The Travelers Companies Annual Report 2012

FY2012 Annual Report · The Travelers Companies
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Satellite photo showing Storm Sandy courtesy of NASA

Reliability in an increasingly uncertain world

2012 ANNUAL REPORT AND FORM 10-K

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FINANCIAL HIGHLIGHTS   At and for the year ended December 31. Dollar amounts in millions, except per share amounts.

2012

$   22,357

$   25,740

$     2,441

$     2,473

$      6.30

$   73,838

$104,938

$   25,405

9.8%

11.0%

$    67.31

$      1.79

2011

$   22,090

$   25,446

$     1,390

$     1,426

$      3.36

$  72,701

$104,575

$  24,477

5.7%

6.1%

$    62.32

$      1.59

2010

$  21,432

$  25,112

$    3,043

$    3,216

$      6.62

$  72,722

$105,631

$   25,475

12.1%

12.5%

$      58.47

$      1.41

2009

$  21,418

$   24,680

$     3,600

$     3,622

$       6.33

$  74,965

$110,013

$  27,415

13.5%

14.0%

$    52.54

$      1.23

2008

$  21,579

$  24,477

$    3,195

$    2,924

$       4.81

$  70,738

$110,088

$  25,319

11.4%

12.4%

$    43.12

$      1.19

Earned Premiums

Total Revenues

Operating Income

Net Income

Net Income Per Diluted Common Share

Total Investments

Total Assets

Shareholders’ Equity

Return On Equity

Operating Return On Equity

Book Value Per Share

Dividends Per Share

TRAVELERS AT A GLANCE

The Travelers Companies, Inc. (NYSE: TRV) is a leading provider of property and casualty 

insurance for auto, home and business. The company’s diverse business lines oﬀ  er customers a 

wide range of coverage predominantly through independent agents and brokers. A component 

of the Dow Jones Industrial Average, Travelers has more than 30,000 employees and operations 

in the United States and selected international markets.

160 YEARS OF RELIABILITY 

For 160 years, Travelers has provided strength and support in challenging times — from the Great Chicago Fire of 1871 
to today’s uncertain economic environment. Throughout its history, the company has maintained its commitment to 
providing superior customer service while upholding its long-standing tradition of industry ﬁ rsts. 

1853

1864

Alexander Wilkin, secretary of the Minnesota Territory, founds the 

J.G. Batterson and nine fellow Hartford businessmen found 

St. Paul Fire and Marine Insurance Company — the ﬁ rst business 

The Travelers Insurance Company for the purpose of insuring 

corporation in Minnesota. The company pays its ﬁ rst claim two 

travelers against death or injury while journeying by railway 

years later after a ﬁ re at a bakery spreads to an adjacent oﬃ  ce 

or steamboat.

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TO OUR SHAREHOLDERS:

I am pleased to report that, in a year of signiﬁ cant challenges for our 

industry, we once again demonstrated the value of our consistent 

strategy of managing the company for the long term and focusing 

on producing top tier returns over time.  

Our business is confronted with a number of uncertainties — the 

outlook for the economy in general and interest rates in particular, 

We accomplished this under very diﬃ  cult circumstances. Several 

loss costs on the insurance products we sell, competitive dynamics 

of our facilities in the aﬀ ected areas were without power, and many 

in the marketplace and, perhaps the largest driver of uncertainty, 

of our employees and the infrastructure that supports them had 

the potential for continuing adverse weather patterns. We only 

to be relocated literally overnight to temporary facilities. Gasoline 

succeed if we are prepared for what might be and are reliable time and 

was in short supply in the region, so we provisioned tanker trucks 

again — especially under the most trying of circumstances. In this 

from unaﬀ ected areas to keep our claim professionals on the road. 

industry, being prepared requires years of thoughtful planning based 

Our customers’ experiences were made better and our losses were 

on careful analysis of all available data and trends. That kind of patient 

mitigated by the fact that we responded to nearly every claim with 

and disciplined approach positions Travelers to deliver exceptional 

our own employees, as opposed to relying on third-party adjusters 

service for our customers and healthy returns for our shareholders.

as is common in the industry, particularly in such large events. This 

Our response to Storm Sandy is a perfect example of our careful 

approach. The immense damage left in Sandy’s wake led to an 

extraordinary number of claims industry-wide, including by our 

extraordinary response to such an extraordinary event requires 

experienced, talented and dedicated employees and years of 

thoughtful preparation. 

policyholders. We responded quickly in the days following the 

In sum, our 2012 total catastrophe losses were $1.9 billion 

storm, as nearly 5,000 of our employees, many of them also severely 

pre-tax ($1.2 billion after-tax), which is a very high level by historic 

aﬀ ected, helped many thousands more of our customers when they 

standards and makes for severe levels of catastrophic weather 

needed us most.

in four of the last ﬁ ve years. Throughout this period, signiﬁ cant 

1871

1897

The Great Chicago Fire destroys 17,450 buildings, leaves 

Travelers issues the ﬁ rst automobile policy to Gilbert J. Loomis, 

100,000 people homeless, kills 275 people and causes 

a mechanic who built a one-cylinder car.

$196 million in property damage. Unlike many of its 

competitors, the company pays all related claims in full.

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INDUSTRY UNDERWRITING ENVIRONMENT 
— IMPACT OF CATASTROPHES
In the 1960s, 1970s and 1980s, catastrophe loss costs* in the 
U.S. property-casualty industry were about 1 percent of written 
premiums. That jumped to approximately 3.5 percent in the 1990s 
and 2000s and has doubled from there to 7.2 percent in the 2010s.

weather losses have come increasingly from inland wind (tornadoes) 

and hail. This adds to the uncertainty of weather as inland wind, as 

compared to coastal wind (hurricanes), is more diﬃ  cult to predict 

and model. Also, while coastal wind predictably impacts speciﬁ c 

coastal regions, much of the country is vulnerable to inland wind. 

7.20%

In addition to the weather, our results in 2012 and in recent years 

have been aﬀ ected by the impact of historically low interest rates 

3.39%

3.52%

on our investment portfolio.

i

m
u
m
e
r
P
f
o
t
n
e
c
r
e
P

1.04%

.85%

1.31%

1960s

1970s

1980s

1990s

2000s

2010s

Source: Insurance Information Institute. 

*Note: Private carrier losses only. Excludes loss adjustment expenses and reinsurance 

reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers 
and reinsurers.

10-YEAR TREASURY BOND YIELD
This chart shows the decline in the yield of 10-year 
Treasury bonds from Jan. 1, 1995, through Dec. 31, 2012.

8%

7

6

5

4

3

2

1

0

1995
Jan. 1

1997 1999 2001 2003 2005 2007 2009 2011

2012
Dec. 31

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis: 
10-Year Treasury Constant Maturity Rate.

Reliability — Years in the making
We have been managing our business for these conditions for 

years. Our philosophy of running the business for the long term 

enables us to address challenges from a position of strength and 

organizational readiness. Our ﬁ nancial foundation is solid. We 

carefully balance risk and reward in both our insurance operations 

and our investment portfolio. And a storm like Sandy, extreme as 

it was, was in our playbook of possibilities, both in terms of our  

understanding of our exposure to severe events and the response  

strategy we put in place following Hurricane Katrina in 2005.  

More speciﬁ cally, we started to take action in response to the 

weather patterns and low interest rates in the middle of 2010. 

Consistent with our approach of focusing on producing top tier 

returns over time, we embarked on a deliberate, carefully calibrated 

strategy of selectively but actively raising rates and improving 

terms and conditions on our insurance policies. Our results in 2012 

beneﬁ tted from that strategy. Improved underwriting margins in 

each of our segments contributed signiﬁ cantly to our proﬁ tability. 

1912

1919

After the Titanic sinks, Travelers pays more than $1 million to 

Travelers issues the ﬁ rst insurance on aerial transportation, 

beneﬁ ciaries in accident claims and life insurance beneﬁ ts.

which includes public liability, property damage and workers’ 

compensation. President Woodrow Wilson is one of the ﬁ rst 

individuals covered by such insurance.

4  TRAVELERS 2012 Annual Report

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Overall, Travelers produced net income of $2.5 billion, a return 

on equity of 9.8 percent and an operating return on equity of 

11.0 percent for the year. We ended 2012 with book value per 

share of $67.31, up 8 percent from year end 2011. 

These results enabled us to return more than $2.1 billion to 

shareholders in 2012 through dividends and share repurchases, 

consistent with our ongoing capital management strategy. Another 

measure of the success of our long-term focus and our strong 

performance is that since May 2006 through our share repurchase 

program, we have returned more than $18 billion to shareholders 

TRAVELERS’ RESPONSE TO STORM SANDY 

By claim volume, Storm Sandy was the largest storm in 

Travelers’ history. Despite that, the company was able 

and reduced our shares outstanding by approximately 50 percent.  

to provide exceptional customer service:

We remain focused on anticipating and preparing for events and 

•  Answered 90 percent of customer phone calls in under 

circumstances — both risks and opportunities — that depart from 

30 seconds.

historical patterns. As we do so, we recognize the inextricable link 

•  Contacted approximately 80 percent of customers within 

between our ﬁ nancial performance and our ability to fulﬁ ll our 

two days of loss notice; virtually all within three days.

commitments to our policyholders and agents. For our shareholders, 

•  Settled 90 percent of Personal Insurance homeowners’ 

our customers and our agents, dependability demands that we plan 

claims within 30 days of loss notice.

thoroughly and look well beyond the short-term horizon. 

160 years of reliability 
Our performance over the last year on behalf of our customers 

followed a long tradition. As we celebrate our 160th anniversary, it 

is worth noting that reliability has been a hallmark of our heritage. 

We have stood behind our customers throughout epic events in 

American history, providing support after the 1871 Chicago Fire, 

the 1906 San Francisco Earthquake, the 1912 sinking of the Titanic, 

the 1929 Wall Street crash, the Great Depression and, more recently, 

the ﬁ nancial crisis of 2008. 

•  Enlisted more than 5,000 Travelers employees to help 

with our response.

•  Deployed tree removal and roof tarping teams to more 

than 900 properties to prevent further damage.

These results validated Travelers’ catastrophe response 

strategy, which employs sophisticated modeling, planning 

and logistical support through the company’s National 

Catastrophe Center; a robust local claim ﬁ eld presence 

supported by a 300-member catastrophe team and ﬁ ve 

Mobile Claim Oﬃ  ce vehicles; and the use of Travelers 

employees rather than third-party administrators to handle 

claims. To learn more about Travelers’ catastrophe response 
capabilities, see travelers.com/catastrophe-response.

1929

1955

Despite the stock market crash and the subsequent Depression, 

Travelers introduces a homeowners policy that combines 

the company does not lay oﬀ  any workers or cut salaries. 

ﬁ re, theft and liability coverages. Soon, the company writes 

In fact, employees receive a special one-month salary bonus. 

such combined coverages for store owners, apartment 

Two years later, company directors contribute $79,000 to 

owners and farm owners policies.

Depression relief funds.

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Just as we emerged from the 2008 crisis stronger than many of 

our peers because of decisions we had made years earlier, we are 

always looking deep into the future to anticipate what might be and 

how we should be prepared. Sustaining our success requires long-

term investments in the future of our company. We continue to 

invest in the people, products and technology that are core to our 

competitive advantages.  

Advocating for opportunity 
We also have long recognized the value of investing in our 

communities and that we have a responsibility to participate 

constructively in public policy dialogue on important issues for 

our industry. We hope to contribute to solutions on a wide range 

of issues that face our customers, our agents and brokers and the 

communities we serve.

In 2012, we marked the ﬁ fth anniversary of our signature education 

program, Travelers EDGE (Empowering Dreams for Graduation and 

Employment), which prepares students for success in school and in 

their careers.

We continued advocating on behalf of small business owners, the 

backbone of the U.S. economy. We hosted a national small business 

symposia series and piloted a risk management education program 

for women and minority small business owners in Los Angeles. 

SMALL BUSINESS ADVOCACY

As one of the nation’s largest insurers of small businesses, 

Travelers advocated for their economic opportunity in 

2012. The company supported public policy solutions to 

the issues facing small business owners and assisted them 

with education by leveraging Travelers’ expertise in risk 

mitigation. Travelers understands that the health of small 

business is key to economic prosperity.

In 2012, Travelers took several steps to support 

small business:

•  The Travelers Institute®, the company’s public policy 

division, continued its “Small Business — Big Opportunity” 

series to raise awareness of and identify solutions to 

common challenges.

•  Travelers Community Relations launched a new Small 

Business Risk Education program in conjunction with the 

company’s Small Commercial and Risk Control businesses. 

By partnering with the Los Angeles-based Valley Economic 

Development Center, the initiative strives to empower 

We partnered with Habitat for Humanity International and the 

women and minority entrepreneurs to understand better 

the risks associated with small business ownership. 

The program will expand to Chicago in 2013.

•  Travelers supported organizations and events focused on 
small business, including Small Business Saturday ®, a day 
organized by American Express to encourage local shopping.

Insurance Institute for Business & Home Safety to build aﬀ ordable, 

wind-resistant homes in vulnerable communities.

1968

1971

Travelers introduces specially modiﬁ ed recreational vehicles as 

Travelers is the ﬁ rst insurance carrier to open an oﬃ  ce of Consumer 

mobile claim oﬃ  ces to assist policyholders after disasters.

Information with a toll free telephone number to address questions 

about insurance.

6  TRAVELERS 2012 Annual Report

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And, ﬁ nally, the Travelers Institute sponsored the award-winning, 

nonpartisan documentary, Overdraft,  which highlights the 

implications of the federal deﬁ cit. It has been broadcast on public 

television, and we hosted screenings at colleges and universities 

across the country to engage students in the dialogue.

We are proud to support these causes.

Outlook — The best of Travelers
We rise to the occasion. In the most challenging circumstances, 

such as the immediate aftermath of Storm Sandy, I can count on a 

“can do — we’re all in this together” attitude from our employees. 

I thank them once again for all they do to serve our customers and 

agents. I also thank our agents, who have worked with us to do the 

right things for our customers, and our Board of Directors for its 

wise counsel and steady leadership. And we are most grateful to our 

customers. Every day they put their trust in us to protect their most 

valuable assets. Many of them have written following Sandy to let 

me know how appreciative they are for our being there when they 

needed us. 

We are a no-excuses company in a no-excuses industry. With a

sound strategy and strong competitive position, we enter 2013 

with a real sense of optimism. We believe that the strategic steps we 

have taken put us in a position to continue to respond, operationally 

GROWING BOOK VALUE PER COMMON SHARE
In the eight-year period between Dec. 31, 2004 (the year of the 
Travelers-St. Paul merger), and Dec. 31, 2012, Travelers increased its 
book value per common share (BVPS) from $31.35 to $67.31, which 
represents a compound annual growth rate (CAGR) of 10.0 percent.

BVPS CAGR: 10.0%

$58.47

$62.32

$67.31

$52.54

$42.22

$43.12

$31.35

$31.94

$36.86

04

05

06

07

08

09

10

11

12

TOTAL RETURN TO SHAREHOLDERS
Travelers’ total return to shareholders in the past one year, three 
years and ﬁ ve years compares favorably to the average total return 
to shareholders for the company’s peer group.1 

Travelers
Peer Group Average1

24.8% 22.4%

56.6%

53.2%

32.9%

–7.3%

and ﬁ nancially. We are well prepared for the opportunities and 

1 Year

3 Year

5 Year

challenges that lie ahead.

Jay S. Fishman 
Chairman and Chief Executive Officer

Total return to shareholders is the percentage change in the stock price and the cumulative 
amount of dividends, assuming dividend reinvestment, to the stock price at the beginning of 
the one-year, three-year and ﬁve-year periods ending December 31, 2012.

1 Peer Group consists of peers identiﬁed in Travelers Proxy Statement and includes: ACE Limited, 
  Aetna Inc., The Allstate Corporation, American Express Company, The Chubb Corporation, 
  Cigna Corp., The Hartford Financial Services Group, Manulife Financial Corporation, MetLife, Inc., 
  Progressive Corp. and Prudential Financial.

Returns for each of the companies included in this peer group have been calculated based 
upon a simple average over the respective periods presented.

1996

1997

The Travelers Indemnity Company and The Aetna Casualty 

Travelers launches the ﬁ rst insurance policy to protect individuals 

and Surety Company merge to form the nation’s fourth largest 

using personal computers for online banking.

property-casualty insurance company.

