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

TPC’s predecessor companies have been in the insurance business for more than 130 years. It is a Connecticut corporation that was formed in 1979 and, prior to its March 2002 Initial Public Offering (IPO), was an indirect wholly-owned subsidiary of Citigroup Inc. (together with its consolidated subsidiaries, Citigroup). In January 1996, Travelers Insurance Group Holdings Inc. (TIGHI) was formed to hold TPC’s property and casualty insurance subsidiaries. In April 1996, TIGHI purchased from Aetna Services, Inc. (Aetna) all of the outstanding capital stock of Aetna’s significant property and casualty insurance subsidiaries for approximately $4.200 billion in cash. In April 1996, TIGHI also completed an initial public offering of its common stock. In April 2000, TPC completed a cash tender offer and merger, as a result of which TIGHI became its wholly-owned subsidiary. In the tender offer and merger, TPC acquired all of TIGHI’s outstanding shares of common stock which it did not already own, representing approximately 14.8% of its outstanding common stock, for approximately $2.413 billion in cash financed by a loan from Citigroup.

On May 31, 2000, the Company completed the acquisition of the surety business of Reliance Group Holdings, Inc. (Reliance Surety). In connection with the acquisition, the Company entered into a reinsurance arrangement for pre-existing business. Accordingly, the results of operations and the assets and liabilities acquired from Reliance Surety are included in the financial statements beginning June 1, 2000. In the third quarter of 2000, the Company purchased the renewal rights to a portion of Reliance Group Holdings, Inc.’s commercial lines middle-market book of business. The Company also acquired the renewal rights to Frontier Insurance Group, Inc.’s environmental, excess and surplus lines casualty businesses and certain classes of surety business. On October 1, 2001, the Company completed its acquisition of the Northland Company and Associates Lloyds Insurance Company (Northland) from Citigroup. On October 3, 2001, the capital stock of Associates Insurance Company (Associates) was contributed to the Company by Citigroup. Accordingly, the results of operations and the assets and liabilities of these companies are included in the Company’s financial statements as of their acquisition dates. On August 1, 2002, Commercial Insurance Resources, Inc. (CIRI), a subsidiary of the Company and the holding company for the Gulf Insurance Group (Gulf), completed the sale of a 24% ownership interest, on a fully diluted basis, in CIRI to a group of outside investors and senior employees of Gulf.

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

On March 21, 2002, TPC issued 231 million shares of its class A common stock in an IPO, representing approximately 23% of TPC’s common equity. After the IPO, Citigroup Inc. beneficially owned all of the 500 million shares of TPC’s outstanding class B common stock, each share of which is entitled to seven votes, and 269 million shares of TPC’s class A common stock, each share of which is entitled to one vote, representing at the time 94% of the combined voting power of all classes of TPC’s voting securities and 77% of the equity interest in TPC. Concurrent with the IPO, TPC issued $892.5 million aggregate principal amount of 4.5% convertible junior subordinated notes, which mature on April 15, 2032. The IPO and the offering of the convertible notes are collectively referred to as the Offerings.

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

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The principal executive offices of the Company are located at One Tower Square, Hartford, Connecticut 06183; telephone number (860) 277-0111.

This discussion of the Company’s business is organized as follows: (i) a description of each of the Company’s two business segments (Commercial Lines and Personal Lines) and related services; (ii) a description of Interest Expense and Other; and (iii) certain other information.(1)

COMMERCIAL LINES

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

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

In 2002, Commercial Lines generated net written premiums of approximately $7.370 billion.

Selected Product and Market Information

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

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

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Product Lines

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

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

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

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

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

Property provides coverage for loss or damage to buildings, inventory and equipment from natural disasters, including hurricanes, windstorms, earthquakes, hail, severe winter weather and other events such as theft and vandalism, fires, explosions, and storms, and financial loss due to business interruption resulting from covered property damage. Property also includes specialized equipment insurance, which provides coverage for loss or damage resulting from the mechanical breakdown of boilers and machinery, ocean and inland marine, which provides coverage for goods in transit and unique, one-of-a-kind exposures and miscellaneous assumed reinsurance.

