriting expense ratio was minimal.  The improvement in the 2005 underwriting expense ratios reflected the impact of expense management initiatives since the completion of the merger.  In addition, the year-to-date 2004 underwriting expense ratio was negatively impacted by $65 million of reinstatement premiums related to the surety charges discussed previously, as well as a provision to increase the allowance for estimated amounts due from policyholder receivables and merger-related restructuring costs.

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

	Three Months Ended September 30,
	2005				2004
(in millions)	Gross		Net		Gross		Net
Construction	$	178	$	179	$	196	$	194
Bond	416		391		412		378
Financial and Professional Services	252		247		224		221
Other	526		440		518		416
Total Domestic Specialty	1,372		1,257		1,350		1,209
International Specialty	282		223		290		242
Total Specialty	$	1,654	$	1,480	$	1,640	$	1,451

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	Nine Months Ended September 30,
	2005				2004
(in millions)	Gross		Net		Gross		Net
Construction	$	699	$	690	$	606	$	594
Bond	1,188		922		1,060		824
Financial and Professional Services	686		599		415		405
Other	1,519		1,185		974		757
Total Domestic Specialty	4,092		3,396		3,055		2,580
International Specialty	1,011		783		726		603
Total Specialty	$	5,103	$	4,179	$	3,781	$	3,183

Gross and net written premiums in the third quarter of 2005 increased 1% and 2%, respectively, over comparable written premium volume in the same 2004 period.  The modest increase in gross and net written premiums in the third quarter of 2005 was primarily driven by growth in the Financial & Professional Services and Bond operations, which was somewhat offset by the impact of the now-completed process of aligning the Construction underwriting profile of the two predecessor companies.  In the third quarter of 2005, approximately $31 million of gross written premiums previously written in the Company's Gulf operation in the Commercial segment were written in Financial and Professional Services, compared with $36 million of gross written premiums in the same 2004 period.  Net written premiums in the third quarter and first nine months of 2005 were reduced by the $46 million of reinstatement premiums related to catastrophe losses that are described in more detail in the “Consolidated Overview” section herein.  In Domestic Specialty operations, and International Specialty operations excluding Lloyd’s, business retention levels were higher than in the same period of 2004 and in the first half of 2005.  New business levels in Domestic Specialty operations were higher than in the third quarter of 2004 and consistent with the first half of 2005.  In International Specialty operations excluding Lloyd’s, new business levels in the third quarter of 2005 were lower than in the same 2004 period, but consistent with the first half of 2005.  Renewal price changes in Domestic Specialty operations, while still positive, were down from the third quarter of 2004 and the first half of 2005.  Through the first nine months of 2005, gross and net written premiums grew 35% and 31%, respectively, over the same 2004 period, primarily reflecting the impact of the merger.  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 a slight increase in ceded premiums in the first nine months of 2005 over what would have been ceded prior to the changes being implemented. 

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.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2005			2004			2005			2004
Revenues:
Earned premiums	$	1,511		$	1,439		$	4,466		$	4,104
Net investment income	112			92			337			330
Other revenues	24			22			71			66
Total revenues	$	1,647		$	1,553		$	4,874		$	4,500
Total claims and expenses	$	1,705		$	1,374		$	4,121		$	3,681
Operating income (loss)	$	(25	)	$	127		$	526		$	561
Loss and loss adjustment expense ratio	84.5		%	69.5		%	64.2		%	63.6		%
Underwriting expense ratio	26.8			24.5			26.5			24.5
GAAP combined ratio	111.3		%	94.0		%	90.7		%	88.1		%

The third quarter 2005 operating loss of $25 million was $152 million lower than operating income of $127 million in the same 2004 period.  The decline was primarily due to the significant losses incurred in the third quarter of 2005 resulting from Hurricanes Katrina and Rita, which are discussed in more detail in the “Consolidated Overview” section herein.  Operating results in the third quarter of 2005 included $317 million of after-tax cost of catastrophes, all of which resulted from those hurricanes.  The after-tax cost of catastrophes in the third quarter of 2004 totaled $92 million.  Through the first nine months of 2005, operating income of $526 million was $35 million, or 6%, lower than operating income in the same period of 2004.  Operating results in the first nine months of 2005 included $332 million of after-tax cost of catastrophes, compared with after-tax cost of catastrophes of $121 million in the same 2004 period.  The Personal segment benefited from after-tax favorable prior year reserve development of $181 million and $155 million in the first nine months of 2005 and 2004, respectively. 

Earned premiums in the third quarter and first nine months of 2005 increased 5% and 9%, respectively, over the same periods of 2004, reflecting continued strong business retention levels, strong new business volumes and renewal price increases over the last twelve months.  Earned premiums in the third quarter and first nine months of 2005 were reduced by $21 million of catastrophe-related reinstatement premiums described in the “Consolidated Overview” section herein.  

Net investment income in the third quarter of 2005 increased $20 million, or 22%, over the same 2004 period, primarily due to the increase in invested assets resulting from strong consolidated operational cash flows since the merger, an increase in short-term interest rates and strong returns from partnership investments.  Through the first nine months of 2005, net investment income of $337 million increased $7 million, or 2%, over the same period of 2004.  Net investment income in the prior year nine-month period included $38 million of income resulting from the initial public trading of one investment. 

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Claims and expenses in the third quarter and first nine months of 2005 included catastrophe losses of $467 million and $490 million respectively, compared with catastrophe losses of $142 million and $186 million in the respective periods of 2004.  Catastrophe losses in both years were driven by the hurricanes described in the “Consolidated Overview” section herein.  Net favorable prior year reserve development in the third quarter and first nine months of 2005 was $83 million and $278 million, respectively, compared with net favorable prior year reserve development of $37 million and $238 million in the respective periods of 2004.  The favorable prior year development in 2005 and 2004 was primarily driven by further declines in the frequency of non-catastrophe related losses.  The third quarters of both 2005 and 2004 also reflected the recognition of lower current accident year frequency of non-catastrophe related claims in the Homeowners and Other line of business and an improvement in frequency trends in the Automobile line of business.  Claims and expenses in 2005 also reflected increased agent profit sharing expenses and continued process re-engineering investments targeted to improve loss severity, as well as investments in personnel, technology and infrastructure designed to sustain and accelerate profitable growth. 