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TRAVELERS’ BUSINESS SEGMENTS

Travelers is organized into the following three business segments: Business Insurance; 
Financial, Professional & International Insurance; and Personal Insurance. For more 
information about Travelers and its products and services, visit travelers.com.

Business Insurance

2012 NET WRITTEN PREMIUMS: $11.9 BILLION 
Business Insurance oﬀ ers a broad array of property and casualty 
insurance products and services to its clients. They range from 
small “Main Street” businesses to mid-sized and specialty 
companies, to Fortune 100™ corporations. Business Insurance is 
organized into underwriting and marketing groups focused on 
particular markets, industries or product lines. Select Accounts 
primarily sells packaged property and casualty coverage to small 
businesses. Commercial Accounts markets tailored insurance 
products and services to mid-sized businesses, including 
domestic ﬁ rms with global exposures. National Accounts 
provides customized insurance and risk management services 
to large companies. In addition, business units in the Target Risk 
Underwriting group provide insurance products and services to 
address large property, inland marine, ocean marine, equipment 
breakdown and excess casualty risks, while business units in 
the Industry-Focused Underwriting and Specialized Distribution 
groups tailor coverage to complex industries, including oil & 
gas, technology, agriculture, trucking and construction, as 
well as to the public sector.

Financial, Professional & International Insurance

2012 NET WRITTEN PREMIUMS: $3.0 BILLION 
Financial, Professional & International Insurance includes 
the Bond & Financial Products business and the International 
business. Bond & Financial Products provides a wide range 
of customers with bond and insurance products and risk 
management services. Coverages include performance, 
payment and commercial surety and ﬁ delity bonds for 

construction and general commercial enterprises, as well as 
management liability, professional liability and crime coverages, 
primarily for U.S.-based businesses. In addition, the business 
provides traditional property and casualty coverages to 
ﬁ nancial institutions. The International business provides 
property and casualty insurance products and management 
liability, professional liability and crime coverages in the 
United Kingdom, Canada and the Republic of Ireland, and 
internationally through its operations at Lloyd’s. The 
International business also provides surety bonds in Canada. 
In addition, the company owns 49.5 percent of J. Malucelli 
Participações em Seguros e Resseguros S.A. (JMalucelli), its 
joint venture in Brazil. JMalucelli is currently the market leader 
in surety in Brazil based on market share and commenced 
writing other property and casualty insurance business in 2012.

Personal Insurance

2012 NET WRITTEN PREMIUMS: $7.6 BILLION 
Personal Insurance’s broad array of property and casualty 
insurance products enables customers to choose insurance 
solutions for their unique and changing needs. Travelers’ 
primary auto and homeowners products are complemented 
by a suite of additional coverage oﬀ erings: umbrella, 
condominium, tenant, homesaver (dwelling ﬁ re), ﬂ ood, identity 
theft, valuable items, boat and yacht, and wedding/special 
events coverage. Consumers can learn about and purchase 
Travelers’ products and services in several ways: through a 
network of about 12,000 independent agencies; by calling 
Travelers directly; online via travelers.com; and through 
employee and aﬃ  nity groups and joint marketing arrangements.

2004

2007

Travelers Property Casualty Corp. and 

The company changes its name to 

Travelers’ Claim U opens in Windsor, Conn., 

The St. Paul Companies, Inc. merge to 

The Travelers Companies, Inc. and 

serving as a state-of-the-art training facility 

form The St. Paul Travelers Companies, 

re-acquires the iconic red umbrella, 

that builds on the company’s commitment 

Inc., positioning the company as one of the 

originally launched as the oﬃ  cial 

to providing customers with highly trained, 

largest property-casualty insurance carriers.

logomark in 1960.

expert claim professionals. 

8  TRAVELERS 2012 Annual Report

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MANAGEMENT

David E. Baker
Senior Vice President, 
Chief Compliance Officer 
& Group General Counsel

Scott C. Belden+
Senior Vice President 
– Reinsurance

D. Keith Bell
Senior Vice President 
– Accounting Policy 

Jay S. Benet*+
Vice Chairman 
& Chief Financial Officer

Diane D. Bengston+
Senior Vice President 
– Enterprise Human Resources

Andy F. Bessette*+
Executive Vice President 
& Chief Administrative Officer

Robert Brody*+ 
Executive Vice President 
– Claim

Lisa M. Caputo*+
Executive Vice President 
– Marketing & Communications

James W. Chapman+
President 
– First Party Business Group

Charles J. Clarke*+
Vice Chairman

John P. Clifford Jr.*+
Executive Vice President 
– Human Resources

Katherine S. Conway+
Senior Vice President
 – Financial Planning 
& Analysis, Catastrophe 
Strategy & Analysis

William E. Cunningham Jr.*+
Executive Vice President 
– Business Insurance

Smitesh Davé+ 
Vice President 
& Chief Corporate Actuary

Fred R. Donner+
Senior Vice President 
& Chief Financial Officer 
– Business Insurance

Irwin R. Ettinger*+
Vice Chairman

Jay S. Fishman*+
Chairman 
& Chief Executive Officer

Matthew S. Furman+
Senior Vice President, 
Corporate Secretary 
& Group General Counsel 
– Corporate & Governance

Marlyss J. Gage+
Senior Vice President 
& Chief Underwriting Officer

William P. Hannon*+
Executive Vice President 
– Enterprise Risk Management, 
Chief Risk Officer 
& Business Conduct Officer

William H. Heyman*+
Vice Chairman 
& Chief Investment Officer

Bruce R. Jones+
Senior Vice President 
– Enterprise Risk Management

Patrick J. Kinney*+
Executive Vice President 
– Field Management

Michael F. Klein*+
Executive Vice President 
– Middle Market

Thomas M. Kunkel*+
Executive Vice President 
– Bond & Financial Products

Elio Lagana+ 
Senior Vice President 
– Operations

Madelyn J. Lankton*+ 
Executive Vice President 
& Chief Information Officer

Patrick L. Linehan+
Vice President 
– Corporate Communications

Brian W. MacLean*+
President 
& Chief Operating Officer

William C. Malugen Jr.+
President 
– National Accounts

Gabriella Nawi+ 
Senior Vice President 
– Investor Relations

Maria Olivo*+ 
Executive Vice President 
– Strategic Development 
& Corporate Treasurer

Brian P. Reilly
Senior Vice President 
& Chief Auditor

Ellen M. Rizzo+
Senior Vice President 
& Chief Financial Officer 
– Claim

David D. Rowland+
Executive Vice President 
– Investments

Douglas K. Russell+
Senior Vice President 
& Corporate Controller

Scott W. Rynda
Senior Vice President 
– Corporate Tax

Marc E. Schmittlein*+
Executive Vice President 
– Select Accounts 
& Agribusiness

Alan D. Schnitzer*+
Vice Chairman 
– Financial, Professional 
& International Insurance 
and Field Management; 
Chief Legal Officer

Richard D. Schug+
Senior Vice President 
& Actuary 

Peter Schwartz 
Senior Vice President 
& Group General Counsel 
– Corporate Litigation

Kevin C. Smith*+
Executive Vice President 
– International

Doreen Spadorcia*+
Vice Chairman – Claim Services, 
Personal Insurance, Operations 
and Systems, & Risk Control

Kenneth F. Spence III*+
Executive Vice President 
& General Counsel

Gregory C. Toczydlowski*+
Executive Vice President 
& President 
– Personal Insurance

Glenn E. Westrick
Vice President & Director 
– Government Relations

Joan K. Woodward*+
Executive Vice President
– Public Policy
& President
– The Travelers Institute

Daniel T. H. Yin+
Executive Vice President 
– Investments

* Management Committee Member
+ Operating Committee Member

2009

2011

Travelers is added to the Dow Jones 

The company establishes the Travelers 

Travelers acquires an interest 

Industrial Average, becoming one of 

Institute as a means of participating in public 

in Brazil’s surety market leader, 

the few ﬁ nancial services companies 

policy dialogue on matters of interest to the 

J. Malucelli Participações em Seguros e 

included on the list.

property-casualty insurance and ﬁ nancial 

Resseguros S.A., positioning the company 

services sectors.

for growth in that emerging market.

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BOARD OF DIRECTORS

Alan L. Beller

John H. Dasburg*

Janet M. Dolan

Kenneth M. Duberstein

Partner, 
Cleary Gottlieb Steen 
& Hamilton LLP

Chairman & CEO,
ASTAR USA, LLC 

President, 
Act 3 Enterprises, LLC
Retired President & CEO, 
Tennant Company

Chairman & CEO,
The Duberstein Group, Inc.

Director since 2007

Director since 1994

Director since 2001

Director since 1998

Jay S. Fishman

Lawrence G. Graev

Patricia L. Higgins

Thomas R. Hodgson

Chairman & CEO,
The Travelers 
Companies, Inc.

Chairman & CEO,
The GlenRock Group, LLC

Retired President & CEO,
Switch and Data 
Facilities, Inc.

Retired President & COO,
Abbott Laboratories

Director since 2001

Director since 2002

Director since 2007

Director since 1997

William J. Kane

Cleve L. Killingsworth Jr.

Donald J. Shepard

Laurie J. Thomsen

Retired Audit Partner,
Ernst & Young

Former President & CEO, 
Blue Cross Blue Shield 
of Massachusetts, Inc.

Retired Chairman of the 
Executive Board & CEO,
AEGON N.V.

Retired Partner 
& Co-Founder,
Prism Venture Partners

Director since 2012

Director since 2007

Director since 2009

Director since 2004

*Lead Independent Director

10  TRAVELERS 2012 Annual Report

128452.indd   10

BOARD 
COMMITTEES

AUDIT

Dasburg (Chair) 

Beller

Dolan

Higgins

Hodgson

Kane

Thomsen

COMPENSATION

Graev (Chair)

Duberstein

Killingsworth

Shepard

EXECUTIVE

Fishman (Chair)

Dasburg

Duberstein

Graev

Hodgson

Killingsworth

INVESTMENT AND 
CAPITAL MARKETS

Killingsworth (Chair)

Duberstein

Graev

Shepard

NOMINATING 
AND GOVERNANCE

Duberstein (Chair)

Graev

Killingsworth

Shepard

RISK

Hodgson (Chair)

Beller

Dasburg

Dolan

Higgins

Kane

Thomsen

10

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UNITED STATES  SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(cid:1) ANNUAL  REPORT PURSUANT TO  SECTION 13  OR 15(d) OF  THE

SECURITIES EXCHANGE ACT OF 1934

FORM 10-K

*

For the  fiscal  year ended December 31, 2012

or

(cid:2) TRANSITION REPORT  PURSUANT  TO  SECTION  13 OR 15(d)  OF THE

SECURITIES EXCHANGE ACT OF 1934
For the  transition period from 

 to

Commission file number 001-10898

The Travelers Companies, Inc.

(Exact  name of registrant as specified  in its  charter)

Minnesota
(State or  other jurisdiction  of
incorporation or organization)

41-0518860
(I.R.S. Employer
Identification No.)

485 Lexington Avenue,
New  York, NY 10017
(Address of  principal executive offices)  (Zip Code)

(917)  778-6000
(Registrant’s  telephone number,  including  area code)

Securities  registered pursuant to  Section  12(b) of  the  Act:

Title of each class

Name of each exchange on which registered

Common stock, without par  value

New York  Stock Exchange

Securities  registered pursuant to Section  12(g) of  the  Act: 

None

Indicate  by check mark  if  the  registrant  is  a  well-known seasoned issuer  (as  defined in  Rule 405 of  the Securities
Act). Yes  (cid:1) No  (cid:2)

Indicate by check mark  if the  registrant  is  not  required  to file reports pursuant  to Section 13  or  Section  15(d)  of the
Act. Yes  (cid:2) No (cid:1)

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

Indicate  by check mark  whether  the  registrant  has  submitted  electronically and  posted  on  its corporate  Web  site,  if any,
every  Interactive  Data File required  to  be  submitted and  posted pursuant to  Rule 405  of  Regulation  S-T  (§232.405 of  this
chapter) during the  preceding 12 months  (or  for  such shorter period that the  registrant was required to submit  and post
such  files). Yes (cid:1) No  (cid:2)

Indicate by check mark if  disclosure  of  delinquent filers  pursuant  to  Item  405 of Regulation S-K is not contained  herein,
and will  not be contained,  to  the best  of  registrant’s knowledge,  in definitive  proxy or information statements  incorporated
by reference in  Part III of this Form 10-K  or any  amendment  to this  Form  10-K. (cid:1)

Indicate  by check mark  whether  the  registrant  is  a  large accelerated filer,  an accelerated  filer, a  non-accelerated filer  or  a
smaller  reporting company.  See the definitions  of  ‘‘large  accelerated  filer,’’  ‘‘accelerated  filer’’  and ‘‘smaller  reporting
company’’  in Rule 12b-2  of  the Act (Check  one):
Large accelerated filer (cid:1)
Non-accelerated filer (cid:2)
(Do not check if a  smaller reporting  company)
Indicate  by check mark  whether  the  registrant  is  a  shell company (as defined  in Rule  12b-2 of the  Act). Yes (cid:2) No  (cid:1)

Accelerated filer (cid:2)
Smaller  reporting  company (cid:2)

As of  June 30, 2012,  the  aggregate market  value  of  the registrant’s voting  and non-voting  common  equity held by
non-affiliates was $24,560,884,330.

As of February 11, 2013, 377,954,687 shares of the registrant’s common stock (without par value) were outstanding.

DOCUMENTS INCORPORATED  BY  REFERENCE

Portions  of the  Registrant’s  Proxy Statement  relating to  the  2013 Annual  Meeting of  Shareholders are  incorporated  by
reference into Part  III  of  this report.

*Incorporates changes as reflected in Form 10-K/A filed on March 1, 2013

.

The  Travelers Companies, Inc.

Annual Report on Form 10-K

For Fiscal Year Ended December 31, 2012

TABLE OF CONTENTS

Item Number

1.
1A.
1B.
2.
3.
4.

5.

6.
7.

7A.
8.
9.

9A.
9B.

10.
11.
12.

13.
14.

15.

Part I
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part II
Market for Registrant’s Common Equity, Related Shareholder Matters and  Issuer

Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results  of

Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quantitative and Qualitative Disclosures  About Market  Risk . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on  Accounting and Financial

Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part III
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of  Certain Beneficial Owners and Management and Related

Shareholder Matters

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . . . .
Principal Accountant Fees  and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part IV
Exhibits and Financial  Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index to Consolidated Financial Statements and Schedules . . . . . . . . . . . . . . . . . .
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

1
47
67
67
68
68

69
72

73
154
157

255
255
258

259
261

261
263
263

263
264
266
276

PART I

Item 1. BUSINESS

The Travelers Companies, Inc. (together with its  consolidated subsidiaries, the Company) is a
holding company principally engaged, through its subsidiaries, in  providing a  wide range of commercial
and personal property and casualty insurance  products and services to businesses, government units,
associations and individuals. The Company is incorporated  as a  general business corporation under  the
laws of  the state of Minnesota and is one  of  the oldest insurance organizations  in the United States,
dating back to 1853. The principal executive offices of the  Company are located at  485 Lexington
Avenue, New York, New York 10017, and its telephone number  is (917) 778-6000. The Company also
maintains executive offices in Hartford, Connecticut,  and  St. Paul, Minnesota.  The  term ‘‘TRV’’ in  this
document refers to The Travelers Companies,  Inc., the parent holding company  excluding subsidiaries.

For a  summary of the Company’s revenues, operating income  and total assets by reportable

business segments, see note 2 of notes  to  the Company’s consolidated financial statements.

PROPERTY AND CASUALTY INSURANCE OPERATIONS

The property and casualty insurance industry is highly competitive in the areas of price, service,
product  offerings, agent relationships and  methods  of distribution.  Distribution methods include  the use
of independent agents, exclusive agents,  direct marketing (including use  of toll-free  numbers  and the
internet) and/or salaried employees. According to A.M.  Best, there are approximately 1,326 property
and casualty groups in the United States,  comprising approximately 2,778 property and casualty
companies. Of those groups, the top 150 accounted for approximately 92%  of the consolidated
industry’s total net written premiums  in 2011. The Company  competes  with both foreign  and domestic
insurers. In addition, 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 include large  deductible programs and various  forms of self-
insurance, some of which utilize captive insurance companies and risk retention groups. The Company’s
competitive position in the marketplace  is  based on  many  factors,  including  the following:

(cid:127) premiums charged;

(cid:127) contract terms and conditions;

(cid:127) products and services offered;

(cid:127) claim service;

(cid:127) agent,  broker and client relationships;

(cid:127) local presence;

(cid:127) geographic scope of business;

(cid:127) overall financial strength;

(cid:127) ratings assigned by independent rating agencies;

(cid:127) experience and qualifications of employees; and

(cid:127) technology and information systems.