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

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

Principal Markets and Methods of Distribution

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

National Accounts sells a variety of casualty products and services to large companies. National Accounts also includes the Company’s residual market business, which primarily offers workers’ compensation products and ser-

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The Company’s residual market business sells claims and policy management services to workers’ compensation and automobile assigned risk plans and to self-insurance pools throughout the United States. The Company services approximately 35% of the total workers’ compensation assigned risk market. The Company is one of only two servicing carriers, which operate nationally. Assigned risk plan contracts generated approximately $137.3 million in service fee income in 2002.

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

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

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

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

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

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

Select Accounts has established strict underwriting guidelines integrated with the Company’s local field office structures. The agents either submit applications to the Company’s field underwriting locations or service centers for underwriting review, quote, and issuance or they utilize one of the Company’s automated quote and issue systems. Automated transactions are edited by the Company’s systems and issued only if they conform to established underwriting guidelines. Exceptions are reviewed by the Company’s underwriters and retrospective agency audits are conducted on a systematic sampling basis. The Company uses policy level management information to analyze and understand results and to identify problems and opportunities.

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

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

Gulf provides a diverse product and program portfolio of specialty insurance lines, with particular emphasis on executive and professional liability. Products include various types of directors’ and officers’ liability insurance, fiduciary, and employment practices liability for all sectors of commercial companies and financial institutions. Errors and omissions coverages are provided for numerous professional exposures including architects and engineers, lawyers, accountants, insurance agents, mutual fund advisors and investment counselors. Gulf provides fidelity and commercial crime coverages for nearly all classes of business. Gulf also offers excess and umbrella coverages for various industries. In 2001, Gulf began reducing its exposure to the assumed reinsurance, property and transportation lines of business and completely exited these non-core business lines during 2002.

Pricing and Underwriting

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

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

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

A significant portion of Commercial Lines business is written with large deductible insurance policies. Under some workers’ compensation insurance contracts with deductible features, the Company is obligated to pay the claimant the full amount of the claim. The Company is subsequently reimbursed by the contractholder for the deductible amount, and is subject to credit risk until such reimbursement is made. At December 31, 2002, contractholder receivables and payables on unpaid losses associated with large deductible policies were each approximately $2.544 billion. Retrospectively rated policies are also used for workers’ compensation coverage. Although the retrospectively rated feature of the policy substantially reduces insurance risk for the Company, it does introduce credit risk to the Company. Receivables on unpaid losses from holders of retrospectively rated policies totaled approximately $266.6 million at December 31, 2002. Significant collateral, primarily letters of credit and, to a lesser extent surety bonds and cash collateral, is generally requested for large deductible plans and/or retrospectively rated policies that provide for deferred collection of deductibles and/or ultimate premiums. The amount of collateral requested is predicated upon the creditworthiness of the customer and the nature of the insured risks. Commercial Lines continually monitors the credit exposure on individual accounts and the adequacy of collateral.

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

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Geographic Distribution

The following table shows the distribution of Commercial Lines’ direct written premiums for the states that accounted for the majority of premium volume for the year ended December 31, 2002:

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

PERSONAL LINES

Personal Lines writes virtually all types of property and casualty insurance covering personal risks. The primary coverages in Personal Lines are personal automobile and homeowners insurance sold to individuals. These products are distributed through independent agents, sponsoring organizations such as employee and affinity groups, and joint marketing arrangements with other insurers. In 2002, Personal Lines generated net written premiums of approximately $4.575 billion.

Selected Product and Distribution Channel Information

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

Product Lines

The Company writes most types of property and casualty insurance covering personal risks. Personal Lines had approximately 5.5 million policies in force at December 31, 2002. The primary coverages in Personal Lines are personal automobile and homeowners insurance sold to individuals.

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

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

Principal Markets and Methods of Distribution

The Company’s Personal Lines products are distributed primarily through approximately 7,200 independent agencies located throughout the United States, supported by personnel in 12 marketing regions and six customer service centers. In selecting new independent agencies to distribute the Company’s products, the Company considers each agency’s profitability, financial stability, staff experience and strategic fit with the Company’s operating and marketing plans. Once an agency is appointed, the Company carefully monitors its performance. While the Company’s principal markets for Personal Lines insurance

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The Company provides technological alternatives to agents to maximize their ease of doing business. Personal Lines agents quote and issue 93% of the Company’s Personal Lines policies directly from their agencies by leveraging either their own agency management system or using the Company’s proprietary quote and issuance systems which facilitate and make it possible for agents to rate, quote and issue policies on line. All of these quote and issue platforms interface with the Company’s underwriting and rating systems, which edit transactions for compliance with the Company’s underwriting and pricing programs. Business processed by agents on these platforms is subjected to consultative review by the Company’s in-house underwriters. In the past year, the Company continued to introduce new Internet-based proprietary systems, and agents have transitioned approximately 90% of the Company’s new business to these platforms. The Company also provides an industry-leading download capability that refreshes the individual agency system databases of approximately 3,000 agents each day with updated new and existing policy information.