The loss and loss adjustment expense ratio for the third quarter and first nine months of 2005 included a 31.7 point and 11.3 point impact from catastrophe losses, whereas the comparable 2004 ratios included a 9.9 point and 4.5 point impact from catastrophe losses.  The impact from net favorable prior year reserve development in the third quarter of 2005 was 5.5 points, compared with 2.6 points in the same 2004 period.  Through the first nine months of 2005 and 2004, the net favorable impact of prior year reserve development was 6.3 points and 5.8 points, respectively. 

The 2.3 point and 2.0 point increases in the underwriting expense ratio for the third quarter and first nine months of 2005, respectively, compared with the respective periods of 2004 reflected an increase in commission expenses and 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.  In addition, reinstatement premiums reduced earned premium volume by $21 million for the third quarter and first nine months of 2005, resulting in a 0.4 point and 0.1 point negative impact on the respective periods’ underwriting expense ratio. 

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

	Three Months Ended September 30,
	2005				2004
(in millions)	Gross		Net		Gross		Net
Automobile	$	910	$	897	$	897	$	884
Homeowners and Other	822		730		738		688
Total Personal	$	1,732	$	1,627	$	1,635	$	1,572

	Nine Months Ended September 30,
	2005				2004
(in millions)	Gross		Net		Gross		Net
Automobile	$	2,668	$	2,629	$	2,651	$	2,624
Homeowners and Other	2,212		2,056		1,983		1,873
Total Personal	$	4,880	$	4,685	$	4,634	$	4,497

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Gross and net written premiums in the third quarter of 2005 increased 6% and 4%, respectively, over the same period of 2004.  For the first nine months of 2005, gross and net written premiums increased 5% and 4%, respectively, over the same period of 2004.  Growth in 2005 was concentrated in the Homeowners and Other product line, driven by continued renewal price increases and unit growth.  Retention levels in both the Automobile and Homeowners and Other lines of business remained strong, and were consistent with the third quarter of 2004 and the first half of 2005.  In the Automobile line, renewal price increases in the third quarter of 2005 remained positive, but declined when compared with the same period of 2004 and the first half of 2005.  However, new business levels in the third quarter of 2005 in the Automobile line increased over the first half of 2005, primarily due to the introduction of the Company’s new multivariate pricing product in selected states.  Net written premiums in the third quarter and first nine months of 2005 were reduced by $21 million of catastrophe-related reinstatement premiums described in the “Consolidated Overview” section herein.  

The Personal segment had approximately 6.5 million and 6.2 million policies in force at September 30, 2005 and 2004, respectively.  In the Automobile line of business, policies in force at September 30, 2005 increased 2% over the same date in 2004.  Policies in force in the Homeowners and Other line of business at September 30, 2005 grew by 6% 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 September 30,						Nine Months Ended September 30,
(in millions)	2005			2004			2005			2004
Revenues	$	13		$	6		$	5		$	9
Net after-tax expense	$	(41	)	$	(46	)	$	(139	)	$	(131	)

The increase in revenues for the third quarter of 2005 compared with the same 2004 period was primarily due to increased net investment income derived from the investment of funds received upon the divestiture of Nuveen Investments.  The decrease in revenues in the first nine months of 2005 compared with the same 2004 period was driven by the amortization of the discount on forward contracts related to the divestiture of the Company’s interest in Nuveen Investments, which was classified as an investment expense and reduced net investment income allocated to Interest Expense and Other.  The decrease in net after-tax expense for Interest Expense and Other for the third quarter of 2005 compared with the same period of 2004 was primarily due to a reduction in non-interest related expenses and the increase in net investment income.  The increase in net after-tax expense for the first nine months of 2005 compared with the same 2004 period was primarily due to incremental interest expense on debt assumed in the merger, partially offset by the absence of the non-recurring merger-related charges and a reduction in non-interest related other expenses in 2005. 

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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 in the near term.  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,

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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.”)

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 the following: 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 nine months of 2005 were $264 million, compared with $199 million in the same period of 2004.  Approximately 36% in the first nine months of 2005 and 15% in the first nine 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.  The increase in net payments in 2005 over 2004 was primarily driven by inclusion of the SPC business for the full nine-month period in 2005 and substantial reinsurance recoveries in the third quarter of 2004.  These recoveries related to gross payments made in prior quarters.  At September 30, 2005, net asbestos reserves totaled $3.67 billion, compared with $3.11 billion at September 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 nine months ended September 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	—			9
Ceded	—			(3		)
Net	—			6
Accretion of discount:
Direct	1			13
Ceded	—			—
Net	1			13
Losses paid:
Direct	364			330
Ceded	(100		)	(131		)
Net	264			199
Ending reserves:
Direct	4,412			3,976
Ceded	(743		)	(868		)
Net	$	3,669		$	3,108

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

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insurance policies that were issued by the Company prior to the mid-1970s. These decisions continue to be inconsistent and vary from jurisdiction to jurisdiction. Environmental claims when submitted rarely indicate the monetary amount being sought by the claimant from the policyholder, and the Company does not keep track of the monetary amount being sought in those few claims which indicate a monetary amount.

The 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.

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In its review of environmental reserves, the Company considers the following: 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, the Company recorded a pretax charge of $290 million, net of reinsurance, in 2004 to increase environmental reserves due to revised estimates of costs related to settlement initiatives. 

At September 30, 2005, approximately 76%, or approximately $332 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 resolving coverage disputes relating to these claims.  The balance, approximately 24%, or approximately $105 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 nine months of 2005 were $208 million, compared with $144 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.