In addition, the marketplace is affected by available capacity of  the  insurance industry, as

measured by policyholders’ surplus, and  the availability  of reinsurance. Industry  capacity as measured
by policyholders’ surplus expands and contracts primarily in conjunction with profit  levels generated  by
the industry, less amounts returned to  shareholders through dividends and share repurchases.  Capital
raised by debt and equity offerings may  also  increase policyholders’  surplus.

1

Pricing and Underwriting

Pricing of the Company’s property and casualty insurance products is  generally developed based
upon an  estimation of expected losses,  the expenses  associated  with producing, issuing and servicing
business and managing claims, the time  value of money related to the expected loss  and expense cash
flows, and a reasonable allowance for  profit  that  considers  the capital needed  to  support the Company’s
business. The Company has a disciplined approach to underwriting and risk management that over  the
long-term emphasizes product returns  and profitable growth rather than  premium volume or market
share. The Company’s insurance subsidiaries are subject to state laws and regulations regarding rate
and policy form approvals. The applicable  state laws and regulations establish  standards in certain lines
of business to ensure that rates are not excessive,  inadequate, unfairly discriminatory, or  used  to  engage
in unfair price competition. The Company’s ability to increase rates and the relative timing of the
process are dependent upon each respective state’s requirements, as well as the  competitive market
environment.

Geographic Distribution

The following table shows the geographic distribution of  the Company’s consolidated direct  written

premiums for the year ended December 31, 2012:

State

California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Jersey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Massachusetts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Georgia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other domestic(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

International

% of
Total

10.1%
9.8
7.3
5.1
4.5
4.0
3.9
3.4
3.1
44.8

96.0
4.0

Consolidated total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100.0%

(1) No other single state accounted for  3.0% or more  of  the  total direct written  premiums

written in 2012 by the Company’s domestic  operations.

Catastrophe Exposure

The wide geographic distribution of the Company’s property and  casualty insurance operations

exposes it to claims arising out of catastrophes. The Company uses various analyses and methods,
including proprietary and third-party computer modeling processes, to continually monitor and analyze
underwriting risks of business in natural catastrophe-prone areas and target risk  areas for conventional
terrorist attacks (defined as attacks other  than nuclear,  biological, chemical or radiological events). The
Company relies, in part, upon this analysis to make underwriting decisions designed  to  manage its
exposure on catastrophe-exposed business.  For example, the Company has limited the writing  of  new
property and homeowners business in some markets and has selectively taken underwriting actions on
new and existing business. These underwriting actions  on new and  existing business include tightened
underwriting standards, selective price increases and  changes to deductibles specific to hurricane-,
tornado-, wind- and hail-prone areas.  See ‘‘Item  7—Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Catastrophe Modeling’’ and ‘‘—Changing Climate Conditions.’’

2

The Company also utilizes reinsurance  to  manage  its  aggregate  exposures to catastrophes. See
‘‘—Reinsurance.’’

The Company is organized into three  reportable business segments: Business Insurance;  Financial,

Professional & International Insurance; and Personal Insurance.

BUSINESS INSURANCE

The Business Insurance segment offers a  broad  array  of  property and casualty insurance and
insurance-related services to its clients  primarily in  the United  States. Business  Insurance  is organized
into the following six groups, which collectively  comprise  Business Insurance Core operations:

(cid:127) Select Accounts provides small businesses with property and casualty products, including

commercial multi-peril, commercial property, general  liability, commercial auto and  workers’
compensation insurance.

(cid:127) Commercial Accounts provides mid-sized businesses with property and casualty products,

including commercial multi-peril, commercial property, general liability, commercial auto  and
workers’ compensation insurance.

(cid:127) National Accounts provides large companies with casualty products and  services, including

workers’ compensation, general liability and  automobile  liability, generally utilizing loss-sensitive
products, on both a bundled and unbundled basis. National Accounts also includes the
Company’s commercial residual market business, which  primarily offers workers’ compensation
products and services to the involuntary market.

(cid:127) Industry-Focused Underwriting. The following units provide targeted  industries with differentiated

combinations of insurance coverage, risk management, claims  handling and other services:

(cid:127) Construction serves a broad range of construction businesses, offering guaranteed cost
products for small  to mid-sized policyholders  and loss-sensitive programs for larger
accounts. For the larger accounts, the  customer and the Company work together in actively
managing and controlling exposure and claims, and they  share risk through policy features
such as deductibles or retrospective rating. Products offered include workers’  compensation,
general liability, umbrella and commercial auto coverages, and  other risk management
solutions.

(cid:127) Technology serves small to large companies involved in telecommunications,  information
technology, medical technology and electronics manufacturing, offering a  comprehensive
portfolio of products and services. Products offered  include commercial property,
commercial auto, general liability, workers’  compensation, umbrella, internet liability,
technology errors and omissions coverages and global companion products.

(cid:127) Public Sector Services provides insurance products and services  to  public  entities including

municipalities, counties, Indian Nation gaming organizations and selected special
government districts such as water and sewer utilities. The policies  written by this  unit
typically cover commercial property,  commercial  auto, general  liability,  professional  liability
and workers’ compensation exposures.

(cid:127) Oil & Gas provides specialized property  and  liability  products and  services  for customers

involved in the exploration and production of oil and natural gas, including operators and
drilling contractors, as well as various  service  and  supply  companies and  manufacturers that
support upstream operations. The policies written by this business group  cover risks
including physical damage, liability, business interruption and workers’  compensation.

3

(cid:127) Agribusiness serves small to medium-sized agricultural businesses, including farms, ranches,

wineries and related operations, offering property  and liability coverages other than workers’
compensation.

(cid:127) Target  Risk Underwriting. The following units serve commercial businesses  requiring  specialized

product underwriting, claims handling and  risk  management  services:

(cid:127) National Property provides traditional and customized property  insurance  programs to large

and mid-sized customers, including office  building owners, manufacturers,  municipalities and
schools, retailers and service businesses.  These insurance programs cover losses  on buildings,
business personal property and business interruption exposures.

(cid:127) Inland Marine provides insurance for  goods in  transit and movable  objects for  customers
such as jewelers, museums, contractors and the transportation industry. Builders’ risk
insurance is also offered to customers during  the construction, renovation or repair of
buildings and other structures.

(cid:127) Ocean Marine serves the marine transportation industry and related services, as  well as

other businesses involved in international trade. The  Company’s  product offerings in this
unit fall under six main coverage categories:  marine  liability, cargo, hull  and machinery,
protection and indemnity, pleasure craft,  and marine property  and liability.

(cid:127) Excess Casualty serves small to mid-sized commercial businesses, offering mono-line

umbrella and excess coverage where the  Company typically does not write the primary
casualty coverage, or where other business units within the Company prefer to access the
underwriting expertise and/or limit capacity of the  Excess Casualty business  unit.

(cid:127) Boiler & Machinery serves small to large companies,  offering comprehensive  breakdown

coverages for equipment, including property and business interruption coverages. Through
the BoilerRe unit, Boiler & Machinery  also serves other property and casualty carriers that
do not have in-house expertise  with reinsurance, underwriting, engineering, claim handling
and risk management services for this type of coverage.

(cid:127) Global Partner Services provides insurance to foreign  organizations with property  and liability

exposures located in the United States (reverse-flow)  as part of a global  program.

(cid:127) Specialized Distribution. The following units market and underwrite their products to customers
predominantly through licensed wholesale,  general  and program  agents that manage customers’
unique insurance requirements:

(cid:127) Northland provides insurance coverage for the commercial  transportation industry, as well as

commercial liability and package policies for small,  difficult to place specialty classes  of
commercial business on an admitted or excess and surplus lines  basis.

(cid:127) National Programs offers tailored property and casualty programs on an admitted basis for
customers with common risk characteristics  or coverage requirements.  Programs available
include those for entertainment, architects and  engineers, equipment rental, golf services
and owners of franchised businesses.

Business Insurance also includes the Special Liability Group  (which manages the  Company’s

asbestos and environmental liabilities) and  the assumed  reinsurance and certain other runoff
operations, which are collectively referred to as  Business Insurance Other.

4

Selected Market and Product Information

The following table sets forth Business  Insurance net written premiums  by market and product  line

for the periods indicated. For a description of the  markets and  product lines referred to in the  table,
see ‘‘—Principal Markets and Methods  of Distribution’’ and ‘‘—Product Lines,’’ respectively.

(for the year ended December 31, in millions)

2012

2011

2010

By market:

Select Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
National Accounts
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industry-Focused Underwriting . . . . . . . . . . . . . . . . . . . . .
Target Risk Underwriting . . . . . . . . . . . . . . . . . . . . . . . . .
Specialized Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,775
3,101
907
2,554
1,666
870

Total Business Insurance Core . . . . . . . . . . . . . . . . . . . .
Business Insurance Other . . . . . . . . . . . . . . . . . . . . . . . . .

11,873
(1)

$ 2,784
2,890
782
2,407
1,587
880

11,330
10

$ 2,718
2,576
806
2,299
1,573
872

10,844
13

% of Total
2012

23.4%
26.1
7.7
21.5
14.0
7.3

100.0
—

Total  Business Insurance by market . . . . . . . . . . . . . . . .

$11,872

$11,340

$10,857

100.0%

By product line:

Workers’ compensation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial automobile . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial property . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial multi-peril . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,400
1,924
1,647
1,765
3,100
36

$ 2,959
1,955
1,595
1,705
3,096
30

$ 2,586
1,910
1,641
1,726
2,995
(1)

28.6%
16.2
13.9
14.9
26.1
0.3

Total  Business Insurance by product  line . . . . . . . . . . . .

$11,872

$11,340

$10,857

100.0%

Principal Markets and Methods of Distribution

Business Insurance distributes its products through approximately 10,500 independent agencies  and

brokers located throughout the United States  that  are serviced by  118 field offices and three  customer
service centers. Business Insurance continues to make significant  investments in enhanced technology
utilizing internet-based applications to  provide real-time interface capabilities with independent
agencies and brokers. Business Insurance builds relationships with well-established, independent
insurance agencies and brokers. In selecting new  independent agencies and brokers to distribute its
products, Business Insurance considers, among other attributes,  each agency’s  or broker’s financial
strength, staff experience and strategic fit with the Company’s operating  and marketing plans. Once an
agency or broker is appointed, Business Insurance carefully monitors  its performance. The majority  of
products offered by the Select Accounts,  Commercial Accounts, Industry-Focused Underwriting  and
Target-Risk Underwriting groups are distributed through a common base of independent agents and
brokers, many of whom also sell the Company’s Personal Insurance products. Additionally, the
Industry-Focused Underwriting and Target  Risk  Underwriting  groups may underwrite business with
agents that specialize in servicing the needs of certain of  the industries served by these groups.

Select Accounts is a leading provider  of commercial property and casualty insurance  products to

small businesses, generally with fewer  than 50 employees. Products offered by Select Accounts are
guaranteed-cost policies, including packaged products  covering property and liability exposures. Each
small business risk is independently evaluated via an  automated underwriting platform which in turn
enables agents to quote, bind and issue a substantial amount of new  small business risks at their
desktop. Risks with more complex characteristics  are underwritten with the assistance of Company
personnel. The automated underwriting  platform has  significantly streamlined the agent desktop
underwriting process.

5

Commercial Accounts sells a broad range  of  commercial property  and casualty  insurance products

through a large network of independent  agents and  brokers, primarily targeting  mid-sized  businesses
with 50  to 1,000 employees. The Company  offers  a full line of products to its Commercial  Accounts
customers with an emphasis on guaranteed cost programs.  Each account is underwritten  based on  the
unique  risk characteristics, loss history and coverage needs of the account. The ability  to  underwrite at
this  detailed level allows Commercial Accounts to have a broad risk appetite  and a  diversified customer
base.

National Accounts sells a variety of casualty products  and services to large companies through a
network of national and regional brokers,  primarily utilizing loss-sensitive products in connection with a
large deductible or self-insured program  and, to a  lesser  extent,  a  retrospectively rated or a  guaranteed
cost insurance policy. National Accounts  also  provides casualty  products and services through retail
brokers on an unbundled basis, using third-party  administrators  for insureds  who utilize programs such
as collateralized deductibles, captive  reinsurers and self-insurance. National Accounts provides
insurance-related services, such as risk  management services,  claims administration,  loss control and risk
management information services, either  in  addition  to,  or in lieu of,  pure risk  coverage,  and generated
$193 million of fee income in 2012, excluding  commercial residual market business. The commercial
residual market business of National  Accounts sells  claims and policy  management services  to  workers’
compensation pools throughout the United States, and generated  $82 million in fee income in  2012.

Workers’ compensation accounted for approximately 73% of  sales  to  National  Accounts  customers

during 2012, based on direct written  premiums and fees.

Industry-Focused Underwriting markets commercial property and  casualty insurance products and

services through a large network of agents and brokers.  These products  and services are  tailored to
targeted industry segments of significant size and complexity that  require unique underwriting,  claim,
risk management or other insurance-related  products and services.

Target Risk Underwriting markets commercial property  and  casualty  insurance products and

services through a large network of agents and brokers  to a wide customer base having specialized
property and casualty coverage requirements.

Specialized Distribution distributes admitted and excess and surplus  lines property and casualty
products predominantly through selected wholesale agents, both on a brokerage  and managing general
underwriting basis, and through selected program agents.  These brokers, general agents and program
agents operate in certain markets that are not typically served  by the Company’s appointed retail
agents, or they maintain certain affinity arrangements  in specialized market segments. The wholesale
excess and surplus lines market, which  is  characterized by the absence of  rate and  form regulation,
allows for more flexibility to write certain  classes of business. In working with  wholesale or program
agents on a brokerage basis, Specialized  Distribution underwrites  the business and sets the  premium
level.  In working with wholesale or program agents on a managing general underwriting or program
manager basis, the agents produce and  underwrite  business subject to underwriting  guidelines that have
been specifically designed for each facility  or program.

Pricing and Underwriting

Business Insurance has developed an underwriting and  pricing methodology  that  incorporates

underwriting, claims, engineering, actuarial and product  development disciplines  for particular
industries, and enables Business Insurance to facilitate its risk selection process and  develop  pricing
parameters. This approach is designed  to  maintain high-quality underwriting  and pricing discipline
utilizing proprietary data gathered and analyzed  with respect  to  business  over many years. The
underwriters and engineers use this information,  which provides specialized knowledge  about specific
industry segments, to assess and evaluate  risks. The Company utilizes  both  standard industry forms and
proprietary forms for the insurance policies it issues.

6

For smaller businesses meeting pre-determined exposure characteristics and thresholds, Select
Accounts utilizes an automated underwriting  system that enables agents to issue a significant number  of
new policies at their desktop.

A portion of business in this segment, particularly in National Accounts and  Construction, is
written with large deductible insurance policies. Under 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,  2012, contractholder payables on
unpaid  losses within the deductible layer  of  large deductible policies and  the associated receivables
were each approximately $4.78 billion.  Retrospectively rated policies are primarily used  for workers’
compensation coverage. Although the  retrospectively rated feature of the policy substantially reduces
insurance risk for the Company, it introduces additional credit risk to the  Company. Premium
receivables from holders of retrospectively rated  policies  totaled approximately $116 million at
December 31, 2012. Significant collateral,  primarily letters  of credit and, to  a lesser extent, cash
collateral or trusts, is generally requested  for large deductible plans and/or retrospectively rated policies
that provide for deferred collection of  deductible recoveries and/or  ultimate premiums. The amount of
collateral requested is predicated upon the  creditworthiness  of the customer  and the  nature of the
insured  risks. Business Insurance continually  monitors the credit  exposure on individual accounts and
the adequacy of collateral.

Product  Lines

The Business Insurance segment writes the following types of coverages:

(cid:127) 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 and cost-effective  quality care.
The Company offers the following types of workers’  compensation products:

(cid:127) 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;

(cid:127) loss-sensitive insurance products, including  large deductible and retrospectively rated

policies, in which fees or premiums are  adjusted based  on actual loss experience of the
insured during the policy period; and

(cid:127) 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.