The Company continues to develop functionality to provide its agents with a comprehensive array of online service capabilities packaged together in an easy-to-use agency service portal, including customer service, marketing and claim functionality. Agencies can also choose to shift the on-going core service responsibility for the Company’s customers to one of the Company’s four Customer Care Centers, where the Company functions as an extension of an agency’s servicing operation by providing a comprehensive array of direct customer service needs, including response to billing and coverage inquiries, and policy changes. More than 800 agents take advantage of this service alternative.

Personal Lines operates single state companies in Massachusetts, New Jersey and Florida with products marketed primarily through independent agents. These states represented 20.6% of Personal Lines direct written premiums in 2002. The companies were established to manage complex markets in Massachusetts and New Jersey and property catastrophe exposure in Florida. Each company has dedicated resources in underwriting, claim, finance, legal and service functions. The establishment of these separate companies limits capital at risk in these markets.

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

Pricing and Underwriting

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

The Company has developed a product management methodology that incorporates underwriting, claims, actuarial and product development disciplines. This approach is designed to maintain high quality underwriting and pricing discipline. Proprietary data is gathered and analyzed with respect to the Company’s Personal Lines business over many years. The Company uses a variety of proprietary and vendor produced risk differentiation models to facilitate its underwriting segmentation. These models use customer supplied and third-party data sources, including credit bureau data. The Company’s Personal Lines product managers establish strict underwriting guidelines integrated with its filed pricing and rating plans, which enable the Company to streamline its risk selection and pricing.

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

Pricing in the homeowners business is also driven by changes in the frequency of claims and by inflation in the cost of building supplies, labor and household possessions. Most homeowners policies offer, but do not require, automatic increases in coverage to reflect growth in replacement costs and property values. In addition to the normal risks associated with any multiple peril coverage,

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

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

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

Geographic Distribution

The following table shows the distribution of Personal Lines’ direct written premiums for the states that accounted for the majority of premium volume for the year ended December 31, 2002:

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

CLAIMS MANAGEMENT

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

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

Claims Services includes field claims management teams, located in 39 offices in 32 states, with appropriate authority and access to resources to address the claim

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

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

Claim Services uses advanced management information and data analysis for more effective claim results. This assists the Company in reviewing its claim practices and results to evaluate and improve its performance. The Company’s claim management strategy is focused on segmentation of claims, technical specialization, and effective claim resolution. In recent years, the Company has dedicated claim professionals to its construction market, invested significant additional resources in its Major Case organization and expanded its “catastrophe van” fleet. The Company’s proven catastrophe response strategy and its catastrophe claim handling teams were instrumental in its industry-leading response to the terrorist attack on September 11th. The Company is a leading user of digital and wireless technology and Internet-based claim notification. Additionally, TravGlass ^SM , the Company’s Internet-based claims application, includes a network of pre-approved and customer or agent selected glass repair providers, to more effectively meet its customers’ automobile glass repair needs.

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

Asbestos, environmental and other cumulative injury claims are separately managed by the Company’s Special Liability Group. See “– Asbestos, Environmental and Other Cumulative Injury Claims.”

REINSURANCE

The Company reinsures a portion of the risks it underwrites in order to control its exposure to losses, stabilize earnings and protect capital resources. The Company cedes to reinsurers a portion of these risks and pays premiums based upon the risk and exposure of the policies subject to such reinsurance. Reinsurance involves credit risk and is generally subject to aggregate loss limits. Although the reinsurer is liable to the Company to the extent of the reinsurance ceded, the Company remains liable as the direct insurer on all risks reinsured. Reinsurance recoverables are reported after reductions for known insolvencies and after allowances for uncollectible amounts. The Company also holds collateral, including trust agreements, escrow funds and letters of credit, under certain reinsurance agreements. The Company monitors the financial condition of reinsurers on an ongoing basis and reviews its reinsurance arrangements periodically. Reinsurers are selected based on their financial condition, business practices and the price of their product offerings. For additional information concerning reinsurance, see note 5 of the notes to the Company’s consolidated financial statements.