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

(at and for the nine months ended September 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	—			243
Ceded	—			(37		)
Net	—			206
Losses paid:
Direct	208			144
Ceded	(4		)	(38		)
Net	204			106
Ending reserves:
Direct	517			701
Ceded	(80		)	(98		)
Net	$	437		$	603

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

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 September 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

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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 to be completed in the fourth quarter of 2005, 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.  The timing and amount of catastrophe claims are inherently unpredictable.  Such claims, including those associated with Hurricanes Katrina and Rita, increase liquidity requirements.  The timing and amount of reinsurance recoveries may be affected by reinsurer solvency and 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.

Net cash flows provided by operating activities from continuing operations totaled $3.11 billion and $4.05 billion in the first nine months of 2005 and 2004, respectively.  The 2004 total included $867 million of cash proceeds received pursuant to the commutation of specific reinsurance agreements described previously.  Excluding the impact of these commutations, net cash flows provided by operating activities from continuing operations were comparable in the first nine months of 2005 and 2004. 

Net cash flows used in investing activities from continuing operations totaled $4.88 billion in the first nine months of 2005, compared with $3.56 billion in the same 2004 period.  Funds in both years were invested predominantly in tax-exempt fixed maturity securities. 

The Company’s cash flows in the first nine months of 2005 included $2.40 billion of pretax proceeds (after underwriting fees and transaction costs) from the divestiture of its equity interest in Nuveen Investments.  Of this amount, $405 million was received directly by the Company’s insurance subsidiaries, and the remainder was received directly by the holding company.  Of the proceeds received directly by the holding company, $1.225 billion was contributed to the capital of the Company’s insurance subsidiaries, with the remainder available for general corporate purposes.  The Company’s insurance subsidiaries did not pay any dividends to the holding company in the third quarter of 2005, as the liquidity needs of the holding company were met through the retained proceeds from the Nuveen Investments divestiture, combined with the third quarter 2005 proceeds of $442 million from the settlement of the forward purchase contracts for the Company’s common stock related to equity units issued in 2002. 

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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 September 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 September 30, 2005, total cash, short-term invested assets and other readily marketable securities aggregating $1.46 billion were held at the holding company level.  These assets were primarily funded by dividends received from the Company’s operating subsidiaries in the first half of 2005, proceeds from the divestiture of Nuveen Investments in the second and third quarters of 2005, and proceeds in the third quarter of 2005 from the issuance of common stock related to the settlement of the Company’s equity unit forward purchase contracts (described in more detail below).  As noted above, the holding company contributed $1.225 billion of the Nuveen Investment proceeds to the capital of its insurance subsidiaries in the third quarter of 2005.  The assets held at the holding company, 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 primarily include shareholder dividends and debt service.

Net cash flows used in financing activities from continuing operations totaled $445 million in the first nine months of 2005, compared with $586 million in the same 2004 period.  Dividends paid to shareholders totaled $467 million and $493 million in the first nine months of 2005 and 2004, respectively.  During the first nine months of 2005, the Company funded the maturity of its $238 million 7.875% senior notes, its $79 million 7.125% senior notes, and $99 million of its medium-term notes bearing interest rates ranging from 6.60% to 7.09%.  In addition, commercial paper borrowings declined by $102 million from year-end 2004.  On October 25, 2005, the Company’s Board of Directors declared a quarterly dividend of $0.23 per share, which is payable December 30, 2005 to shareholders of record on December 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, which matured in August 2005, and an unsecured $50 senior note of the Company (maturing in 2007).  Total annual distributions on the equity units 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%.  Holders of the equity units had the opportunity to

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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 forward purchase contract required 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 purchased was determined based on a formula that considered 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.  On the August 16, 2005 settlement date, the Company issued 15.2 million common shares and received total proceeds of $442 million. 

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 nine 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 default, including with respect to a change in control.  At September 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 September 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 $45 million in the first nine months of 2005, reduced reported interest expense. 

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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 September 29, 2005, Fitch affirmed all ratings of The St. Paul Travelers Companies, Inc., including the A- long-term issuer rating; the A- rating on the Company’s senior unsecured notes; and the BBB+ ratings on the Company’s subordinated notes and capital securities.  Additionally, Fitch affirmed the AA- insurer financial strength (IFS) ratings on members of the St. Paul Travelers Reinsurance Pool.  The rating outlooks are stable. 

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 November 3, 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 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

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insurer).  Informed judgment is applied throughout the process.  The Company continually refines its loss reserve estimates in a regular ongoing 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.

There are also risks which impact the estimation of ultimate costs for catastrophes.  For example, the estimation of reserves related to hurricanes can be affected by the inability of the Company and its insureds to access portions of the impacted areas, the complexity of factors contributing to the losses, the legal and regulatory uncertainties and the nature of the information available to establish the reserves.  Complex factors include, but are not limited to: determining whether damage was caused by flooding versus wind; evaluating general liability and pollution exposures; estimating additional living expenses, the effect of mold damage and business interruption costs; and reinsurance collectibility.  The timing of a catastrophe’s occurrence, such as at or near the end of a reporting period, can also affect the information available to the Company in estimating reserves.  The estimates related to catastrophes are adjusted as actual claims emerge. 

A portion of the Company’s loss reserves are for asbestos and environmental claims and related litigation, which aggregated $4.11 billion at September 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 September 30, 2005. 

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

	September 30, 2005						December 31, 2004
(in millions)	Case		IBNR		Total		Case		IBNR		Total
General liability	$	8,489	$	11,691	$	20,180	$	8,445	$	12,232	$	20,677
Property	1,240		1,868		3,108		1,534		1,359		2,893
Commercial multi-peril	1,922		3,125		5,047		1,979		2,216		4,195
Commercial automobile	2,703		2,047		4,750		2,817		1,966		4,783
Workers’ compensation	8,600		6,459		15,059		8,313		6,658		14,971
Fidelity and surety	1,280		675		1,955		1,216		845		2,061
Personal automobile	1,448		1,182		2,630		1,484		1,219		2,703
Homeowners and personal – other	459		1,123		1,582		470		523		993
International and other	3,081		3,109		6,190		2,934		2,774		5,708
Property-casualty	29,222		31,279		60,501		29,192		29,792		58,984
Accident and health	75		10		85		76		10		86
Claims and claim adjustment expense reserves	$	29,297	$	31,289	$	60,586	$	29,268	$	29,802	$	59,070

The $1.52 billion increase in claims and claim adjustment expense reserves since December 31, 2004 reflected the impact of the significant catastrophe losses incurred in the third quarter of 2005.  That increase in reserves was partially offset by 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 non-catastrophe 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.