(cid:127) 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.

(cid:127) Commercial Property. Provides coverage for loss of or damage to buildings,  inventory and

equipment from a variety of events, including, among others, hurricanes  and other windstorms,
earthquakes, hail, wildfires, severe winter weather, floods, volcanic eruptions, tsunamis, theft,

7

vandalism, fires, explosions, terrorism and financial loss due to business interruption resulting
from covered property damage. For additional information  on terrorism  coverages,  see
‘‘Reinsurance—Catastrophe Reinsurance—Terrorism Risk  Insurance Program.’’ Property also
includes specialized equipment insurance, which provides coverage for loss  or damage  resulting
from the mechanical breakdown of boilers and machinery, and ocean  and  inland marine
insurance, which provides coverage for  goods in transit and unique, one-of-a-kind exposures.

(cid:127) General Liability. Insures businesses against third-party claims arising  from accidents occurring
on their premises or arising out of their operations, including as a result of injuries sustained
from products sold. 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.

(cid:127) Commercial Multi-Peril. Provides a combination of the property and liability coverages

described in the foregoing product line descriptions.

Net Retention Policy

The following discussion reflects the  Company’s retention policy with  respect to the Business
Insurance segment as of January 1, 2013. For third-party liability, Business  Insurance  generally limits its
net retention, through the use of reinsurance, to a  maximum of $18.8  million per insured, per
occurrence. The net retained amount per risk for property  exposures is generally  limited to
$18.0 million per occurrence,  after reinsurance. The Company  generally retains  its workers’
compensation exposures. Reinsurance treaties often have  aggregate  limits  or caps which  may result in
larger net per-risk retentions if the aggregate limits or  caps are reached. The Company utilizes
facultative reinsurance to provide additional  limits capacity or to reduce retentions on  an individual risk
basis. The Company may also retain amounts greater  than those  described herein based upon  the
individual characteristics of the risk.

Geographic Distribution

The following table shows the geographic distribution of Business  Insurance’s direct  written
premiums for the states that accounted for the majority of premium volume for the year ended
December 31, 2012:

State

California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Jersey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Massachusetts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All others(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

% of
Total

13.3%
7.7
7.5
5.0
4.2
4.1
3.7
3.5
51.0

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100.0%

(1) No other single state accounted for  3.0% or more  of  the  total direct written  premiums

written in 2012 by the Business Insurance segment.

8

Competition

The insurance industry is represented  in the commercial 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 within the insurance  regulatory framework to
set the price charged for insurance products and the  levels of coverage and service provided. A
company’s success in the competitive  commercial insurance landscape is  largely measured by its ability
to provide insurance and services, including  claims  handling and  risk  control services, at  a price and on
terms that are reasonable and acceptable to the customer, as well as  its  ability  to  retain existing
customers and to attract new customers.

Select Accounts business is typically written through independent  agents  and,  to  a lesser extent,

regional brokers and direct writers. Both  national and regional property and  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 product offerings,  service  levels,  ease of  doing  business  and price. Select Accounts
has established a strong marketing relationship  with its distribution  network and has provided this
network with defined underwriting policies,  a broad  array  of products, competitive prices and  a highly
efficient, automated platform that significantly reduces the time period between quoting a price  on a
new policy and issuing that policy. In addition, the  Company has established centralized service centers
to help agents perform many service functions, in return for  a fee.

Commercial Accounts business has historically been principally  written  through independent  agents

and brokers. Competitors in this market are primarily national property and  casualty  insurance
companies that write most classes of  business using traditional products  and  pricing,  and regional
insurance companies. Companies compete  based  on product offerings, service levels, price and claim
and loss prevention services. Efficiency  through automation and rapid response time to customer  needs
is one key to success in this market.

In the National Accounts market, competition is based on price, product  offerings, claim and loss

prevention services, managed care cost containment,  risk  management  information systems and
collateral requirements. National Accounts primarily competes  with national property and casualty
insurance companies, as well as with other underwriters of property and casualty  insurance in  the
alternative risk transfer market, such  as  self-insurance plans, captives managed by others, and a variety
of other risk-financing vehicles and mechanisms. The  residual  market  division competes for  state
contracts to provide claims and policy management services. National Accounts services approximately
33% of the total workers’ compensation assigned  risk  market, making  the Company one of  the largest
servicing carriers in the industry.

There are several other business groups in Business Insurance  that compete in focused target
markets. Each of these markets is different  and requires  unique  combinations  of industry knowledge,
customized coverage, specialized risk  control  and loss handling services, along  with partnerships with
agents and brokers that also focus on  these markets. Some of these business groups compete with
national carriers with similarly dedicated underwriting and marketing groups, whereas others compete
with smaller regional companies. Each  of these business groups has regional structures that allow them
to deliver personalized service and local knowledge to their customer base. Specialized  agents and
brokers, including managing general  agents and  wholesale agents, supplement this strategy. In all of
these business groups, the competitive strategy typically  is  the application of focused industry
knowledge to insurance and risk needs.

9

FINANCIAL, PROFESSIONAL & INTERNATIONAL  INSURANCE

The Financial, Professional & International Insurance segment  includes surety and  financial
liability coverages, which primarily use credit-based underwriting processes, as  well as property  and
casualty products that are primarily marketed on  a domestic basis  in the  United Kingdom, Canada and
the Republic of Ireland, and on an international basis  as a  corporate member of Lloyd’s. The  segment
includes the following groups:

(cid:127) Bond & Financial Products provides a  wide range of customers with bond and insurance  products

and risk management services. The range of coverages  includes performance, payment  and
commercial surety and fidelity bonds for construction and general commercial enterprises;
management liability coverages for losses caused by the actual or alleged negligence or
misconduct of directors and officers or employee dishonesty;  employment  practices  liability
coverages and fiduciary coverages for  public  corporations, private companies and not-for-profit
organizations; professional liability coverage for actual  or alleged errors and omissions
committed in the course of professional  conduct or practice for  a  variety  of  professionals
including, among others, lawyers, design professionals and real estate agents; and  professional
and management liability, property, workers’ compensation, auto and general liability and fidelity
insurance for financial institutions.

(cid:127) International, through its operations in  the United Kingdom,  Canada and the Republic  of

Ireland, offers specialized insurance and risk  management  services to several customer groups,
including, among others, those in the  technology, public services, and financial and professional
services industry sectors. International, through its Lloyd’s syndicate  (Syndicate 5000), for which
the Company provides 100% of the capital, underwrites  through five principal  business  units—
marine, global property, accident & special risks,  power & utilities and aviation.

In addition, the Company owns 49.5%  of  the common stock  of  J. Malucelli Participa¸c˜oes em
Seguros e Resseguros S.A. (JMalucelli), its  joint  venture in Brazil.  JMalucelli  is currently the market
leader in surety in Brazil based on market share, and commenced writing other property and casualty
insurance business in 2012. The Company’s investment in  JMalucelli is accounted for  using  the equity
method and is included in ‘‘other investments’’  on the consolidated balance sheet.

Selected Market and Product Information

The following table sets forth Financial, Professional & International Insurance  net written
premiums by market and product line for  the periods  indicated. For a  description of the markets and
product  lines referred to in the table,  see  ‘‘—Principal Markets and Methods of Distribution’’ and
‘‘—Product Lines,’’ respectively.

10

(for the year ended December 31, in millions)

By market:

2012

2011

2010

% of Total
2012

Bond & Financial Products . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,924
1,057

$1,953
1,149

$1,981
1,230

64.5%
35.5

Total  Financial, Professional & International Insurance  by

market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,981

$3,102

$3,211

100.0%

By product line:

Fidelity and surety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 895
859
1,057
170

$ 957
836
1,149
160

$ 993
834
1,230
154

30.0%
28.8
35.5
5.7

Total  Financial, Professional & International Insurance  by

product line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,981

$3,102

$3,211

100.0%

Principal Markets and Methods of Distribution

Within the Financial, Professional & International Insurance segment,  Bond  & Financial Products

distributes the vast majority of its products in the  United States through  approximately  6,200 of the
same independent agencies and brokers  that distribute the Business Insurance segment’s  products.
These independent agencies and brokers are located  throughout the United States. Bond & Financial
Products, in conjunction with the Business Insurance  segment, continues to make investments  in
enhanced technology utilizing internet-based applications to provide real-time  interface capabilities with
its  independent agencies and brokers.  Bond & Financial Products  builds relationships with well-
established, independent insurance agencies and brokers. In selecting new  independent agencies and
brokers to distribute its products, Bond & Financial Products considers,  among  other  attributes, 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, its ongoing performance is closely
monitored. In addition, Bond & Financial  Products  sells its surety products through independent
brokers in the United Kingdom.

The International market distributes  its products principally through  brokers in the  domestic
markets of each of the countries in which it  operates. It also  writes  business at Lloyd’s, where its
products are distributed through Lloyd’s  wholesale and retail  brokers. By virtue of  Lloyd’s worldwide
licenses, Financial, Professional & International Insurance has access to international markets across
the world. In late 2008, the Company commenced an exclusive relationship with a  broker in the
Republic of Ireland that significantly  increased the 2009 volume of personal  automobile coverage
written and also resulted in the Company  writing personal household coverages.  The Company ceased
writing business through this relationship  in the fourth quarter of  2010 and  ceased writing all remaining
personal insurance business in the Republic  of  Ireland in  the fourth  quarter  of 2011.

Pricing and Underwriting

Financial, Professional & International Insurance has developed underwriting and  pricing
methodologies that incorporate dedicated underwriting, claims, engineering,  actuarial  and product
development disciplines. This approach is  designed to maintain high  quality underwriting  and pricing
discipline, based on an in-depth knowledge of the specific  account, industry or country. Underwriters
use industry and proprietary data gathered  and analyzed  over  many years to assess and evaluate  risks
prior to quotation. The Company utilizes both  standard industry forms and proprietary forms for the
insurance policies it issues. This methodology  enables Financial,  Professional  & International  Insurance
to facilitate its risk selection process  and develop  pricing parameters.

11

Product  Lines

The Financial, Professional & International Insurance segment  writes  the  following  types of

coverages:

(cid:127) 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 third 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.

(cid:127) General Liability. Provides coverage for specialized liability  exposures as  described above in

more detail in the ‘‘Business Insurance’’ section of  this report.

(cid:127) International. Provides coverage for employers’ liability (similar to workers’ compensation

coverage in the United States), public and product liability (the equivalent  of general  liability),
professional indemnity (similar to professional  liability  coverage),  motor (similar to automobile
coverage in the United States), property, surety,  marine, aviation, personal  accident and
kidnap & ransom. Marine provides coverage  for ship  hulls,  cargoes  carried,  private yachts,
marine-related liability, offshore energy, ports and terminals,  fine art  and terrorism. Aviation
provides coverage for worldwide aviation risks including physical damage and liabilities for
airline, aerospace, general aviation, aviation  war  and space risks. Personal accident provides
financial protection in the event of death or disablement due  to  accidental  bodily injury, while
kidnap & ransom provides financial protection  against kidnap, hijack, illegal detention and
extortion. While the covered hazards may be similar  to  those in the U.S.  market, the different
legal environments can make the product risks and coverage terms potentially very  different
from those the Company faces in the United States.

(cid:127) Other. Coverages include Property, Workers’  Compensation,  Commercial Automobile and

Commercial Multi-Peril, which are described above  in more detail  in the ‘‘Business Insurance’’
section of this report.

Net Retention Policy

The following discussion reflects the  Company’s retention policy with  respect to the Financial,
Professional & International Insurance segment  as of January 1, 2013.  In the  U.S. operations for third
party liability, including but not limited to umbrella  liability,  professional  liability,  directors’ and
officers’ liability, and employment practices  liability,  Financial, Professional &  International Insurance
generally limits net retentions, through the use of reinsurance,  to  up to $16.6  million per policy after
the Company retains an aggregate layer  of  expected losses.  For surety protection, where  insured limits
are often significant, the Company generally retains up to $55.0  million  probable maximum loss (PML)
per  principal but may retain higher amounts based on the type of obligation, credit  quality and other
credit risk factors. In the International operations, per-risk retentions are  usually  limited  up to $18.8
million, after  reinsurance. Reinsurance  treaties often have aggregate limits or caps which may result  in
larger net per risk retentions if the aggregate  limits or caps are reached. The  Company utilizes
facultative reinsurance to provide additional  limits capacity or to reduce retentions on  an individual risk
basis. The Company may also retain amounts  greater  than those  described herein based upon  the
individual characteristics of the risk.

12

Geographic Distribution

The following table shows the geographic distribution of  Financial, Professional &  International’s
direct written premiums for the states  that accounted for  the  majority of premium volume for the year
ended December 31, 2012:

State

California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other domestic(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total international . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

% of
Total

6.8%
5.3
5.0
3.4
3.1
45.9

69.5
30.5

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100.0%

(1) No other single state within the United States accounted  for 3.0% or more  of  the total
direct written premiums written in 2012  by  the domestic operations of the Financial,
Professional & International Insurance segment.

Competition

The competitive landscape in which Bond  &  Financial Products  operates is affected by many of

the same factors described previously  for  the Business Insurance segment. Competitors  in this market
are primarily national property and casualty insurance companies that  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.

Bond & Financial Products underwrites and markets its products to all sizes of businesses  and
other organizations, as well as individuals. The  Company believes that its 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
products, provides Bond & Financial  Products an advantage over many  of  its competitors  and enables it
to compete effectively in a complex, dynamic marketplace. The Company believes that the ability of
Bond & Financial Products to cross-sell its products  to  customers of the Business Insurance and
Personal Insurance segments provides  additional competitive advantages for the Company.

International competes with numerous  international and  domestic insurers in the  United Kingdom,

Canada and the Republic of Ireland.  Companies compete  on  the basis of  price, product  offerings  and
the level of claim and risk management services provided. The Company has  developed  expertise in
various markets in these countries similar  to  those served  in the  United States and provides both
property and casualty coverage for these markets.

At Lloyd’s, International competes with other syndicates operating in  the Lloyd’s market as  well as
international and domestic insurers in  the various markets where  the Lloyd’s  operation writes business
worldwide. Competition is again based on  price, product  and service. The Company focuses on lines it
believes it can underwrite effectively and profitably with an emphasis on short-tail insurance  lines.

PERSONAL INSURANCE

The Company’s Personal Insurance segment writes a broad range of property  and casualty
insurance covering individuals’ personal  risks. The primary products of  automobile and homeowners
insurance are complemented by a broad  suite  of related  coverages.

13

Selected Product and Distribution Channel Information

The following table sets forth net written  premiums for the Personal Insurance segment’s business

by product line for the periods indicated. For  a description of the product lines referred  to  in the
following table, see ‘‘—Product Lines.’’ In addition, see ‘‘—Principal Markets and Methods of
Distribution’’ for a discussion of distribution  channels  for Personal  Insurance’s product  lines.

(for the year ended December 31, in millions)

By product line:

2012

2011

2010

% of Total
2012

Automobile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Homeowners and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,642
3,952

$3,788
3,957

$3,772
3,795

48.0%
52.0

Total Personal Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . .

$7,594

$7,745

$7,567

100.0%

Principal Markets and Methods of Distribution

Personal Insurance products are distributed primarily  through approximately 12,000 active
independent agents located throughout  the  United States, supported  by personnel in 13 sales  regions
and seven service centers. While the  principal markets for  Personal Insurance  products continue to be
in states along the East Coast, California and Texas, the business continues  to  expand  its geographic
presence across the United States.

In selecting new independent agencies  to  distribute its products,  Personal Insurance considers,
among other attributes, each agency’s  profitability,  financial  stability, staff experience and strategic  fit
with the segment’s operating and marketing plans. Once an  agency  is appointed,  Personal Insurance
carefully monitors its performance.

Agents can access the Company’s agency service portal for a number of resources including

customer service, marketing and claims  management.  In  addition, agencies can choose to shift the
ongoing service responsibility for Personal  Insurance’s  customers to one  of the Company’s  five
Customer Care Centers, where the Company provides, on behalf of  an  agency, a  comprehensive array
of customer service needs, including response to billing  and  coverage  inquiries,  and policy changes.
Approximately 1,800 agents take advantage of this service alternative.

Personal Insurance also distributes its  products through  additional  channels,  including corporations

that make the company’s product offerings available to their employees  primarily through payroll
deduction, consumer associations and  affinity groups.  Personal  Insurance  handles the sales and  service
for these programs either through a sponsoring  independent agent or through two of the Company’s
call center locations. In addition, since  1995, the Company has had a marketing agreement with
GEICO to underwrite homeowners business for their  auto customers.