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

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

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The following presents the Company’s top five reinsurers, except Lloyd’s of London (Lloyd’s), which is discussed in more detail below, by reinsurance recoverable at December 31, 2002 (in millions):

As of December 31, 2002, the Company had reinsurance recoverables from Lloyd’s of $573.4 million. In 1996, Lloyd’s restructured its operations with respect to claims for years prior to 1993 and reinsured these into Equitas Limited, which is currently unrated. Approximately $296.5 million of the Company’s Lloyd’s reinsurance recoverable at December 31, 2002 relates to Equitas liabilities. The remaining recoverables of $276.9 million are from the continuing market of Lloyd’s, which is rated A- (4th highest of 16 ratings) by A.M. Best.

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

At December 31, 2002, the Company had $10.978 billion in reinsurance recoverables. Of this amount, $2.095 billion is for mandatory pools and associations that relate primarily to workers’ compensation service business and have the obligation of the participating insurance companies on a joint and several basis supporting these cessions. Also, $2.482 billion is attributable to structured settlements relating primarily to personal injury claims, for which the Company has purchased annuities and remains contingently liable in the event of any defaults by the companies issuing the annuities. Of the remaining $6.401 billion ceded to reinsurers at December 31, 2002, $1.357 billion is attributable to environmental, asbestos and other cumulative injury claims and the remainder principally reflects reinsurance in support of ongoing business. At December 31, 2002, $765.6 million of reinsurance recoverables were collateralized by letters of credit, trust agreements and escrow funds. Also at December 31, 2002, the allowance for estimated uncollectible reinsurance recoverables was $329.1 million.

Current Net Retention Policy

The descriptions below relate to the Company’s reinsurance arrangements in effect at January 1, 2003. Most casualty and property reinsurance agreements that renewed on or after January 1, 2002 and subsequent now have terrorism sublimits or exclusions. For third-party liability, including automobile no-fault, the reinsurance agreement used by Commercial Lines limits the net retention to a maximum of $8.0 million per insured, per occurrence. Reinsurance is also used to limit net retained policy limits to $10.0 million for commercial property. For executive liability coverages such as errors and omissions liability, directors’ and officers’ liability, employment practices liability and blended insurance, the Company generally retains up to $5.0 million per risk. For surety protection, the Company generally retains up to $28.5 million per principal but may retain higher amounts based on the type of obligation, credit quality and other credit risk factors. Personal Lines retains the first $5.0 million of umbrella policies and purchases facultative reinsurance for limits over $5.0 million. For personal property insurance, there is a $6.0 million maximum retention per risk.

Catastrophe Reinsurance

The Company utilizes reinsurance agreements with nonaffiliated reinsurers to control its exposure to losses resulting from one occurrence. For the accumulation of net property losses arising out of one occurrence, a reinsurance agreement covers 67% of total losses between $450.0 million and $750.0 million. This agreement excludes nuclear, chemical, and biochemical terrorism losses for Personal Lines and all terrorism losses for Commercial Lines.

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

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

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Terrorism Risk Insurance Act of 2002

On November 26, 2002, the Terrorism Risk Insurance Act of 2002 (the Terrorism Act) was enacted into Federal law and established a temporary Federal program in the Department of the Treasury that provides for a system of shared public and private compensation for insured losses resulting from acts of terrorism committed by or on behalf of a foreign interest. In order for a loss to be covered under the Terrorism Act (i.e., subject losses), the loss must be the result of an event that is certified as an act of terrorism by the U.S. Secretary of Treasury. In the case of a war declared by Congress, only workers’ compensation losses are covered by the Terrorism Act. The Terrorism Insurance Program (the Program) generally requires that all commercial property casualty insurers licensed in the U.S. participate in the Program. The Program became effective upon enactment and terminates on December 31, 2005. The amount of compensation paid to participating insurers under the Program is 90% of subject losses, after an insurer deductible, subject to an annual cap. The deductible under the Program is 7% for 2003, 10% for 2004, and 15% for 2005. In each case, the deductible percentage is applied to the insurer’s direct earned premiums from the calendar year immediately preceding the applicable year. The Program also contains an annual cap that limits the amount of subject losses to $100 billion aggregate per program year. Once subject losses have reached the $100 billion aggregate during a program year, there is no additional reimbursement from the U.S. Treasury and an insurer that has met its deductible for the program year is not liable for any losses (or portion thereof) that exceed the $100 billion cap. The Company’s deductible under this federal program is $570.0 million for 2003 subject to final rules to be established by the U.S. Treasury.