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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.

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.

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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.

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.

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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.

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.

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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)	September 30, 2005			December 31, 2004
Gross reinsurance recoverables on paid and unpaid claims and claim adjustment expenses	$	14,308		$	13,367
Allowance for uncollectible reinsurance	(796		)	(751		)
Net reinsurance recoverables	13,512			12,616
Mandatory pools and associations	2,047			2,497
Structured settlements	3,893			3,941
Total reinsurance recoverables	$	19,452		$	19,054

The $941 million increase in gross reinsurance recoverables over year-end 2004 was primarily due to amounts recoverable related to Hurricanes Katrina and Rita.  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.

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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:

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.

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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 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.

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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		3rd Quarter
Fixed maturities	$	3	$	2	$	5
Equity securities	—		—		—
Venture capital	6		40		29
Real estate and other	—		—		—
Total	$	9	$	42	$	34

	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 nine months ended September 30, 2005, the Company recognized other-than-temporary impairments of $5 million and $10 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 ended September 30, 2005, the Company realized impairments of $29 million in its venture capital portfolio on 14 holdings, three of which had also been impaired in the first six months of the year.  The year-to-date impairment loss total of $75 million included losses related to those 14 holdings, plus five additional holdings.  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. 

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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 September 30, 2005:

(in millions)	Carrying Value
Investment partnerships, including hedge funds	$	1,756
Fixed income securities	364
Equity investments	123
Real estate partnerships and joint ventures	134
Venture capital	429
Total	$	2,806

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 September 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	$	1	$	—	$	—	$	—	$	1
Equity securities	—		—		—		—		—
Venture capital	—		—		—		—		—
Total	$	1	$	—	$	—	$	—	$	1

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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 September 30, 2005 represented less than 1% of the portfolio, and, therefore, any impact on the Company’s financial position would not be significant.

At September 30, 2005, non-investment grade securities comprised 3% of the Company’s fixed income investment portfolio.  Included in those categories at September 30, 2005 were securities in an unrealized loss position that, in the aggregate, had an amortized cost of $793 million and a fair value of $767 million, resulting in a net pretax unrealized loss of $26 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 September 30, 2005, and accounted for 6% 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 September 30, 2005:

(in millions)	Loss		Fair Value
Fixed maturities	$	21	$	677
Equity securities	—		4
Other	—		2
Total	$	21	$	683

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

(in millions)	Loss		Fair Value
Fixed maturities	$	88	$	2,454
Equity securities	8		155
Other	17		203
Total	$	113	$	2,812

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

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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 September 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 September 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.

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 the 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 the first nine months of 2005, or during the years ended December 31, 2004 and 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.

In part as a result of the severity and frequency of storms since the end of the second quarter of 2005, the Company expects the cost of reinsurance to increase, and there may be reduced availability of reinsurance coverage.  To the extent that the Company is not able to reflect the increased costs in its pricing, total revenues will be adversely impacted.  In particular, in the Personal segment, the Company expects a delay in its ability to increase pricing to offset the increased cost of reinsurance as the Company seeks to have increased rates approved by the relevant state regulatory authorities.  Given the increased severity and frequency of storms, the Company is reassessing its definition of and exposure to coastal risks.

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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); the cost and availability of reinsurance coverage; and strategic initiatives.  Such statements are subject to 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 catastrophic events, both natural and man-made, including terrorist acts, with a severity or frequency exceeding the Company’s expectations; adverse developments involving catastrophe claims, in particular those arising out of Hurricanes Katrina, Rita and Wilma, and any Company loss estimates with respect to these storms; 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 corporate bankruptcies on surety bond claims; adverse developments relating to the cost and/or availability of reinsurance, the credit quality and liquidity of reinsurers and the Company’s ability to collect reinsurance on a timely basis or at all; 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 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.

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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 and continuing through the third quarter of 2005.  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 September 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 September 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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.

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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.

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 the 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”).

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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.

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.”

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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.  Before court approval of the settlement, additional shareholder litigation was commenced, as described below.  On September 12, 2005, plaintiffs voluntarily withdrew their complaints without prejudice.

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.  On August 23, 2005, the Company and the other defendants in In re St. Paul Travelers Securities Litigation I moved to dismiss the amended consolidated complaint.

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.  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 an amended consolidated complaint.  The amended consolidated complaint alleges 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, the Company’s alleged involvement in a conspiracy to rig bids and the Company’s alleged involvement in the purchase and sale of finite reinsurance.  The consolidated action will be coordinated with In re St. Paul Travelers Securities Litigation I for pretrial purposes.  On September 26, 2005, the Company and the other defendants in In re St. Paul Travelers Securities Litigation II moved to dismiss the amended consolidated complaint.  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.

97

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.  On June 10, 2005, the Company and the other defendants in Rowe moved to dismiss the complaint.  Oral argument on the motion to dismiss was presented on September 19, 2005.

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.

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.

The Company’s Gulf operation 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.

98

As part of ongoing, industry-wide investigations, the Company and its affiliates have received subpoenas and written requests for information from government agencies and authorities.  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,” branding requirements for salvage automobiles and the reporting of workers’ compensation premiums.   On August 26, 2005, the State of New York Office of the Attorney General informed the Company that its investigation relating to lawyer liability insurance has been closed with no action taken against the Company.  The Company or its affiliates have received subpoenas or written requests for information, in each case with respect to one or more of the areas described above, 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 Hampshire Insurance Department; (xviii) State of New York Office of the Attorney General; (xix) State of New York Insurance Department; (xx) State of North Carolina Department of Insurance; (xxi) State of Ohio Office of the Attorney General; (xxii) State of Ohio Department of Insurance; (xxiii) Commonwealth of Pennsylvania Office of the Attorney General; (xxiv) State of Texas Department of Insurance; (xxv) State of Washington Office of the Insurance Commissioner; (xxvi) State of West Virginia Office of Attorney General; (xxvii) the United States Attorney for the Southern District of New York; and (xxviii) the United States Securities and Exchange Commission.  The Company and its affiliates may receive additional subpoenas and requests for information with respect to the areas described above from other agencies or authorities.