In 2009, the Company began marketing  its insurance products  directly to consumers, largely

through online channels. The investment  in the direct-to-consumer initiative generated  modest
premium volume for Personal Insurance in recent years, which  was  consistent with the Company’s
expectations. However, the direct-to-consumer initiative, while intended  to  enhance the Company’s
long-term ability to compete successfully  in  a consumer-driven marketplace, is expected  to  remain
unprofitable for a number of years as the  Company continues to develop, test and  evaluate this
distribution channel.

Pricing and Underwriting

Personal Insurance has developed a product management methodology  that  integrates the
disciplines of underwriting, claim, actuarial  and product development. This approach is designed to
maintain high quality underwriting discipline and pricing segmentation. Proprietary data accumulated
over many years is analyzed and Personal  Insurance uses a  variety of risk differentiation  models  to

14

facilitate its pricing segmentation. The Company’s product  management area  establishes  underwriting
guidelines integrated with its filed pricing and rating plans, which enable  Personal Insurance to
effectively execute  its risk selection and pricing processes.

Pricing for personal automobile insurance is  driven in large part by changes in the frequency of

claims and by inflation in the cost of automobile  repairs, medical  care  and litigation  of  liability  claims.
Pricing in the homeowners business is  driven in  large part by changes in the frequency of claims  and by
inflation in the cost of building supplies, labor and household  possessions. In addition to the normal
risks associated with any multiple peril coverage, the  profitability and pricing of both homeowners and
automobile insurance are affected by the  incidence of  natural  disasters,  particularly those related to
weather and, for homeowners insurance,  earthquakes. Insurers writing personal lines property  and
casualty policies may be 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 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. In addition, changes
to methods of marketing and underwriting in  some jurisdictions  are  subject  to  state-imposed
restrictions, which  can make it more  difficult for an  insurer to significantly manage catastrophe
exposures.

The Company’s ability or willingness to raise prices, modify underwriting terms or reduce  exposure

to certain geographies may be limited due to considerations of public policy, the evolving political
environment, changes in the general  economic climate and/or social responsibilities.  The Company also
may choose to write business it might not otherwise  write in some states for strategic purposes,  such as
improving access to other commercial  or  personal  underwriting opportunities. In choosing  to  write
business in some states, the Company  also considers the costs and  benefits  of  those states’ residual
markets and guaranty funds, as well as  other  property and  casualty business the Company writes  in
those states.

Personal Insurance utilizes technology intended to maximize independent agents’  ease of doing
business with the Company. Automated quote transactions can  be  submitted online by independent
agents either through Personal Insurance’s  proprietary platform, their own agency management
platform or comparative raters (discussed in more detail  in the  ‘‘Competition’’ section that follows).
Nearly all new business policies can be issued online either by using the agents’  own platform or
Personal Insurance’s platform, both of  which interface  with  Personal Insurance’s underwriting  and
rating systems to monitor transactions for  compliance with the  company’s underwriting and pricing
programs. All online business is subject  to consultative review by Personal Insurance’s in-house
underwriters. Audits of on-line business are conducted  by  an internal review  team using systematic
sampling across all of the Company’s  distribution channels.

Product  Lines

The primary coverages in Personal Insurance are personal automobile and  homeowners and other

insurance sold to individuals. Personal Insurance had  approximately 7.3  million active policies
(e.g., policies-in-force) at December  31, 2012.

The Personal Insurance segment writes  the following types of  coverages:

(cid:127) Personal Automobile provides coverage  for liability to others for both bodily injury and property
damage, uninsured motorist protection,  and  for physical damage to an insured’s own  vehicle

15

from collision, fire, flood, hail and theft. In  addition, many states require  policies to provide
first-party personal injury protection,  frequently referred  to as no-fault coverage.

(cid:127) Homeowners and Other provides protection  against losses  to dwellings and contents from a
variety of perils (excluding flooding)  as well as  coverage for personal liability.  The  Company
writes  homeowners insurance for dwellings, condominiums and tenants, and  rental properties.
The Company writes coverage for boats  and  yachts and valuable personal items such  as jewelry,
and also writes coverages for umbrella  liability,  identity fraud,  and weddings and  special events.

Net Retention Policy

The following describes the Company’s retention policy with respect to the Personal Insurance
segment as of January 1, 2013. The Company  generally retains its primary personal auto exposures  in
their entirety. For personal property  insurance, there  is an  $8.0 million maximum retention per risk.
Personal Insurance retains the first $10.0  million of umbrella policies and  purchases facultative
reinsurance to provide additional limits capacity or to reduce retentions on an  individual risk  basis. The
Company may also retain amounts greater than those  described herein based on the individual
characteristics of the risk.

Geographic Distribution

The following table shows the geographic distribution of  Personal Insurance’s direct written
premiums for the states that accounted  for the majority of premium volume for the year ended
December 31, 2012:

State

New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Jersey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Georgia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Connecticut . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Massachusetts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All others(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

% of
Total

14.9%
7.8
7.6
6.3
5.4
5.1
4.4
4.2
4.1
3.7
3.4
33.1

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100.0%

(1) The percentage for Texas includes  business  written  by the Company through a fronting

agreement with another insurer.

(2) No other single state accounted for  3.0% or more  of  the  total direct written  premiums

written in 2012 by the Personal Insurance  segment.

Competition

Although national companies write the majority of  this business,  Personal Insurance also faces

competition from many regional and  hundreds  of local  companies. Personal  Insurance  primarily
competes based on breadth of product  offerings,  price, service  (including claims handling),  ease of
doing business, stability of the insurer  and name recognition.  Personal  Insurance 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,  service (including  claims handling), the level of

16

automation and the development of long-term  relationships  with individual agents.  In  recent years,
most independent personal insurance  agents have begun utilizing price comparison rating technology,
sometimes referred to as ‘‘comparative raters,’’ as a  cost-efficient means of obtaining quotes from
multiple companies. Because the use  of this technology  facilitates the process of generating multiple
quotes, the technology has increased price  comparison  on new  business and, increasingly, on renewal
business. Personal Insurance also competes with  insurance  companies that use exclusive agents or
salaried  employees to sell their products,  as well as  those that employ direct marketing strategies,
including the use of toll-free numbers and the  internet. See ‘‘Item 1A—Risk Factors—The intense
competition that we face could harm  our ability  to  maintain or increase our business volumes  and our
profitability.’’

CLAIMS MANAGEMENT

The Company’s claim functions are managed  through its Claims  Services operation, with locations

in the United States and in the countries where it does business. With more than 13,000 employees,
Claims Services employs a diverse group  of professionals, including  claim  adjusters,  appraisers,
attorneys, investigators, engineers, accountants, system specialists  and training, management and
support personnel. Approved external service providers, such as  investigators, attorneys and,  in the rare
circumstances when necessary, independent  adjusters  and  appraisers, are  available for use as
appropriate.

U.S. field claim management teams located in 21  claim  centers and  58 satellite and specialty-only
offices in 45 states are organized to maintain focus on the specific claim characteristics unique to the
businesses within the Company’s business segments. Claim teams with specialized skills, required
licenses, resources and workflows are matched to the unique exposures of those businesses, with  local
claims management dedicated to achieving optimal  results within each segment.  The Company’s home
office operations provide additional support in the  form of  workflow  design, quality management,
information technology, advanced management  information and  data analysis, training, financial
reporting and control, and human resources  strategy.  This structure permits the  Company to maintain
the economies of scale of a large, established  company while retaining the agility to respond promptly
to the needs of customers, brokers, agents and  underwriters. Claims management for  International,
while generally provided locally by staff  in  the respective international locations due to local knowledge
of applicable  laws and regulations, is also managed by the Company’s U.S. Claims Services organization
to leverage that knowledge base and  to  share best practices.

An integral part of the Company’s strategy to benefit customers and  shareholders is its continuing

industry leadership in the fight against  insurance fraud through its Investigative Services unit. The
Company has a nationwide staff of experts who  investigate  a wide array  of  insurance fraud  schemes
using in-house forensic resources and other technological tools. This staff also has specialized expertise
in fire scene examinations, medical provider  fraud schemes and data mining.  The Company also
dedicates investigative resources to ensure that  violations of law are reported  to  and prosecuted by law
enforcement agencies.

Claims Services uses technology, management  information and data analysis  to  assist  the Company

in reviewing its claim practices and results in  order to evaluate and improve its  claims management
performance. The Company’s claims management strategy is  focused on  segmentation  of  claims and
appropriate technical specialization to  drive effective claim resolution. The Company continually
monitors its investment in claim resources to maintain  an effective focus on  claim  outcomes and a
disciplined approach to continual improvement.  The Company operates  a state-of-the-art  claims
training facility, offering hands-on experiential learning to help ensure  that  its claim professionals  are
properly trained. In recent years, the Company  has invested significant additional  resources  in many of
its  claim handling operations and routinely  monitors the effect of those investments to ensure a
consistent optimization among outcomes,  cost and service.

17

In recent years, Claims Services refined its catastrophe response strategy to increase the

Company’s ability to respond to a significant  catastrophic event using its own personnel, enabling  it to
minimize reliance on independent adjusters and appraisers. The  Company has  developed  a large
dedicated catastrophe response team and trained  a large Enterprise Response  Team  of  existing
employees who can be deployed on short  notice in the event of a catastrophe that generates  claim
volume exceeding the capacity of the  dedicated catastrophe response team. In recent years, these
internal resources were successfully deployed to respond  to a  record  number  of catastrophe claims,
including those related to Storm Sandy in 2012.

REINSURANCE

The Company reinsures a portion of  the  risks it underwrites in order to control its exposure to
losses. 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. Ceded  reinsurance involves  credit risk,
except with regard to mandatory pools  and associations,  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, the  price of their product offerings and the value of
collateral provided. After reinsurance  is  purchased, the Company has  limited ability to manage the
credit risk to a reinsurer. In addition, in a number of jurisdictions,  particularly the European Union
and the United Kingdom, a reinsurer  is permitted  to  transfer a  reinsurance arrangement  to  another
reinsurer, which may be less creditworthy,  without a counterparty’s consent, provided that the transfer
has been approved by the applicable  regulatory and/or court authority. For additional information
concerning reinsurance, see note 5 of  notes  to  the Company’s consolidated financial statements and
‘‘Item 1A—Risk Factors.’’

The Company utilizes a variety of reinsurance agreements to  manage its exposure to large property

and casualty losses, including:

(cid:127) 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;

(cid:127) quota share reinsurance, in which reinsurance is provided for an  agreed-upon fixed percentage

of liabilities, premiums and losses for each policy covered on a pro  rata basis;

(cid:127) treaty reinsurance, in which reinsurance is provided  for a specified type  or category  of risks; and

(cid:127) 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.

For a  description of reinsurance-related litigation, see note  16 of notes  to the Company’s

consolidated financial statements.

Included in reinsurance recoverables  are amounts related to structured  settlements, which  comprise

annuities purchased from various life insurance companies  to settle certain  personal  physical injury
claims, of which workers’ compensation  claims comprise a significant portion. In cases  where the
Company did not receive a release from the  claimant, the amount due from the life  insurance company
related to the structured settlement is  included  in the Company’s consolidated balance sheet as a
liability and as a reinsurance recoverable, as the Company  retains the  contingent liability to the
claimant. In the event that the life insurance company fails to make  the required annuity  payments, the

18

Company would be required to make  such payments,  if and to the extent the  purchased annuities are
not covered by state guaranty associations.

Catastrophe Reinsurance

Catastrophes can be caused by a variety  of events, including,  among  others, hurricanes, tornadoes
and other windstorms, earthquakes, hail,  wildfires, severe winter weather,  floods, tsunamis and volcanic
eruptions. Catastrophes can also result  from a terrorist attack  (including those involving nuclear,
biological, chemical or radiological events), explosions, infrastructure  failures or  as a consequence of
political instability. The incidence and severity of  catastrophes  are  inherently unpredictable. The extent
of losses from a catastrophe is a function  of both the  total amount of insured exposure in the  area
affected by the event and the severity of  the event.  Most catastrophes are restricted  to  small geographic
areas; however, hurricanes and earthquakes may  produce significant damage in larger areas,  especially
those areas that are heavily populated.  The Company generally seeks to manage its exposure to
catastrophes through individual risk selection and the purchase of catastrophe  reinsurance. The
Company utilizes a general catastrophe reinsurance treaty with unaffiliated reinsurers to manage  its
exposure to losses resulting from catastrophes. In addition to  the coverage provided  under this treaty,
the Company also utilizes a catastrophe bond program, as well as a Northeast catastrophe reinsurance
treaty, to protect against certain losses resulting from catastrophes in  the Northeastern  United States.
In addition, the Company also has a  general  catastrophe aggregate  excess-of-loss  reinsurance treaty, an
earthquake excess-of-loss reinsurance  treaty  and  several reinsurance treaties specific to its international
operations.

General Catastrophe Reinsurance Treaty. The general catastrophe reinsurance treaty covers the

accumulation of net property losses arising out of one occurrence.  The  treaty covers all of the
Company’s exposures in the United States  and  Canada and  their  possessions, and waters contiguous
thereto, the Caribbean and Mexico. The  treaty only provides  coverage  for  terrorism  events in limited
circumstances and excludes entirely losses arising from nuclear, biological, chemical or radiological
attacks.

The following table summarizes the Company’s coverage under its General Catastrophe

Reinsurance Treaty, effective for the  period  July 1, 2012 through June 30, 2013,  as well as certain other
catastrophe-related coverages:

Layer of  Loss

Reinsurance Coverage In-Force

$0 -  $1.5 billion . . . . . . . . . . . . Loss 100% retained by the Company,  except for certain

$1.5 billion - $2.25 billion . . . . .

Greater than $2.25 billion . . . . .

losses covered by the Earthquake Excess-of-Loss  Treaty as
described below.

53.3% ($400 million) of loss covered by  treaty;  46.7%
($350 million) of loss retained by the Company.
Additionally, certain losses incurred in the Northeastern
United States are covered by the Catastrophe  Bond
Program as described below.

100% of loss retained by the Company,  except for certain
losses incurred in the Northeastern United States, which
are covered by the Catastrophe Bond Program and
Northeast Catastrophe Treaty as described below.

In addition to the general catastrophe reinsurance treaty described above,  the Company also
maintains a General Catastrophe Aggregate Excess-of-Loss Treaty,  the coverage terms  of which are
described below.

19

Catastrophe Bond Program. On December 18, 2009, Longpoint Re  II,  Ltd. (Longpoint Re II), a

newly formed independent Cayman Islands company licensed as a Class B  insurer  in the Cayman
Islands, completed an offering to unrelated investors  of  $500 million aggregate  principal amount of
catastrophe bonds. In connection with the offering, the Company  and Longpoint  Re II  entered into two
reinsurance agreements (covering a three-year and four-year period, respectively), each providing up to
$250 million of reinsurance on a proportional basis from  certain  losses resulting from  certain  hurricane
events in the northeastern United States.  The three-year  term  reinsurance agreement  expired in
December 2012, and the remaining reinsurance agreement expires in December 2013.

Under the terms of the remaining reinsurance agreement,  the Company is obligated to pay annual

reinsurance premiums to Longpoint Re  II  for the  reinsurance coverage. The reinsurance agreement
utilizes a dual trigger that is based upon the  Company’s covered losses incurred and an index  that  is
created by applying predetermined percentages to insured industry  losses  in each state in the  covered
area as reported by a third-party service provider. The reinsurance agreement meets the requirements
to be accounted for as reinsurance in accordance with the guidance for  reinsurance contracts. Amounts
payable to the Company under the reinsurance agreement  with  respect to any covered event  will  be
determined by the  index-based losses from such event (which are  designed to approximate the
Company’s actual losses), but cannot exceed the Company’s actual losses  from such event.  The
Company’s actual loss experience may differ from the  index-based losses.  The  principal amount of the
catastrophe bonds will be reduced by any  amounts paid  to  the Company under the  reinsurance
agreement.