Florida Reinsurance Fund

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

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

RESERVES

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

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

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

Discounting

The liability for losses for some long-term disability payments under workers’ compensation insurance and workers’ compensation excess insurance has been discounted using an interest rate of 5%. The liability for losses for certain fixed and determinable asbestos-related settlements, where all payment amounts and their timing are known, has also been discounted using various interest rates ranging from 1.56% to 5.50%. At December 31, 2002, 2001 and 2000, the combined amounts of discount on the consolidated balance sheet were $802.9 million, $792.4 million

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Other Factors

The table on page 13 sets forth the year-end reserves from 1992 through 2002 and the subsequent changes in those reserves, presented on a historical basis. The original estimates, cumulative amounts paid and reestimated reserves in the table for the years 1992 to 2001 and 1992 to 1995 have not been restated to reflect the acquisition of the Northland and Associates insurance companies and of Aetna’s property and casualty insurance subsidiaries, respectively. Beginning in 2002 and 1996, the table includes the reserve activity of Northland and Associates and of Aetna, respectively. The data in the table is presented in accordance with reporting requirements of the Securities and Exchange Commission. Care must be taken to avoid misinterpretation by those unfamiliar with this information or familiar with other data commonly reported by the insurance industry. The accompanying data is not accident year data, but rather a display of 1992 to 2002 year-end reserves and the subsequent changes in those reserves.

For instance, the “cumulative deficiency or redundancy” shown in the accompanying table for each year represents the aggregate amount by which original estimates of reserves as of that year-end have changed in subsequent years. Accordingly, the cumulative deficiency for a year relates only to reserves at that year-end and those amounts are not additive. Expressed another way, if the original reserves at the end of 1992 included $4.0 million for a loss that is finally paid in 2002 for $5.0 million, the $1.0 million deficiency (the excess of the actual payment of $5.0 million over the original estimate of $4.0 million) would be included in the cumulative deficiencies in each of the years 1992 to 2001 shown in the accompanying table.

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

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

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

The differences between the reserves for loss and loss adjustment expenses shown in the accompanying table, which is prepared in accordance with accounting principles generally accepted in the United States of America and those reported in the Company’s annual reports filed with state insurance departments, which are prepared in accordance with statutory accounting practices, were $(12.1) million, $(17.2) million and $9.2 million for 2002, 2001 and 2000, respectively.

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(a)

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

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

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Asbestos, Environmental and Other Cumulative Injury Claims

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

INTERCOMPANY REINSURANCE POOLS

Most of the Company’s insurance subsidiaries are members of intercompany property and casualty reinsurance pooling arrangements. As of December 31, 2002, there were three intercompany pools, the Travelers Property Casualty pool, the Gulf pool and the Northland pool. Each of these pools permits the participating companies to rely on the capacity of the entire pool’s capital and surplus rather than just on its own capital and surplus. Under the arrangements of each pool, the members share substantially all insurance business that is written, and allocate the combined premiums, losses and expenses. Travelers Casualty and Surety Company of America (Travelers C&S of America), which is dedicated to the Bond business, does not participate in any of the pools. The Personal Lines single state companies and Associates and affiliates (see Ratings below) are also not included in any of the pools.

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

RATINGS

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

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

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

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INVESTMENTS

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

At December 31, 2002, the carrying value of the Company’s investment portfolio was $38.425 billion, of which 91% was invested in fixed maturity investments and short-term investments (of which 38% was invested in federal, state or municipal government obligations), 1% in mortgage loans and real estate held for sale, 2% in common stocks and other equity securities and 6% in other investments. Adjusting for the effect of securities in the process of settlement, invested assets were $34.826 billion at December 31, 2002, of which 90% was invested in fixed maturity investments and short-term investments (of which 42% was invested in federal, state or municipal government obligations), 1% in mortgage loans and real estate held for sale, 2% in common stocks and other equity securities and 7% in other investments. The average duration of the fixed maturity portfolio, including short-term investments, was 5.0 years at December 31, 2002. The average duration of the fixed maturity portfolio excluding short-term investments was 5.8 years. Non-investment grade securities totaled approximately $1.945 billion, representing approximately 6% of the Company’s fixed maturity investment portfolio as of December 31, 2002.