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 described 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. 

99

Six putative class action lawsuits and two individual actions have been brought against a number of insurance brokers and insurers, including the Company and certain of its affiliates, by plaintiffs who allegedly purchased insurance products through one or more of the defendant brokers.  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.  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, lead plaintiffs filed an amended consolidated complaint.  The complaint includes causes of action under the Sherman Act, the Racketeer Influenced and Corrupt Organizations Act, state common law and the laws of the various states prohibiting antitrust violations.  Plaintiffs seek monetary damages, including punitive damages and trebled damages, permanent injunctive relief, restitution, including disgorgement of profits, interest and costs, including attorneys’ fees.  One other putative class action, Bensley Construction, Inc. v. Marsh & McLennan Companies, Inc., et al. (Mass. Super. Ct. May 16, 2005), and the two individual actions, Office Depot, Inc. v. Marsh & McLennan Companies, Inc., et al. (Fla. Cir. Ct. June 22, 2005) and Delta Pride Catfish, Inc. v. Marsh USA, Inc., et al. (D. Miss. Sept. 13, 2005), assert claims that are similar to those asserted in In re Insurance Brokerage Antitrust Litigation, but have not been consolidated with 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 plaintiffs in Bensley Construction have moved to remand it to state court.  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 material the Company’s results of operations in a future period, in the opinion of the Company’s management none would likely have a material adverse effect on the Company’s financial condition or liquidity.

100

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)

Period Beginning	Period Ending	(a) Total number of shares (or units) purchased	(b) Average price paid per share (or unit)		(c) Total number of shares (or units) purchased as part of publicly announced plans or programs	(d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
July 1, 2005	July 31, 2005	96,380	$	41.49	—	—
Aug. 1, 2005	Aug. 31, 2005	200,448	44.60		—	—
Sept. 1, 2005	Sept. 30, 2005	22,224	43.37		—	—
Total		319,052	$	43.57	—	—

(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

None.

Item 6.EXHIBITS

See Exhibit Index.

101

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:	November 3, 2005	By	/s/ Bruce A. Backberg
			Bruce A. Backberg
			Senior Vice President
			(Authorized Signatory)
Date:	November 3, 2005	By	/s/ Douglas K. Russell
			Douglas K. Russell
			Senior Vice President, Corporate
			Controller & Treasurer
			(Principal Accounting Officer)

102

EXHIBIT INDEX

Exhibit
Number	Description of Exhibit
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†	Second Amendment to The St. Paul Travelers Companies, Inc. Severance Plan.
10.2†	Form of Performance Share Award Notification and Agreement.
12.1†	Statement re computation of ratios.
31.1†	Certification of Jay S. Fishman, Chairman and 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, Vice Chairman and 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, Chairman and 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, Vice Chairman and 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.

103

EX-10.1

Exhibit 10.1

SECOND AMENDMENT

TO

THE ST. PAUL TRAVELERS COMPANIES, INC.

SEVERANCE PLAN

(Effective April 1, 2004)

The St. Paul Travelers Companies, Inc. Severance Plan (effective April 1, 2004) is hereby amended effective September 28, 2005, as follows:

I.

Section II.7 through II.17 are renumbered as II.8 through II. 18, and a new Section II.7 is added to read as follows:

II.7“Specified Employee” means an Employee who is a key employee, as that term is defined in Internal Revenue Code (“Code”) Section 416(i), without regard to Code section 416(i)(5).  An Employee is a Specified Employee for the twelve (12)-month period beginning April 1 and ending the following March 31 if he/she was a key employee any time during the twelve (12)-month period ending on the December 31 preceding such April 1.

II.

Section II.18 (as renumbered above) is amended by restating the first paragraph thereof to read as follows (the remaining paragraph is unaltered by this amendment):

II.18“Year of Service” means each of an Employee’s twelve (12)-month periods of continuous employment with the Company or an Affiliate, commencing with the Employee’s most recent date of employment with the Company or an Affiliate (while it is an Affiliate) or with Travelers Property Casualty Corp. or any subsidiary of Travelers Property Casualty Corp.  An Employee will not receive pro-rated credit for any partial year worked.

III.

The first paragraph of Section I of Schedule A is amended by adding the following to the end:

provided, however, that any Employee who is eligible for Severance Benefits under Schedule B will receive such benefits in lieu of the Severance Benefits under this Schedule A.

IV.

The first paragraph of Section I.A. of Schedule A is amended to read as follows (in its entirety – that is, the second sentence of the first paragraph is deleted but the remaining paragraphs are unaltered by this amendment):

The Employee will be eligible to receive a Severance Benefit in an amount equal to two (2) weeks of his/her base salary as of the date of termination for each full Year of Service with a minimum payment equal to four (4) weeks of base salary and a maximum payment equal to fifty-two (52) weeks of base salary.

V.

The first paragraph of Section II of Schedule A is amended by adding the following to the end:

provided, however, that any Employee who is eligible for Severance Benefits under Schedule B will receive such benefits in lieu of the Severance Benefits under this Schedule A.

VI.

The first paragraph of Section II.A. of Schedule A is amended to read as follows (in its entirety – that is, the second clause of the first sentence is deleted but the remaining paragraphs are unaltered by this amendment):

The Employee will be eligible to receive a Severance Benefit in an amount equal to two (2) weeks of his/her base salary as of the date of termination for each full Year of Service with a minimum payment equal to four (4) weeks of base salary and a maximum payment equal to fifty-two (52) weeks of base salary.

VII.