The attachment point for index-based  losses and the maximum limit  in the  program’s remaining
reinsurance agreement are reset annually  using a third-party  proprietary computer  model  to  estimate
potential hurricane losses for the entire industry. The  purpose of the annual  reset is  to  maintain
modeled probabilities of attachment  and expected loss on the respective catastrophe  bonds equal to
their initial modeled probabilities. The attachment point  for the indexed-based  losses and  maximum
limit were increased significantly on May  1, 2012. Through April  30, 2013, the  Company will be entitled
to begin recovering amounts under the  reinsurance agreement if  the index-based losses in the covered
area for a single occurrence reach an initial attachment amount of $3.500 billion. The full  $250 million
coverage amount of the reinsurance  agreement is available on  a proportional  basis until index-based
losses reach a maximum $4.358 billion limit. In accordance  with the Longpoint Re  II program, the
attachment point for the index-based losses and  the maximum limit will be reset again  for the  period
May 1, 2013 through December 18, 2013.  Covered losses  under  the agreement are  limited to the
following geographic locations: Connecticut, Maine, Massachusetts,  New Hampshire, New Jersey, New
York, Pennsylvania, Rhode Island and  Vermont.

As with any reinsurance agreement, there is credit risk associated with collecting amounts due
from reinsurers. With regard to Longpoint Re II, the  credit risk is mitigated  by  a reinsurance trust
account that has been funded by Longpoint Re II with money market funds  that  invest  solely in direct
government obligations backed by the U.S.  government with maturities of no  more than 13 months.
The money market funds must have a principal stability rating of at  least AAAm by Standard  & Poor’s.
Other permissible investments include  repurchase and  reverse repurchase agreements  collateralized by
direct government obligations backed  by  the U.S. government with terms of  no more  than 397  calendar
days, and cash.

On June 6, 2012, Long Point Re III Ltd.(Long Point  Re III), a  newly  formed independent  Cayman

Islands company licensed as a Class B insurer in the Cayman Islands,  completed an  offering to
unrelated investors of $250 million aggregate principal amount of catastrophe bonds. In  connection
with the offering, the Company and Long  Point  Re III entered into a three-year reinsurance  agreement
providing coverage to the Company for  certain losses from a hurricane  in the northeastern United
States. Long Point Re III was structured  similarly to Longpoint Re  II but does not utilize  a dual trigger
reinsurance agreement that is based on index-based losses. The business covered by the  reinsurance

20

agreement comprises specified property and related  coverages in  the Company’s  Personal  Insurance
segment, and within the ‘‘Select Accounts’’ and  the ‘‘Commercial Accounts’’ business groups within the
Company’s Business Insurance segment.  Covered  losses  under the agreement are limited to the
following geographic locations: Connecticut, Delaware, District of Columbia,  Maine, Maryland,
Massachusetts, New Hampshire, New  Jersey, New York, Pennsylvania, Rhode Island,  Virginia and
Vermont. Coverage under the agreement is  subject to a $2.0 billion retention, after which  the Company
is entitled to recover 50% of losses, up to a maximum recovery  of $250 million. The attachment point,
maximum limit and insurance percentage  are reset  annually to maintain modeled probabilities of
attachment and expected loss on the respective catastrophe bonds equal  to  the initial modeled
probabilities of attachment and expected  loss. Similar  to  Longpoint Re  II, in Long  Point Re  III the
proceeds of the offering were deposited  in a reinsurance trust account. In addition, the permitted
investments for such proceeds are of  the  same type as in Longpoint Re II in  all  material  respects,
except that in Long Point Re II the money  market  funds  must always  be  rated  at least AAAm by
Standard & Poor’s, and in Long Point Re  III, the  money  market funds must have  been rated AAAm by
Standard & Poor’s on the issuance date  of the bonds and thereafter must be rated by Standard &
Poor’s. The reinsurance agreement meets  the requirements to be accounted for as  reinsurance in
accordance with the guidance for reinsurance contracts.

At the time the agreements were entered into with Longpoint Re II and Long Point Re III, the
Company evaluated the applicability  of  the accounting  guidance that addresses  variable interest entities
or VIEs. Under this guidance, an entity that is formed for business purposes is considered a VIE  if:
(a) the equity investors lack the direct  or indirect  ability through  voting rights or similar rights to make
decisions about an entity’s activities that have  a significant  effect on the entity’s operations, or  (b) the
equity investors do not provide sufficient financial  resources for the entity to support its  activities.
Additionally, a company that absorbs a majority  of  the expected losses  from a VIE’s activities or is
entitled to receive a majority of the entity’s  expected residual returns, or both, is considered to be the
primary beneficiary of the VIE and is  required to consolidate the  VIE  in the  company’s financial
statements.

As a result of the evaluation of the reinsurance  agreements with Longpoint Re II and Long Point
Re III, the Company concluded that they were VIEs  because  the conditions described  in items (a) and
(b) above were present. However, while Longpoint Re  II and Long  Point Re  III were determined  to  be
VIEs,  the Company concluded that it did  not  have a variable interest  in the entities,  as the variability
in their results, caused by the reinsurance agreements, is expected to be absorbed entirely  by  the
investors in the catastrophe bonds issued  by  Longpoint Re  II and Long Point Re III and  residual
amounts earned by them, if any, are expected to be absorbed by the equity investors  (the  Company has
neither an equity nor a residual interest  in  Longpoint  Re II or Long Point Re III).

Accordingly, the Company is not the primary beneficiary of Longpoint Re  II or Long Point Re III

and does not consolidate those entities  in the  Company’s consolidated  financial  statements.
Additionally, because the Company has  no intention  to  pursue any transaction  that  would result  in it
acquiring interest in and becoming the  primary  beneficiary  of Longpoint  Re II  or Long Point Re III,
the consolidation of those entities in the  Company’s consolidated financial  statements  in future  periods
is unlikely.

The Company has not incurred any losses that have resulted  or  are expected to result in a recovery

under the Longpoint Re II or Long Point  Re III agreements since their inception.

Northeast General Catastrophe Reinsurance Treaty.

In addition to its general catastrophe treaty  and
its  multi-year catastrophe bond program,  the Company also  is party  to  a northeast general catastrophe
reinsurance treaty  which provides up  to  $600 million of coverage, subject to a  $2.25 billion  retention,
for certain losses arising from hurricanes, tornados,  hail storms, earthquakes and winter storm or freeze
losses from Virginia to Maine for the period  July 1,  2012 through June  30, 2013. Losses from a  covered

21

event (occurring over several days) anywhere in the United  States, Canada,  the Caribbean and  Mexico
and waters contiguous thereto may be  used to satisfy the retention.  Recoveries under the catastrophe
bond programs (if any) would be first  applied  to  reduce losses subject to this treaty.

General Catastrophe Aggregate Excess-of-Loss Reinsurance Treaty. For the period January 1, 2013 to

December 31, 2013, the Company has  entered into a reinsurance  agreement that covers  the
accumulation of certain property losses  arising from multiple occurrences.  For  each occurrence,
qualifying losses are 90% of $1.4 billion  in excess of $100 million. The treaty covers aggregate
qualifying losses during 2013 for 40% of  $1.0 billion in excess of $1.5  billion. The treaty  covers all of
the Company’s exposures in the United States and  Canada  and their possessions, and waters contiguous
thereto, the Caribbean and Mexico.

Earthquake Excess-of-Loss Reinsurance Treaty. For the period July 1, 2012 through June 30, 2013,

the Company has entered into an earthquake excess-of-loss  treaty  that provides for  up to $142.5 million
of coverage, subject to a $125 million retention, for earthquake  losses  incurred under policies written
by the National Property business unit in  the Company’s Business  Insurance  segment.

International Reinsurance Treaties. For business underwritten in Canada, the  United Kingdom and

Republic of Ireland and in the Company’s operations  at Lloyd’s, separate reinsurance protections are
purchased locally that have lower net  retentions more commensurate with the size of the respective
local balance sheet. The Company conducts an ongoing review  of  its  risk and catastrophe coverages
and makes changes as it deems appropriate.

Terrorism Risk Insurance Program. The Terrorism Risk Insurance Program  (the  Program)  is a
Federal program administered by the Department of the Treasury that provides for a system of shared
public and private compensation for  certain insured  losses resulting from acts of terrorism or  war
committed by or on behalf of a foreign  interest. The  Program  has been authorized through 2014. For a
further description of the Program, including the  Company’s estimated deductible under the  Program in
2012, see note 5 of notes to the Company’s  consolidated financial statements in this  annual report and
‘‘Item 1A—Risk Factors—Catastrophe losses  could materially and adversely affect our  results of
operations, our financial position and/or  liquidity, and could adversely impact our ratings, our ability to
raise capital and the availability and cost  of reinsurance.’’

CLAIMS AND CLAIM ADJUSTMENT EXPENSE RESERVES

Claims and claim adjustment expense  reserves represent management’s estimate of  ultimate unpaid

costs of losses and loss adjustment expenses for claims  that have been reported and claims that have
been incurred but not yet reported.

The Company continually refines its  reserve estimates in a regular ongoing process  that  includes
review of key assumptions, underlying variables  and  historical loss  experience. 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 regularly by qualified actuaries  employed by the
Company. For additional information  on the  process of estimating  reserves  and a  discussion of
underlying variables and risk factors, see  ‘‘Item 7—Management’s Discussion and  Analysis  of Financial
Condition and Results of Operations—Critical Accounting Estimates.’’

The process of estimating loss reserves  involves  a high degree of judgment and is  subject to a
number of variables. These variables  (discussed by  product line in the ‘‘Critical Accounting Estimates’’
section of ‘‘Item 7—Management’s Discussion and Analysis of  Financial Condition and Results of
Operations’’) are affected by both internal  and  external events, such as changes  in claims handling
procedures, inflation, judicial trends and  legislative changes, among others. The  impact  of many of
these items on ultimate costs  for claims  and  claim  adjustment expenses is difficult to estimate. Reserve

22

estimation difficulties also differ significantly by product  line due to differences in  the underlying
insurance contract (e.g., claims-made  versus occurrence), claim  complexity, the volume of claims, the
potential severity of individual claims, the  determination  of  the  occurrence date for a claim, and
reporting lags (the time between the  occurrence  of  the insured event  and when it is actually reported
to the insurer). Informed judgment is  applied throughout  the process.

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 business unit. 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 ‘‘Item 7—Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Asbestos Claims  and
Litigation,’’ and ‘‘—Environmental Claims  and Litigation.’’

Discounting

The claims and claim adjustment expense  reserves  for  most  long-term disability and annuity claim

payments, primarily arising from workers’ compensation insurance and workers’ compensation excess
insurance policies, were discounted to  the present value of  estimated  future  payments using a  rate of
5% at both December 31, 2012 and 2011. These discounted reserves  totaled  $2.01 billion  and
$2.20 billion at December 31, 2012 and 2011, respectively.

Claims and Claim Adjustment Expense Development Table

The table that follows sets forth the year-end reserves from 2002  through 2012 and the subsequent

changes in those reserves, presented on  a historical basis. The  original estimates, cumulative amounts
paid and re-estimated reserves in the table for  the years 2002 and 2003 have not been restated to
reflect the acquisition by Travelers Property Casualty  Corp. (TPC)  of The St. Paul Companies,  Inc.
(SPC) in 2004 (referred to hereafter as the  Merger). The table  includes SPC reserves beginning at
December 31, 2004.

The data in the table is presented in  accordance with reporting requirements  of  the Securities and
Exchange Commission (SEC). 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 data in
the table is not accident year data, but rather  a display of  2002 to 2012 year-end reserves and the
subsequent changes in those reserves.

For instance, the ‘‘cumulative deficiency (redundancy)’’  shown  in the 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 2002 included $4 million for a loss that  is finally paid in 2007  for $5 million,  the $1 million
deficiency (the excess of the actual payment of  $5 million  over  the original estimate  of  $4 million)
would be included in the cumulative deficiencies in  each of the years 2002 to 2006  shown in the
accompanying table.

Various factors may distort the re-estimated reserves and cumulative deficiency  or redundancy
shown in the table. For example, a substantial portion of  the cumulative deficiencies  shown in  the table
arise from claims on policies written prior  to the  mid-1980s involving liability exposures  such as
asbestos and environmental 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 ‘‘Item 7—Management’s Discussion and Analysis  of  Financial Condition  and Results
of Operations—Asbestos Claims and  Litigation,’’ and ‘‘—Environmental Claims and Litigation.’’

23

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  table  include the discounting of certain  reserves  (as

discussed above) and the use of retrospectively rated  insurance policies.  For example, reserves for
long-term disability and annuity claim  payments (tabular  reserves),  primarily  arising  from workers’
compensation insurance and workers’ compensation  excess insurance policies, 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 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  table.

(at December 31, in millions)

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Reserves for claims and claim

adjustment expense  originally
estimated . . . . . . . . . . . . . . . $23,268 $24,055 $41,446 $42,895 $42,844 $43,098 $41,312 $40,941 $40,255 $40,919 $40,634

Cumulative amounts paid as of

One year later . . . . . . . . . . . .
Two years later . . . . . . . . . . . .
. . . . . . . . . .
Three years later
Four years later . . . . . . . . . . .
Five years later
. . . . . . . . . . .
Six years later . . . . . . . . . . . .
Seven years later
. . . . . . . . . .
Eight years later . . . . . . . . . . .
Nine years later . . . . . . . . . . .
Ten years later . . . . . . . . . . . .

Reserves re-estimated as  of

One year later . . . . . . . . . . . .
Two years later . . . . . . . . . . . .
. . . . . . . . . .
Three years later
Four years later . . . . . . . . . . .
Five years later
. . . . . . . . . . .
Six years later . . . . . . . . . . . .
Seven years later
. . . . . . . . . .
Eight years later . . . . . . . . . . .
Nine years later . . . . . . . . . . .
Ten years later . . . . . . . . . . . .
Cumulative deficiency  (redundancy)

5,170
8,319
11,312
13,548
15,229
16,836
17,738
18,563
19,236
19,854

23,658
24,592
25,553
26,288
26,731
27,055
27,022
26,815
26,911
27,002
3,734

4,651
8,686
11,541
13,708
15,574
16,624
17,558
18,320
18,988

24,222
25,272
26,042
26,501
26,803
26,619
26,342
26,382
26,431

8,871
14,666
18,733
22,514
24,572
26,189
27,469
28,557

41,706
42,565
42,940
43,148
42,655
42,068
42,019
41,987

8,632
13,837
18,466
21,025
22,992
24,423
25,616

42,466
42,311
41,692
40,855
40,026
39,849
39,694

7,417
13,181
16,545
19,113
20,820
22,205

8,146
12,798
16,264
18,524
44
20,2

42,172
40,837
39,739
38,734
38,409
38,134

41,373
39,925
38,842
38,223
37,716

7,519
12,454
15,668
18,053

7,748
12,374
15,708

7,653
12,567

8,326

39,863
38,640
37,613
36,892

39,524
38,421
37,539

39,413
38,393

39,845

2,376

541

(3,201)

(4,710)

(5,382)

(4,420)

(3,402)

(1,862)

(1,074)

Gross liability—end  of  year . . . . . $33,914 $34,760 $59,438 $61,461 $59,677 $58,094 $55,121 $53,529 $51,537 $51,353 $50,888
10,254
18,566
Reinsurance recoverables . . . . . . .

13,809

10,705

10,646

16,833

12,588

11,282

14,996

17,992

10,434

Net liability—end of  year . . . . . . . $23,268 $24,055 $41,446 $42,895 $42,844 $43,098 $41,312 $40,941 $40,255 $40,919 $40,634

Gross re-estimated  liability—latest . $39,064 $37,587 $59,849 $57,684 $53,689 $51,527 $49,345 $48,964 $48,996 $50,007
Re-estimated reinsurance

recoverables—latest . . . . . . . . .

12,062

11,156

17,862

17,990

15,555

13,811

12,453

11,425

10,603

10,162

Net re-estimated liability—latest

. . $27,002 $26,431 $41,987 $39,694 $38,134 $37,716 $36,892 $37,539 $38,393 $39,845

Gross cumulative deficiency

(redundancy) . . . . . . . . . . . . . $ 5,150 $ 2,827 $

411 $ (3,777) $ (5,988) $ (6,567) $ (5,776) $ (4,565) $ (2,541) $ (1,346)

24

For years prior to 2004, the table excludes reserves of  SPC, which  were  acquired in the Merger  on

April 1, 2004. Accordingly, the reserve  development (net reserves  for claims and claim adjustment
expense re-estimated as of subsequent years less net  reserves recorded at the end  of  the year, as
originally estimated) for years prior to  2004 relates only to  losses recorded by TPC and does  not
include reserve development recorded by  SPC. For 2004 and  subsequent years, the table includes SPC
reserves acquired and subsequent development recorded on those reserves. At December 31, 2004, SPC
gross  reserves were $23,274 million, and net  reserves were $15,959  million.