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

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

DERIVATIVES

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

COMPETITION

The property and casualty insurance industry is highly competitive in the areas of price, service, product offerings, agent relationships and, in the case of personal property and casualty business, method of distribution, i.e., use of independent agents, exclusive agents and/or salaried employees. According to A.M. Best, there are approximately 950 property casualty organizations in the United States, comprising approximately 2,400 property casualty companies. Of those organizations, the top 150 accounted for approximately 91% of the consolidated industry’s total net written premiums in 2001. Several property and casualty insurers writing commercial lines of business, including the Company, offer products for alternative forms of risk protection in addition to traditional insurance products. These products, including large deductible programs and various forms of self-insurance that utilize captive insurance companies and risk retention groups, have been instituted in reaction to the escalating cost of insurance caused in part by increased costs from workers’ compensation cases and jury awards in third-party liability cases.

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

National Accounts business is typically written through national brokers and, to a lesser extent, regional brokers. Insurance companies compete in this market based on price, product offerings, claim and loss prevention services, managed care cost containment and risk management information systems. National Accounts also offers a large nationwide network of localized claim service centers which provide greater flexibility in claims adjusting and allows the Company to more quickly respond to the needs of its customers. The Company’s residual market business also

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

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

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

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

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

REGULATION

State Regulation

The Company’s insurance subsidiaries are subject to regulation in the various states and jurisdictions in which they transact business. The extent of regulation varies, but generally derives from statutes that delegate regulatory, supervisory and administrative authority to a department of insurance in each state. The regulation, supervision and administration relate, among other things, to standards of solvency that must be met and maintained, the licensing of

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Insurance Holding Company Statutes

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

Insurance Regulation Concerning Dividends

The Company’s principal insurance subsidiaries are domiciled in the State of Connecticut. The insurance holding company law of Connecticut applicable to the Company’s subsidiaries requires notice to, and approval by, the state insurance commissioner for the declaration or payment of any dividend, that together with other distributions made within the preceding twelve months exceeds the greater of 10% of the insurer’s surplus as of the preceding December 31, or the insurer’s net income for the twelve-month period ending the preceding December 31, in each case determined in accordance with statutory accounting practices. This declaration or payment is further limited by adjusted unassigned surplus, as determined in accordance with statutory accounting practices. The insurance holding company laws of other states in which the Company’s insurance subsidiaries are domiciled generally contain similar, although in some instances somewhat more restrictive, limitations on the payment of dividends. During 2003, a portion of dividends from the Company’s insurance subsidiaries is likely to be subject to approval from the Connecticut Insurance Department, depending upon the amount and timing of the payments.

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

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

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

The Company’s insurance subsidiaries are also required to participate in various involuntary assigned risk pools, principally involving workers’ compensation and automobile insurance, which provide various insurance coverages to individuals or other entities that otherwise are unable to purchase that coverage in the voluntary market. Participation in these pools in most states is generally in proportion to voluntary writings of related lines of business in that state. In the event that a member of that pool becomes

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

Insurance Regulations Concerning Change of Control

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

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

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

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

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

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

Insurance Regulatory Information System

The NAIC Insurance Regulatory Information System (IRIS) was developed to help state regulators identify companies that may require special attention. The IRIS system consists of a statistical phase and an analytical phase whereby financial examiners review annual statements and financial ratios. The statistical phase consists of 12 key financial ratios based on year-end data that are generated from the NAIC database annually; each ratio has an established “usual range” of results. These ratios assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies.

A ratio result falling outside the usual range of IRIS ratios is not considered a failing result; rather, unusual values are viewed as part of the regulatory early monitoring system. Furthermore, in some years, it may not be unusual for financially sound companies to have several ratios with results outside the usual ranges. Generally, an insurance company will become subject to regulatory scrutiny if it falls outside the usual ranges of four or more of the ratios. As published by the NAIC, approximately 14.9% of the companies included in the IRIS system have reported results outside the usual range on four or more ratios.