The following new Schedule B is added:

Severance Payment Schedule B

Executive Severance Policy

This Schedule B applies to Terminations of Employment due to a Reduction in Force (“RIF”) that occur on or after September 28, 2005 with respect to any Employee who is serving the Employer in a position of Executive Vice President, Senior Vice President or Vice President.  In order to be eligible for the Severance Benefits described below, the Employee must first execute a Waiver and Release of all claims against the Employer in the form provided to the Employee by the Employer.

For purposes of this Schedule B, “total monthly cash compensation” equals one twelfth (1/12) of the Employee’s annual base salary in effect at the time of his/her Termination of Employment plus one twelfth (1/12) of the average of his/her two most recent cash payments under the annual incentive compensation plan of the Company.

I.This Section I of Schedule B applies to Terminations of Employment due to RIF by Employees who are Executive Vice Presidents.

The Employee will be eligible to receive a Severance Benefit in an amount equal to the number of months specified in the chart below (determined based on his/her Years of Service at Termination of Employment) multiplied by his/her total monthly cash compensation:

	Years of Service
	Less than 5	5 but less than 10	10 or more
Months of Severance Benefit	18	21	24

The Severance Benefit will be paid as follows:

A.No amount will be paid until the first day of the seventh month following the Employee’s Termination of Employment.

B.On the first day of the seventh month following the Employee’s Termination of Employment, or as soon as administratively practicable thereafter, the Employee will receive a single lump-sum payment equal to one-half of his/her annual base salary in effect at Termination of Employment.

C.Starting with the seventh month following the Employee’s Termination of Employment and continuing for a total of six (6) months, the Employee will receive a monthly amount (paid in accordance with the Company’s payroll practices) equal to one twelfth (1/12) of his/her annual base salary in effect at the time of his/her Termination of Employment.

D.On the first day of the month following the one year anniversary of the Employee’s Termination of Employment, or as soon as administratively practicable thereafter, the Employee will receive a single lump-sum payment equal to his/her total Severance Benefit calculated above, reduced by the previous payments made to the Employee under A., B., and C.

II.This Section II of Schedule B applies to Terminations of Employment due to RIF by Employees who are Senior Vice Presidents.

The Employee will be eligible to receive a Severance Benefit in an amount equal to the number of months specified in the chart below (determined based on his/her Years of Service at Termination of Employment) multiplied by his/her total monthly cash compensation:

	Years of Service
	Less than 5	5 but less than 10	10 or more
Months of Severance Benefit	12	15	18

The Severance Benefit will be paid as follows:

A.No amount will be paid until the first day of the seventh month following the Employee’s Termination of Employment.

B.On the first day of the seventh month following the Employee’s Termination of Employment, or as soon as administratively practicable thereafter, the Employee will receive a single lump-sum payment equal to one-half of his/her annual base salary in effect at Termination of Employment.

C.Starting with the seventh month following the Employee’s Termination of Employment and continuing for a total of six (6) months, the Employee will receive a monthly amount (paid in accordance with the Company’s payroll practices) equal to one twelfth (1/12) of his/her annual base salary in effect at the time of his/her Termination of Employment.

D.On the first day of the month following the one year anniversary of the Employee’s Termination of Employment, or as soon as administratively practicable thereafter, the Employee will receive a single lump-sum payment equal to his/her total Severance Benefit calculated above, reduced by the previous payments made to the Employee under A., B., and C.

III.This Section III of Schedule B applies to Terminations of Employment due to RIF by Employees who are Vice Presidents.

The Employee will be eligible to receive a Severance Benefit in an amount equal to the number of months specified in the chart below (determined based on his/her Years of Service at Termination of Employment) multiplied by his/her total monthly cash compensation:

	Years of Service
	Less than 5	5 but less than 10	10 or more
Months of Severance Benefit	6	9	12

The Severance Benefit will be paid as follows:

A.In the case of an Employee who is not a Specified Employee, such Employee will receive a monthly amount (paid in accordance with the Company’s payroll practices) equal to one twelfth (1/12) of his/her annual base salary in effect at the time of his/her Termination of Employment, with payments commencing as soon as administratively practicable following the later of (i) the date of the Employee’s Termination of Employment; or (ii) twenty-five (25) days after the Employee executes the Waiver and Release in the form provided to the Employee by the Employer.  Such payments will continue until the total payments to the Employee equal the full Severance Benefit calculated above (with the final payment being equal to the full Severance Benefit minus all prior monthly payments) or until twelve (12) monthly payments have been made, whichever occurs first.

B.If a Severance Benefit remains after the monthly payments have been made under A., then, on the first day of the month following the last such monthly payment, the Employee will receive a single lump-sum payment equal to his/her total Severance Benefit calculated above, reduced by the previous payments to the Employee made under A.

In the case of an Employee who is a Specified Employee, such Employee’s Severance Benefit will be paid as follows:

A.No amount will be paid until the first day of the seventh month following the Employee’s Termination of Employment.

B.On the first day of the seventh month following the Employee’s Termination of Employment, or as soon as administratively practicable thereafter, the Employee will receive a single lump-sum payment equal to one-half of his/her annual base salary in effect at Termination of Employment.

C.Starting with the seventh month following the Employee’s Termination of Employment, the Employee will receive a monthly amount (paid in accordance with the Company’s payroll practices) equal to one twelfth (1/12) of his/her annual base salary in effect at the time of his/her Termination of Employment. Such payments will continue until the total payments to the Employee made under B. and C. equal the full Severance Benefit calculated above (with the final payment being equal to the full Severance Benefit minus all prior payments made under B. or C.) or until six (6) monthly payments have been paid, whichever occurs first.

D.If a Severance Benefit remains after the payments have been made under B. and C., then, on the first day of the month following the last such monthly payment, the Employee will receive a single lump-sum payment equal to his/her total Severance Benefit calculated above, reduced by the previous payments to the Employee made under B and C.