In December 2008, the Company completed  the sale  of  Unionamerica  Holdings Limited

(Unionamerica), which comprised its United  Kingdom (U.K.)-based runoff insurance and  reinsurance
businesses. (Unionamerica was acquired  in 2004 as part of the  Merger.) Immediately before the sale,
the claims and claim adjustment expense reserves of Unionamerica totaled $790 million. As a result  of
the sale, those obligations ceased being the  responsibility of the Company and its affiliates. The sale is
reflected in the table as a reduction in December 31, 2008  net reserves of $790  million  and as  a $790
million increase in paid losses for each of the years 2004 through 2007  to  reflect  the transfer (payment)
of the reserves to the buyer, resulting  in no impact to incurred losses.

The gross and net cumulative deficiency (redundancy) by calendar  year as set  forth  in the table

above includes the following impact of  unfavorable prior year  reserve development related  to  asbestos
and environmental claims and claim  adjustment expenses, in millions:

Asbestos

2002

2003

2004

2005

Gross . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Net

$1,728
$1,604

$1,703
$1,580

$1,913
$1,732

$1,079
$ 901

2006

$882
$745

2007

$883
$745

2008

$813
$675

2009

$628
$490

2010

$366
$350

2011

$171
$175

Environmental

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Gross . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Net

$ 807
$ 760

$ 748
$ 701

$ 701
$ 691

$ 684
$ 661

$576
$541

$394
$356

$309
$271

$224
$201

$179
$166

$ 99
$ 90

Reserves on Statutory Accounting Basis

At December 31, 2012, 2011 and 2010, claims and claim adjustment  expense reserves (net of
reinsurance) shown in the preceding table, which are prepared in accordance  with U.S. generally
accepted accounting principles (GAAP  reserves), were $22 million lower, $20 million  higher and $20
million higher, respectively, than those reported in the  Company’s  respective annual  reports filed  with
insurance regulators, which are prepared  in accordance  with statutory accounting  practices (statutory
reserves).

The differences between GAAP and statutory reserves  are primarily due  to  the differences in

GAAP and statutory accounting for two  items, (1) fees associated with billing  of required
reimbursements under large deductible  business, and  (2)  the accounting  for retroactive reinsurance. For
large deductible business, the Company pays the deductible portion  of  a casualty insurance  claim  and
then seeks reimbursement from the insured, plus  a fee. This fee is reported as fee income for GAAP
reporting, but as an offset to claim expenses paid for statutory reporting. Retroactive reinsurance
balances result from reinsurance placed  to  cover losses on insured events occurring prior  to  the
inception of a reinsurance contract. For  GAAP reporting,  retroactive  reinsurance balances  are included
in reinsurance recoverables and result in lower net reserve amounts. Statutory accounting  practices
require retroactive reinsurance balances to be recorded in other liabilities as  contra-liabilities rather
than in loss reserves.

Asbestos and Environmental Claims

Asbestos and environmental 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

25

engineering professionals. For additional information on  asbestos and environmental claims, see
‘‘Item 7—Management’s Discussion and  Analysis of Financial Condition and Results  of Operations—
Asbestos Claims and Litigation’’ and ‘‘—Environmental Claims and Litigation.’’

INTERCOMPANY REINSURANCE POOLING  ARRANGEMENTS

Most of the Company’s insurance subsidiaries are members of an intercompany property  and
casualty reinsurance pooling arrangement. Pooling arrangements permit the participating companies  to
rely on the capacity of the entire pool’s  policyholders’ surplus  rather than just on its  own policyholder
surplus. Under such arrangements, the  members share substantially all insurance business that is
written and allocate the combined premiums, losses and  expenses.

RATINGS

Ratings are an important factor in assessing the Company’s competitive position in  the insurance
industry. The Company receives ratings  from the following major rating agencies: A.M. Best  Company
(A.M. Best), Fitch Ratings (Fitch), Moody’s Investors Service  (Moody’s) and Standard & Poor’s Corp.
(S&P). Rating agencies typically issue two types of ratings for insurance companies: claims-paying (or
financial strength) ratings which reflect  the rating agency’s assessment of an insurer’s ability to meet  its
financial obligations to policyholders and  debt ratings which reflect  the rating agency’s assessment  of  a
company’s prospects for repaying its debts and are  considered  by lenders  in connection with the  setting
of interest rates and terms for a company’s short- and long-term borrowings.  Agency ratings are not a
recommendation to buy, sell or hold any security,  and they may be revised or withdrawn at any time  by
the rating agency. Each agency’s rating should be evaluated independently  of any  other  agency’s rating.
The system and the number of rating  categories can vary widely from rating agency to rating agency.
Customers usually focus on claims-paying ratings,  while creditors  focus on debt ratings.  Investors use
both to evaluate a  company’s overall  financial  strength. The ratings issued on the Company  or its
subsidiaries by any of these agencies are  announced  publicly  and are available  on the  Company’s
website and from the agencies.

A downgrade in one or more of the  Company’s claims-paying ratings could  negatively impact the
Company’s business volumes and competitive position because demand for certain of its products may
be reduced, particularly because some  customers require  that  the  Company maintain minimum  ratings
to enter into or renew business with it.

Additionally, a downgrade in one or  more  of  the Company’s debt ratings could adversely  impact

the Company’s ability to access the capital markets and other sources of funds, including in the
syndicated bank loan market, and/or  result  in higher financing costs. For  example, downgrades in the
Company’s debt ratings could result in  higher interest expense under the Company’s revolving credit
agreement (under which the cost of borrowing  could  range  from  LIBOR plus 100  basis points to
LIBOR plus 175 basis points, depending  on the Company’s debt ratings), the  Company’s commercial
paper program, or in the event that the  Company  were to  access  the capital markets by issuing debt or
similar types of securities. See ‘‘Item 7—Management’s Discussion  and  Analysis of Financial Condition
and Results of Operations—Liquidity and Capital Resources’’ for a discussion of the  Company’s
revolving credit agreement and commercial paper program. The Company considers the  level of
increased cash funding requirements in the event  of  a ratings downgrade as part  of the evaluation of
the Company’s liquidity requirements.  The Company currently believes that a  one- to two-notch
downgrade in its debt ratings would not result in a material increase in interest expense  under its
existing credit agreement and commercial  paper programs. In addition, the  Company considers the
impact of a ratings downgrade as part of the evaluation  of  its common share  repurchases.

26

Claims—Paying Ratings

The following table summarizes the current claims-paying (or financial strength) ratings of the
Travelers Reinsurance Pool, Travelers  C&S Co. of  America, Travelers  Personal  single state companies,
Travelers C&S Co. of Europe, Ltd., Travelers Insurance Company  of  Canada  and Travelers Insurance
Company Limited as of February 19,  2013. The table presents the position  of  each rating in the
applicable agency’s rating scale.

A.M. Best

Moody’s

S&P

Fitch

Travelers Reinsurance Pool(a)(b) . . . . . . . . . A+ (2nd of 16) Aa2  (3rd of  21)
Travelers C&S Co. of America . . . . . . . . . . . A+ (2nd of 16) Aa2  (3rd of  21)
First Floridian Auto and Home Ins. Co.
—
First Trenton Indemnity Company . . . . . . . .
—
The Premier Insurance  Company of

. . . . A(cid:4) (4th of 16)
A (3rd of  16)

AA (3rd of 21) AA  (3rd of 21)
AA (3rd of 21) AA  (3rd of 21)
— AA (3rd of 21)
— AA (3rd of 21)

Massachusetts . . . . . . . . . . . . . . . . . . . . .

Travelers C&S Co. of Europe, Ltd.
Travelers Insurance Company of Canada . . . . A+ (2nd of  16)
A (3rd of  16)
Travelers Insurance Company Limited . . . . . .

—
. . . . . . . A+ (2nd of 16) Aa2  (3rd of  21)

A  (3rd of  16)

—
AA (3rd of 21)
— AA(cid:4) (4th of  21)
AA  (3rd of 21)
—

—
—
—
—

(a) The Travelers Reinsurance Pool consists of: The  Travelers Indemnity  Company, The Charter Oak  Fire

Insurance Company,  The  Phoenix  Insurance  Company, The Travelers  Indemnity  Company of Connecticut,
The Travelers Indemnity Company  of  America,  Travelers  Property  Casualty  Company of America,  Travelers
Commercial Casualty Company, TravCo Insurance Company,  The  Travelers Home and  Marine Insurance
Company, Travelers Casualty and Surety  Company,  Northland  Insurance  Company, Northfield Insurance
Company, Northland Casualty Company,  American  Equity Specialty Insurance  Company, The Standard  Fire
Insurance Company,  The  Automobile  Insurance  Company  of  Hartford, Connecticut,  Travelers  Casualty
Insurance Company  of America, Farmington  Casualty Company, Travelers Commercial  Insurance  Company,
Travelers Casualty Company  of Connecticut,  Travelers  Property  Casualty Insurance  Company, Travelers
Personal Security Insurance Company, Travelers  Personal  Insurance  Company,  Travelers  Excess  and  Surplus
Lines Company, St. Paul  Fire and Marine Insurance Company, St. Paul  Surplus Lines  Insurance  Company,
The Travelers Casualty Company, St. Paul  Protective  Insurance Company,  Travelers Constitution  State
Insurance Company,  St.  Paul Guardian Insurance  Company, St. Paul  Mercury  Insurance  Company, Fidelity
and Guaranty Insurance Underwriters, Inc.,  Discover Property  &  Casualty Insurance Company,  Discover
Specialty Insurance Company and  United States  Fidelity and  Guaranty Company.

(b) The following affiliated companies are 100% reinsured  by one of  the  pool  participants noted  in (a)  above:
Fidelity and Guaranty Insurance Company,  Gulf Underwriters  Insurance Company,  American Equity
Insurance Company,  Select  Insurance  Company, St. Paul Fire  and  Casualty  Insurance  Company, The
Travelers Lloyds Insurance Company  and Travelers Lloyds  of Texas Insurance Company.

Debt Ratings

The following table summarizes the current debt, trust  preferred  securities and  commercial paper

ratings of the Company and its subsidiaries as of February 19, 2013.  The  table also presents the
position of each rating in the applicable agency’s rating scale.

A.M. Best

Moody’s

S&P

Fitch

Senior debt . . . . . . . . . . . . . . . . . . .
Subordinated debt
. . . . . . . . . . . . . .
Junior subordinated debt . . . . . . . . . .
Trust preferred securities . . . . . . . . . .
. . . . . . . . . . . . . .
Commercial paper

a (6th of 22) A2 (6th of  21)
a(cid:4) (7th of 22) A3 (7th of  21)

A (6th of 22)
A(cid:4) (7th of 22) BBB+ (8th of 22)
bbb+ (8th of 22) A3 (7th of 21) BBB+ (8th of 22) BBB+ (8th of 22)
a(cid:4) (7th of 22) A3 (7th of 21) BBB+ (8th of 22) BBB+ (8th of 22)
F-1 (2nd of 8)

A-1 (2nd of 10)

A  (6th of  22)

P-1 (1st of 4)

AMB-1 (2nd of  6)

27

Rating Agency Actions

The following rating agency actions were taken  with respect to the Company  from February 16,
2012 (the date on which the Company filed its  Form  10-K for the  year ended December 31, 2011),
through February 19, 2013:

(cid:127) On May 4, 2012, Moody’s affirmed  all ratings of the  Company. The  outlook for all ratings is

stable.

(cid:127) On May 10, 2012, A.M. Best affirmed all ratings of the Company. The outlook for all ratings is

stable.

(cid:127) On June 15, 2012, Fitch affirmed all ratings  of  the Company.  The outlook  for all ratings is

stable.

(cid:127) On October 3, 2012, S&P affirmed  its ‘‘3(cid:4)’’ Lloyd’s Syndicate assessment on Travelers  Syndicate

Management—Syndicate 5000, and subsequently withdrew  the assessment  at the Company’s
request.

(cid:127) On November 21, 2012, A.M. Best  affirmed the financial strength rating of Travelers Insurance

Company Limited. The outlook is stable.

(cid:127) On December 19, 2012, Fitch affirmed all ratings of  the Company. The outlook  for all ratings  is

stable.

(cid:127) On January 24, 2013, S&P assigned  its ‘‘AA(cid:4)’’ financial strength rating to Travelers Insurance

Company of Canada. The outlook is stable.

INVESTMENT OPERATIONS

The majority of funds available for investment are deployed  in a widely  diversified portfolio of
high quality, liquid taxable U.S. government, tax-exempt U.S. municipal and taxable corporate and  U.S.
agency mortgage-backed bonds. The  Company closely monitors  the duration  of  its  fixed  maturity
investments, and the Company’s investment purchases and sales are executed with the  objective of
having adequate funds available to satisfy  its insurance and debt obligations. Generally,  the expected
principal and interest payments produced  by  the Company’s fixed maturity portfolio adequately fund
the estimated runoff of the Company’s  insurance reserves. The Company’s management of the duration
of the fixed maturity investment portfolio, including its use of Treasury  futures, has  produced a
duration that is less than the estimated duration of the  Company’s  net insurance liabilities. In recent
periods, the estimated average effective  duration  of the Company’s portfolio of fixed maturity  and
short-term security investments has declined,  primarily due to the impact of declining market  yields  and
tightening investment spreads on existing holdings of mortgage-backed securities (both of which impact
the assumptions related to optional pre-payments), an increase  in pre-refunded municipal  bonds and
general portfolio management decisions.  In  2013, subject to market conditions, the Company plans  to
increase its short position in U.S. Treasury  futures, which it uses to manage the duration of its fixed
maturity portfolio. The Company has  also  recently experienced an increase in the  estimated  average
duration of its net insurance liabilities, primarily  reflecting the impact of declining  market interest rates
and, to a lesser degree, an increase in the  proportion of workers’ compensation insurance  reserves  as a
component of total insurance reserves.  The substantial amount  by which the fair value  of  the fixed
maturity portfolio exceeds the value of  the net insurance liabilities, as well as  the positive cash flow
from newly sold policies and the large  amount of high quality liquid bonds, contributes to the
Company’s ability to fund claim payments without having to  sell illiquid  assets or access credit  facilities.

The Company also invests much smaller amounts in equity securities, real estate, private equity
limited partnerships, hedge funds, real estate partnerships, real  estate and  insurance joint ventures,
mortgage loans, venture capital (through direct  ownership and limited partnerships) and trading
securities. These investment classes have the  potential for  higher  returns but also involve varying
degrees of risk, including less stable  rates  of return and less liquidity.

See note 3 of notes to the Company’s consolidated  financial statements for additional  information

regarding the Company’s investment  portfolio.

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REGULATION

U.S. State and Federal Regulation

TRV’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 insurers and their agents,  the nature  of  and limitations on
investments, premium rates, restrictions  on the  size of risks that  may be insured under a  single  policy,
reserves and provisions for unearned  premiums, losses and other  obligations, deposits of securities  for
the benefit of policyholders, approval of policy forms and the regulation  of market  conduct,  including
the use of credit information in underwriting as well  as other  underwriting and claims practices. In
addition, many states have enacted variations of competitive ratemaking laws, which allow insurers to
set certain premium rates for certain classes  of  insurance without having  to  obtain  the prior approval  of
the state insurance department. State insurance departments also conduct periodic  examinations  of  the
financial condition and market conduct of insurance companies and require the filing of financial and
other reports on a quarterly and annual basis. State insurance regulation continues  to  evolve in
response to the changing economic and business environment  as well as  efforts by regulators
internationally to develop a consistent  approach to regulations. These changes are  evidenced by the
recent changes that the states have made to provide  greater emphasis on understanding an  insurer’s
corporate governance and control environment, including  enterprise risk management  (ERM), in
conducting financial examinations. Additional requirements are also expected. For example,  the
National Association of Insurance Commissioners (NAIC) is considering  an Own  Risk and Solvency
Assessment (ORSA) requirement, which if  adopted  by states would require insurers to perform an
ORSA and, upon request, file an ORSA  report that describes for  the regulators the  ERM process used
by an insurer. See ‘‘Enterprise Risk Management’’ herein for further discussion of the Company’s
ERM. TRV’s insurance subsidiaries are  collectively licensed to transact insurance business in all U.S.
states, the District of Columbia, Guam, Puerto Rico and the  U.S.  Virgin Islands.