In 2002, most of the Company’s insurance subsidiaries in the Travelers Property Casualty pool had results outside the usual range for the one year reserve development to surplus ratio, the two year reserve development to surplus ratio and the estimated current reserve deficiency to surplus ratio ranging from 21% to 44%, which exceeded the usual range of 20% to 25%, primarily because of the pretax statutory income statement charges for additions to asbes-

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In 2001 and 2000, two of the Company’s principal subsidiaries had ratios outside the usual ranges. In 2001, The Travelers Indemnity Company had a liabilities to liquid asset ratio of 110%, which exceeded the usual result of 105%. This resulted from The Travelers Indemnity Company’s acquisition of The Northland Company and the contribution of Associates Insurance Company and affiliates, because these entities are not liquid assets for the purposes of calculating this ratio. Travelers Casualty and Surety Company has an estimated current reserve deficiency to policyholders’ surplus ratio of 26% which exceeded the usual result of 25%. The two factors which contributed to this result were the combining of the Travelers Property Casualty and Gulf Insurance intercompany reinsurance pools in 2001 and the decline in workers’ compensation business volume in previous years. For 2000, Travelers Casualty and Surety Company of America had a change in net writings that was 138%, compared to the usual range of 33% to (33%). Travelers Casualty and Surety Company had a change in surplus ratio that was unusual (13%) compared to the usual range of 50% to (10%).

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

In all of these instances in prior years, regulators have been satisfied upon follow-up that no regulatory action was required. It is possible that similar results could occur in the future. Management does not anticipate regulatory action as a result of the 2002 IRIS ratio results. No regulatory action has been taken by any state insurance department or the NAIC with respect to IRIS ratios of any of the Company’s insurance subsidiaries for the years ended December 31, 2001 and 2000.

Risk-Based Capital (RBC) Requirements

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

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

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

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

The formulas have not been designed to differentiate among adequately capitalized companies that operate with higher levels of capital. Therefore, it is inappropriate and ineffective to use the formulas to rate or to rank these companies. At December 31, 2002, all of the Company’s property and casualty insurance subsidiaries had total adjusted capital in excess of amounts requiring company or regulatory action at any prescribed RBC action level.

INTEREST EXPENSE AND OTHER

Interest Expense and Other consists primarily of interest expense.

OTHER INFORMATION

General Business Factors

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

Employees

At December 31, 2002, the Company had 19,837 full-time and 754 part-time employees. The Company believes that its employee relations are satisfactory. None of the Company’s employees are subject to collective bargaining agreements.

Source of Funds

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

Taxation

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

Financial Information about Industry Segments

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

Recent Transactions

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

Company Website and Availability of SEC Filings

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

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Executive Officers of the Company

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

Robert I. Lipp, 64, has been chairman and chief executive officer of the Company since December 18, 2001. Mr. Lipp served as chairman of the board of TIGHI from 1996 to 2000 and from January 2001 to October 2001, and was the chief executive officer and president of TIGHI from 1996 to 1998. During 2000 he was a vice chairman and member of the office of the chairman of Citigroup. He was chairman and chief executive officer – Global Consumer Business of Citigroup from 1999 to 2000. From October 1998 to April 1999, he was co-chairman – Global Consumer Business of Citigroup. From 1993 to 2000, he was chairman and chief executive officer of Travelers Insurance Group, Inc., a TPC predecessor company. From 1991 to 1998, he was a vice chairman and director of Travelers Group, Inc. and from 1991 to 1993, he was chairman and chief executive officer of CitiFinancial Credit Company. Prior to joining Citigroup in 1986, Mr. Lipp spent 23 years with Chemical New York Corporation. He is a director of Accenture Ltd., president of the New York City Ballet, a trustee of Carnegie Hall and the Massachusetts Museum of Contemporary Art, chairman of the executive committee at Williams College, and chairman of Dance-On Inc.

Charles J. Clarke, 67, is president and was chairman and chief executive officer of TIGHI just prior to December 18, 2001. He has been a director of the Company since June 2000. Mr. Clarke was president from January 2001 to October 2001. Prior to that time he had been vice chairman from January 1998 to January 2001. Mr. Clarke had been chief executive officer of Commercial Lines from January 1996 to January 1998 and was chairman of Commercial Lines from 1990 to January 1996. He has held other executive and management positions with the Company for many years, and he has been with the Company since 1958.