Executed this 3rd day of November, 2005.
	THE ST. PAUL TRAVELERS COMPANIES, INC.
	By:	/s/ John P. Clifford, Jr.
		John P. Clifford, Jr.
		Senior Vice President – Human Resources

EX-10.2

Exhibit 10.2

ST. PAUL TRAVELERS

PERFORMANCE SHARE AWARD NOTIFICATION AND AGREEMENT

Participant:	Grant Date:
Target Number of Performance Shares:
Performance Period: January 1, 2006 to December 31, 2008

1. Grant of Performance Shares.  This performance share award is granted pursuant to The St. Paul Travelers Companies, Inc. 2004 Stock Incentive Plan (the “Plan”), by The St. Paul Travelers Companies, Inc. (the “Company”) to you, an employee (the “Participant”). The Company hereby grants to the Participant an award for the target number of Performance Shares set forth above (the “Award”), pursuant to the Plan, as it may be amended from time to time, and subject to the terms, conditions, and restrictions set forth herein.

2. Terms and Conditions. The terms, conditions, and restrictions applicable to the Award are specified in this award notification and agreement, the Plan, the prospectus dated [January 1, 2006] (titled “St. Paul Travelers Equity Awards”), and any applicable prospectus supplement (together, the “Prospectus”).  The terms, conditions and restrictions in the Prospectus include, but are not limited to, provisions relating to amendment, vesting, cancellation, and settlement, all of which are hereby incorporated by reference into this grant notification and agreement.  The terms, conditions and restrictions in this award notification and agreement, the Prospectus, and the Plan constitute the Award agreement between the Participant and the Company (the “Agreement”). By accepting this Award, the Participant acknowledges receipt of the Prospectus and that he or she has read and understands the Prospectus.

The Participant understands that this Award and all other incentive awards are entirely discretionary and that no right to receive an award exists absent a prior written agreement with the Company to the contrary. The Participant also understands that the value that may be realized, if any, from the Award is contingent, and depends on the future financial performance of the Company, among other factors.  The Participant further confirms his or her understanding that the Award is intended to promote employee retention and stock ownership and to align employees’ interests with those of shareholders, is subject to performance conditions and will be canceled if the performance conditions are not satisfied.  Thus, Participant understands that (a) any monetary value assigned to the Award in any communication regarding the Award is contingent, hypothetical, or for illustrative purposes only, and does not express or imply any promise or intent by the Company to deliver, directly or indirectly, any certain or determinable cash value to the Participant; (b) receipt of this Award or any incentive award in the past is neither an indication nor a guarantee that an incentive award of any type or amount will be made in the future, and that absent a written agreement to the contrary, the Company is free to change its practices and policies regarding incentive awards at any time; and (c) performance may be subject to confirmation and final determination by the Company’s Board of Directors or a Committee of the Board that the performance conditions have been satisfied.  The Participant shall have no rights as a stockholder of the Company with respect to any shares covered by this Award unless and until the Award is earned and settled in shares of Common Stock.

3. Performance Period.  For purposes of this Award, the Performance Period shall be defined as the three-year period commencing January 1, 2006 and ending December 31, 2008.

4. Vesting. The Participant’s right to the Performance Shares vests on the last day of the Performance Period if the Participant remains continuously employed by the Company or one of its subsidiaries on such day.  If the Participant’s employment with the Company and its subsidiaries terminates during the Performance Period, the Participant’s rights to the Performance Shares will be determined in accordance with Exhibit A.

5. Settlement of Award.  The number of Performance Shares earned by the Participant (which shall include any additional Performance Shares credited to the Participant’s account pursuant to Section 6) shall be calculated based on the Performance Earnout Schedule table set forth in Exhibit B.  The Company shall deliver to the Participant, subject to any certification of satisfaction of the performance goal as required by the Plan in order to comply with Section 162(m) of the Internal Revenue Code, a number of shares of Common Stock equal to the number of vested and earned Performance Shares on the later of (a) January 1 of the year following the end of the Performance Period or (b) as soon as administratively practicable thereafter but no later than December 31 of the year following the end of the Performance Period.  The number of shares of Common Stock delivered to the Participant shall be reduced by a number of shares of Common Stock having a Fair Market Value on the date of delivery equal to the tax withholding obligation, unless the Plan administrator is notified in advance of the Award settlement and the Participant elects another method for tax withholding.

6. Dividend Equivalents.  The Participant shall be entitled to receive additional Performance Shares with respect to any cash dividends declared by the Company.  The number of additional Performance Shares shall be determined by multiplying the number of Performance Shares credited to the Participant’s account (which shall include the target number of Performance Shares set forth above, plus any Performance Shares credited in connection with dividend payments under this Section 6), times the dollar amount of the cash dividend per share of Common Stock, and then dividing by the Fair Market Value of the Common Stock as of the dividend payment date.  The Participant’s right to any Performance Shares credited to the Participant’s account in connection with dividends shall vest in the same manner described in Section 4.  As described in Section 5, such additional Performance Shares shall be included in the total number of Performance Shares credited to the Participant’s account for purposes of applying the Performance Earnout Schedule.

7. Consent to Electronic Delivery. In lieu of receiving documents in paper format, the Participant agrees, to the fullest extent permitted by law, to accept electronic delivery of any documents that the Company may be required to deliver (including, but not limited to, prospectuses, prospectus supplements, grant or award notifications and agreements, account statements, annual and quarterly reports, and all other forms or communications) in connection with this and any other prior or future incentive award or program made or offered by the Company or its predecessors or successors. Electronic delivery of a document to the Participant may be via a Company e-mail system or by reference to a location on a Company intranet or internet site to which Participant has access.

8. Administration. In administering the Plan, or to comply with applicable legal, regulatory, tax, or accounting requirements, it may be necessary for the Company or the subsidiary employing the Participant to transfer certain Participant data to the Company, its subsidiaries, outside service providers, or governmental agencies.  By accepting the Award, the Participant consents, to the fullest extent permitted by law, to the use and transfer, electronically or otherwise, of his or her personal data to such entities for such purposes.