Irwin R. Ettinger, 64, joined the Company as vice chairman in June 2002. Prior to this, Mr. Ettinger served as the chief accounting and tax officer for Citigroup from 1998 to 2002 and held other positions of increasing responsibility since joining Citigroup in 1987. He joined Citigroup from Arthur Young & Co. (now Ernst and Young) where he was a partner for 18 years. He serves as a member of the Advisory Council of the Weissmen Center for International Business of Baruch College of the City University of New York and is a member of the executive committee of the Baruch College Fund.

Douglas G. Elliot, 42, is chief operating officer of the Company, responsible for the business operations of the Company. He was president and chief operating officer of TIGHI just prior to December 18, 2001. Mr. Elliot was president and chief executive officer from October 2001 to December 2001. He was chief operating officer and president of Commercial Lines from September 2000 to October 2001, chief operating officer of Commercial Lines from August 1999 to September 2000 and senior vice president of Select Accounts from June 1996 to August 1999. He has held other executive and management positions with the Company for several years, and he has been with the Company since 1987. Mr. Elliot serves on the Corporator’s Board of Hartford Hospital.

Jay S. Benet, 50, has been the chief financial officer of the Company since February 2002. Before joining the Company, from March 2001 until January 2002, Mr. Benet was the worldwide head of financial planning, analysis and reporting at Citigroup and chief financial officer for Citigroup’s Global Consumer Europe, Middle East and Africa unit between April 2000 and March 2001. Prior to this, Mr. Benet served 10 years in various executive positions with Travelers Life & Annuity, including chief financial officer and executive vice president, Group Annuity from December 1998 to April 2000 and senior vice president Group Annuity from December 1996 to December 1998. Prior to joining Travelers Life & Annuity in 1990, Mr. Benet was a partner of Coopers & Lybrand (now Pricewaterhouse Coopers).

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

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

Stewart R. Morrison, 46, is the chief investment officer of the Company. Mr. Morrison joined the Company in November 2002 from Security Benefit Group in Topeka, Kansas, where he served as chief investment officer. Prior to his role there, Mr. Morrison spent more than 10 years with Keyport Life Insurance Company in Boston in a variety of strategic investment positions, including chief investment officer. Before moving into the insurance field, Mr. Morrison held positions of increasing responsibility in the banking industry, beginning at Hartford National Bank.

Maria Olivo, 38, was appointed executive vice president, Business and Corporate Development and Investor Relations of the Company in June 2002. Ms. Olivo, a certified financial analyst, joined the Company from Swiss Re Capital Partners where she was a managing director involved in Strategic Investments and Corporate Development from April 2000 to June 2002. Prior to that, she was a director at Salomon Smith Barney where she worked on numerous initial public offerings, mergers and acquisitions and public debt offerings.

Peter N. Higgins, 55, has been executive vice president, Underwriting since 2000, and chief executive officer of Commercial Accounts since 1996. In addition, he is the chief executive officer of the Northland Companies. Mr. Higgins began his career with the Company in 1969, was promoted to senior vice president, Commercial Lines in 1992, and chief underwriting officer in 2000.

Brian W. MacLean, 49, is executive vice president, Claim Services. Prior to this, Mr. MacLean served as president of Select Accounts from July 1999 to January 2002. He also served as chief financial officer of Claim Services from March 1993 to June 1996. From June 1996 to July 1999, Mr. MacLean was chief financial officer for Commercial Lines. He joined the Company in 1988 and has served in several other positions. Prior to joining the Company, Mr. MacLean was an audit manager at the public accounting firm of Peat Marwick (now KPMG LLP).

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

Douglas K. Russell, 45, is the chief accounting officer and treasurer and has been controller and chief accounting officer of the Company since July 1999. Mr. Russell has also served in several other positions with the Company since January 1997. Prior to joining the Company, Mr. Russell was director of financial reporting of both The MetraHealth Companies, Inc. from May 1995 to October 1995, and of United Healthcare Corporation, from October 1995 to December 1996. From 1979 to May 1995, Mr. Russell served in several positions at Ernst & Young, LLP.

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Glossary of Selected Insurance Terms

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