9. Entire Agreement; No Right to Employment. The Agreement constitutes the entire understanding between the parties hereto regarding the Award and supersedes all previous written, oral, or implied understandings between the parties hereto about the subject matter hereof.  Nothing contained herein, in the Plan, or in the Prospectus shall confer upon the Participant any rights to continued employment or employment in any particular position, at any specific rate of compensation, or for any particular period of time.

10. Arbitration; Conflict.  Any disputes under this Agreement shall be resolved by arbitration in accordance with the Company’s arbitration policies. In the event of a conflict between the Plan and this award notification and agreement, or the terms, conditions, and restrictions of the Award as specified in the Prospectus, the Plan shall control.

11. Acceptance and Agreement by Participant. By clicking the button below, Participant accepts the Award and agrees to be bound by the terms, conditions, and restrictions set forth in the Prospectus, the Plan, this notification and agreement, and the Company’s policies, as in effect from time to time, relating to the Plan.

EXHIBIT A

To St. Paul Travelers Performance Share Award Notification and Agreement

When you leave the Company

References to “you” or “your” are to the Participant

If you terminate your employment or if there’s a break in your employment, your Award may be canceled before the end of the Performance Period and your rights to vesting and settlement of your Award may be affected.

The provisions in the chart below apply to Awards made under the Plan. Additional rules for vesting and settlement of your Award apply in cases of termination if you satisfy certain age and years of service requirements (“Retirement Rule”), as set forth in “Retirement Rule” below.

If you:	Here’s what happens to Your Award:
Resign, or retire (and do not meet the Retirement Rule)	Your rights under the Award are cancelled and your right to the Performance Shares is forfeited.
Become disabled (as defined under the Company’s applicable long-term disability plan)	You will be entitled to receive a payout equal to the number of shares of Common Stock you would have received, if any, if your employment had not terminated due to disability, multiplied by a fraction equal to the number of days worked in the Performance Period divided by the total number of days in the Performance Period. Any such payout will be made at the time of settlement of the Performance Shares after the end of the Performance Period.
Take an approved personal leave of absence	Your rights under the Award continue when you are on such leave of absence for up to three months. Once your approved leave of absence exceeds three months, your rights under the Award are suspended until you return to work and remain actively employed for 30 calendar days, after which your rights under the Award will be restored retroactively. If you terminate employment during the leave for any reason, the applicable termination provisions will apply. If your personal leave of absence exceeds one year, your rights under the Award are cancelled and your right to the Performance Shares is forfeited.
Are on an approved family leave, medical leave, dependent care leave, military leave, or other statutory leave of absence	Your rights under the Award continue when you are an such leave of absence.

Die	Your estate will be entitled to receive a payout equal to the number of shares of Common Stock you would have received at the target level of performance (which is equal to the target number of Performance Shares set forth at the beginning of this Award), multiplied by a fraction equal to the number of days worked in the Performance Period divided by the total number of days in the Performance Period. Any such payout will be made as soon as administrative possible following your death.
Are terminated involuntarily for gross misconduct or for cause	Your rights under the Award are cancelled and your right to the Performance Shares is forfeited.
Are terminated involuntarily other than for gross misconduct or for cause (including under the Company’s applicable separation pay plan or any successor or comparable arrangement)	Your rights under the Award are cancelled and your right to the Performance Shares is forfeited.

Retirement Rule

If, as of your termination date, you are at least (i) age 65, (ii) age 62 with one or more full years of service, or (iii) age 55 with 10 or more full years of service, then you meet the “Retirement Rule.”  If you are terminated under the Company’s applicable separation pay plan or any successor or comparable arrangement, if any, your termination date for purposes of determining whether you qualify under the Retirement Rule is your last day of active employment with the Company.

The Retirement Rule does not apply if you were involuntarily terminated for gross misconduct or for cause.  If you retire and do not meet the Retirement Rule, you will be considered to have resigned.

If you:

Meet the Retirement Rule You will be entitled to receive a payout a number of shares of Common Stock equal to the shares you would have received, if any, if your employment had not terminated due to retirement in accordance with the Retirement Rule, multiplied by a fraction equal to the number of days worked in the Performance Period divided by the total number of days in the Performance Period. Any such payout will be made at the time of settlement of the Performance Shares after the end of the Performance Period.

Notes to the termination provisions

•The Committee determines what constitutes “gross misconduct” and “cause.”

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 September 30,					Nine Months Ended September 30,
(in millions, except ratios)	2005			2004		2005		2004
Income (loss) from continuing operations before income taxes and minority interest	$	(8	)	$	364	$	2,474	$	640
Interest	70			67		211		166
Portion of rentals deemed to be interest	16			17		46		41
Income available for fixed charges	$	78		$	448	$	2,731	$	847
Fixed charges:
Interest	$	70		$	67	$	211	$	166
Portion of rentals deemed to be interest	16			17		46		41
Total fixed charges	86			84		257		207
Preferred stock dividend requirements	2			3		8		6
Total fixed charges and preferred stock dividend requirements	$	88		$	87	$	265	$	213
Ratio of earnings to fixed charges	0.91			5.33		10.63		4.09
Ratio of earnings to combined fixed charges and preferred dividend requirements	0.89			5.14		10.31		3.97

The data included in this exhibit for the three months and nine months ended September 30, 2005 reflect information for the Company for those periods.  Data for the three months and nine months ended September 30, 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. 

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EX-31.1

EXHIBIT 31.1

Certification

I, Jay S. Fishman, Chairman and Chief Executive Officer, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 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:	November 3, 2005	By:	/s/ Jay S. Fishman
			Jay S. Fishman
			Chairman and Chief Executive Officer

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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 September 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:	November 3, 2005	By:	/s/ Jay S. Benet
			Jay S. Benet
			Vice Chairman and Chief Financial Officer

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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 September 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:	November 3, 2005	By:	/s/ Jay S. Fishman
		Name:	Jay S. Fishman
		Title:	Chairman and Chief Executive Officer

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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 September 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:	November 3, 2005	By:	/s/ Jay S. Benet
		Name:		Jay S. Benet
		Title:		Vice Chairman and Chief Financial Officer

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