Although the U.S. federal government historically  has not regulated the insurance  business,  in

2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the  Dodd-Frank Act)
established a  Federal Insurance Office  within  the U.S. Department of the  Treasury.  The Federal
Insurance Office has limited regulatory  authority and is empowered to gather data and information
regarding the insurance industry and insurers, including conducting  a  study for submission to the  U.S.
Congress on how to modernize and improve  insurance regulation  in the U.S. Further, the Dodd-Frank
Act gives the Federal Reserve supervisory  authority over  a number of  nonbank  financial  services
holding companies, including insurance companies, if they are  designated  by  a two-thirds vote by the
newly created Financial Stability Oversight Council (the FSOC) as ‘‘systemically important financial
institutions’’ (SIFI). The FSOC, chaired by the Secretary  of the Treasury,  is a group of federal  and
state financial regulators and includes an independent insurance expert. Based on rules and interpretive
guidance adopted by the FSOC, the  Company  does not expect  that it will be designated as a  SIFI.
Consistent with that expectation, the Company has not received a  notice from  the FSOC that it will be
reviewed for systemic risk designation. Nonetheless,  it is  possible that the FSOC may change its rules
or guidance in the future, or exercise the discretion granted  to  the Council by the Dodd-Frank Act,  and
conclude that the Company is a SIFI.  If the Company were designated  as a SIFI, the  Federal  Reserve’s
supervisory authority could include the ability  to  impose  heightened financial regulation and could
impact requirements regarding the Company’s capital, liquidity and leverage  as well as its  business  and
investment conduct. As a result of the foregoing, the Dodd-Frank Act, or  other  additional state and
federal regulation that may be adopted  in the future, could  impose significant burdens on  the
Company, including impacting the ways  in which the Company conducts its business, increasing capital
requirements or compliance costs and duplicating  state regulation, and could result  in a competitive

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disadvantage, particularly relative to other insurers that may not be subject to the  same level  of
regulation.

Insurance Regulation Concerning Dividends from Insurance Subsidiaries. TRV’s principal insurance

subsidiaries are domiciled in the state  of  Connecticut. The Connecticut insurance holding company laws
require notice to, and approval by, the state insurance  commissioner for  the declaration or payment  of
any dividend from  an insurance subsidiary  that, together  with other distributions  made within the
preceding twelve months, exceeds the  greater  of 10% of the  insurance subsidiary’s policyholders’
surplus as of the preceding December 31,  or the insurance subsidiary’s net income for the twelve-
month period ending the preceding December  31, in  each case determined in accordance with statutory
accounting practices and by state regulation. 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 TRV’s insurance  subsidiaries  are
domiciled generally contain similar, although  in some  instances  somewhat more restrictive, limitations
on the payment of dividends.

Rate and Rule Approvals. TRV’s insurance subsidiaries are subject  to  each  state’s laws and

regulations regarding rate and rule approvals. The applicable laws and  regulations  are used by states to
establish standards to ensure that rates are not  excessive,  inadequate, unfairly discriminatory or used to
engage in unfair price competition. An insurer’s ability to increase rates and the relative timing of the
process are dependent upon each respective state’s  requirements.

Requirements for Exiting Geographic Markets and/or Canceling or  Nonrenewing  Policies. Several
states have laws and regulations which  may impact the timing and/or the ability of an  insurer  to  either
discontinue or substantially reduce its writings  in that state.  These laws  and  regulations typically require
prior notice, and in some instances insurance department  approval, prior to  discontinuing a line of
business or withdrawing from that state, and they allow insurers to cancel  or non-renew  certain  policies
only for certain specified reasons.

Assessments for Guaranty Funds and Second-Injury Funds  and Other Mandatory Pooling  and
Reinsurance Arrangements. Virtually all states require insurers licensed to do business in their state,
including TRV’s insurance subsidiaries, to bear a portion of  the loss suffered by some claimants
because  of the insolvency of other insurers. Many states also  have laws that establish  second-injury
funds to provide compensation to injured employees for  aggravation of  a  prior condition or injury.

TRV’s insurance subsidiaries are also  required to participate in various  involuntary  assigned risk

pools, principally involving workers’ compensation, automobile insurance,  property windpools in states
prone to property damage from hurricanes, and  FAIR plans, which provide various  insurance coverages
to individuals or other entities that otherwise are unable to purchase  that  coverage  in the voluntary
market.

Assessments may include any charge mandated by statute or regulatory authority  that  is related

directly or indirectly to underwriting  activities. Examples of such  mechanisms include, but are not
limited to, the Florida Hurricane Catastrophe Fund,  Florida  Citizens  Property Insurance Corporation,
National Workers’  Compensation Reinsurance Pool, North  Carolina Beach Plan, Louisiana Citizens
Property Insurance Corporation, and  the Texas  Windstorm Insurance Association. Amounts payable or
paid as a result of arrangements that  are  in substance reinsurance, including certain involuntary pools
where insurers are required to assume  premiums and losses from those pools,  are accounted for as
reinsurance (e.g., National Workers’ Compensation  Reinsurance  Pool,  North Carolina Beach Plan).
Amounts related to assessments from  arrangements that  are not reinsurance  are reported as  a
component of ‘‘General and Administrative Expenses.’’  For additional  information  concerning
assessments for guaranty funds and second-injury funds and other mandatory pooling and reinsurance
agreements  including  state-funding  mechanisms,  see  ‘‘Item  1A—Risk  Factors.’’

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Insurance Regulatory Information System. The NAIC developed the Insurance Regulatory
Information System (IRIS) to help state  regulators identify companies that  may require special
attention. Financial examiners review  annual  statements  and key financial ratios  based on year-end
data. These ratios assist state insurance departments in executing their statutory mandate to oversee
the financial condition of insurance companies. Each ratio has an  established ‘‘usual  range’’ of results.
A ratio result falling outside the usual range of  IRIS ratios, however,  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.

Based on preliminary 2012 IRIS ratios calculated by the Company for its lead insurance

subsidiaries, The Travelers Indemnity Company and St. Paul Fire and  Marine Insurance Company had
results outside the  normal range for one IRIS  ratio due to the size of their  investments in certain
non-fixed maturity securities.

In 2011, The Travelers Indemnity Company and St.  Paul Fire and Marine Insurance Company had

results outside the  normal range for one IRIS  ratio due to the size of their  investments in certain
non-fixed maturity securities. Travelers  Casualty and Surety Company  and The Standard Fire  Insurance
Company had results outside the normal range for two IRIS ratios due  to  the amount of dividends paid
to their respective parent. Additionally,  Travelers Casualty  and Surety Company  had results outside  the
normal range for one IRIS ratio due  to  the amount of dividends  received  from its  subsidiaries.

Management does not anticipate regulatory action as  a result of the 2012 IRIS ratio results for  the

lead insurance subsidiaries or their insurance  subsidiaries.  In all instances in prior  years,  regulators
have been satisfied upon follow-up that no  regulatory action was  required.

Risk-Based Capital (RBC) Requirements. The NAIC has an  RBC requirement  for most property
and casualty insurance companies. The  RBC requirement  determines minimum capital  requirements
and is intended to raise the level of protection  for policyholder obligations. 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 formulas have not been designed to differentiate among adequately capitalized  companies that
operate with levels of capital above the RBC requirement. Therefore, it is inappropriate and ineffective
to use the formulas to rate or to rank  these companies.  At December 31, 2012, all of TRV’s insurance
subsidiaries had total adjusted capital in excess of the RBC requirement.

Investment Regulation.

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, 2012, the  Company was in
compliance with these laws and regulations.

International Regulation

TRV’s  insurance underwriting subsidiaries based in the United Kingdom, Travelers Insurance
Company Limited and Travelers Casualty  and Surety Company of Europe Limited, are regulated by the
Financial Services Authority (FSA). The  FSA’s principal  objectives are to maintain market confidence,
promote public understanding of the  financial system, protect consumers, and  fight financial crime.
TRV’s  managing agency (Travelers Syndicate  Management Ltd.) of its Lloyd’s syndicate is also
regulated by the FSA, which has delegated  certain regulatory responsibilities to the Council of Lloyd’s.
During  2013, the role of the FSA as insurance regulator will be replaced by two  successor bodies, The

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Prudential Regulation Authority (‘‘PRA’’), as prudential regulator, and  The Financial  Conduct
Authority (‘‘FCA’’), as conduct regulator.

TRV’s  managing agency is licensed to  write  business in  over  75 jurisdictions throughout  the world
by virtue of Lloyd’s international licenses. In  each such jurisdiction, TRV’s managing  agency, as  part of
Lloyd’s, is subject to the laws and insurance regulation of that jurisdiction. In  addition,  TRV’s
managing agency has an underwriting agency in  Singapore,  the operations of which are regulated by the
Monetary Authority of Singapore. A  TRV subsidiary, Travelers Casualty and Surety  Company, has a
representative office in China. The representative office is regulated by the China Insurance Regulatory
Commission. A TRV subsidiary, TCI Global Services, Inc., has a liaison office in India. Insurance
business in India is regulated by the Insurance Regulatory and Development  Authority.

TRV’s  insurance operations in the Republic of Ireland are conducted through an  Irish branch  of

Travelers Insurance Company Limited  which is regulated  by the Insurance Supervision Departments of
the Central Bank of Ireland (as to conduct)  and  also by the  FSA. In  Canada, the conduct of TRV’s
insurance business is regulated by the  Office of the Superintendent of Financial Institutions under
provisions of the Insurance Companies  Act. TRV has an interest in  JMalucelli, a  joint  venture holding
company in Brazil. JMalucelli’s subsidiaries operate in the  insurance  and reinsurance business in  Brazil
and are regulated  by the Superintendencia de Seguros Privados.

Regulators require insurance companies  to  maintain certain  levels of capital depending on the  type

and amount of insurance policies in force.

Solvency  II. The European Union’s executive body, the European  Commission, is  implementing

new capital adequacy and risk management  regulations called Solvency II  that  would apply  to  the
Company’s businesses across the European Union.  Solvency  II is  currently  required to be implemented
on  January  1,  2014;  however,  the  effective  implementation  date  may  be  delayed.  Under  Solvency  II,  it
is possible that the U.S. parent of a European Union  subsidiary could  be  subject to certain Solvency II
requirements if the regulator determines that the  subsidiary’s  capital position is dependent on the
parent company and the U.S. company is not already  subject  to  regulations deemed  ‘‘equivalent’’ to
Solvency II. In addition, regulators in countries where the Company has  operations  are working  with
the International Association of Insurance  Supervisors (and with the NAIC  in the U.S.)  to  consider
changes to insurance company supervision, including  group  supervision. While it is not certain  how or if
these actions will impact the Company, it  is currently not expected that  the  capital management
strategies for the Company’s U.S. or  European  Union operations will  be  materially impacted.

International Association of Insurance Supervisors (IAIS) Guidance for Determining Global

Systemically Important Insurers. The IAIS is working with the Financial Stability  Board  (FSB) created
by the G-20 and is developing a methodology for determining whether and which,  if any, insurance
companies pose a systemic risk to the global economy.  Such insurers would be designated ‘‘global
systemically important insurers’’ (G-SIIs) and  would likely be  subject to higher capital  requirements,
enhanced supervision or both. The IAIS has released for comment proposed  methodology for
identifying potential G-SIIs but has not  yet decided upon the criteria  for or the consequences of such
designation. Upon finalizing the assessment methodology  and  determining the consequences of a  G-SII
designation, the FSB along with national  authorities expect  to  publish the list of G-SIIs in April  2013.
See ‘‘Part I—Item 1A—Risk Factors—New regulations outside of the  U.S., including in  the European
Union, could adversely impact our results of operations  and limit our growth.’’

Insurance Holding Company Statutes

As a holding company, TRV is not regulated as an insurance company. However,  since TRV owns
capital stock in insurance subsidiaries, it is  subject to state  insurance  holding  company statutes, as well
as certain other laws, of each of its insurance subsidiaries’ states of domicile.  All holding company
statutes, as well as other laws, require  disclosure  and,  in some instances, prior approval of  material

32

transactions between an insurance company and  an affiliate.  The holding company statutes and  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 Regulations Concerning Change of Control. Many state insurance regulatory laws 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 laws of many states also 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 transactions that would constitute a  change in control of any of TRV’s insurance  subsidiaries

would generally require prior approval  by the insurance  departments of the  states in which the
insurance subsidiaries are domiciled or commercially  domiciled.  They may  also require pre-acquisition
notification in those states that have  adopted  pre-acquisition  notification provisions and  in which such
insurance subsidiaries are admitted to  transact business.

Two of TRV’s insurance subsidiaries and its operations  at Lloyd’s are domiciled  in the United
Kingdom. Insurers in the United Kingdom are subject to change of control restrictions in  the Financial
Services and Markets Act of 2000 including approval of the FSA, or the successor  regulatory authority,
the PRA (as described above). Some  of TRV’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  TRV’s shareholders.

ENTERPRISE RISK MANAGEMENT

As a large property and casualty insurance enterprise, the Company is  exposed  to  many risks.
These risks are a function of the environments within which the  Company operates. Since certain risks
can be correlated with other risks, an event or  a series of events can impact  multiple areas  of the
Company simultaneously and have a material  effect on the Company’s  results of operations, financial
position and/or liquidity. These exposures require an entity-wide  view of risk and an understanding  of
the potential impact on all aspects of  the Company’s operations. It also requires the Company  to
manage its risk-taking to be within its  risk appetite in a prudent  and  balanced effort to create  and
preserve value for  all of the Company’s  stakeholders.  This approach to Company-wide risk evaluation
and management is commonly called  Enterprise Risk  Management (ERM). ERM  activities involve
both the identification and assessment  of a  broad  range of risks and  the  execution of synchronized
strategies to effectively manage such risks. Effective ERM also  includes the determination of the
Company’s risk capital needs, which takes  into account  regulatory requirements  and credit rating
considerations, in addition to economic  and other factors.

ERM at the Company is an integral part of its business operations. All risk owners across all

functions, all corporate leaders and the  board of directors are engaged  in ERM. ERM involves
risk-based analytics, as well as reporting  and feedback throughout the enterprise in support of the
Company’s long-term financial strategies  and  objectives.

33

The Company uses various methods, including proprietary and third-party computer modeling

processes, to continually monitor and  analyze  catastrophic events  and the risks associated with  them.
These analyses and methods are used in making underwriting and reinsurance decisions  as part  of
managing the Company’s exposure to  catastrophic events. In addition to catastrophe modeling and
analysis, the Company also models and analyzes its exposure to other extreme events.  The Company
also utilizes proprietary and third-party  computer modeling  processes  to  evaluate capital  adequacy.
These analytical techniques are an integral component of  the Company’s ERM process and further
support the Company’s long-term financial strategies  and objectives.

In addition to the day-to-day ERM activities within the Company’s business units, other key
internal risk management functions include the  Management and Operating Committees (comprised  of
the Company’s Chief Executive Officer and the other most senior members  of  management), the
Enterprise and Underwriting Risk Committees of  management,  the Credit  Committee,  the Chief
Compliance Officer, the Business Conduct  Officer, the Corporate  Actuarial group, the Corporate Audit
group, the Accounting Policy group, the  Enterprise Underwriting group and many others.  A senior
executive oversees the ERM process.  The mission  of  this executive is to facilitate  risk assessment and
to collaborate in implementing effective risk management  strategies throughout  the Company. Another
strategic ERM objective of this executive includes  working  across the Company  to  enhance effective
and realistic risk modeling capabilities  as part of the Company’s overall effort  to  understand and
manage its portfolio of risks to be within  its risk  appetite. Board  oversight  of  ERM is  provided by the
Risk Committee of the board of directors,  which reviews  the strategies, processes  and controls
pertaining to the Company’s insurance operations and oversees the implementation, execution  and
performance of the Company’s ERM program.

The Company’s ERM efforts build upon the foundation of an effective  internal control

environment. ERM expands the internal  control  objectives of effective and  efficient operations,  reliable
financial reporting and compliance with applicable laws and regulations,  to fostering, leading and
supporting an integrated, risk-based culture within  the Company that  focuses on value creation  and
preservation. However, the Company can provide only reasonable, not absolute, assurance that these
objectives will be met. Further, the design of any risk management or control  system must reflect the
fact that there are resource constraints, and the benefits must be considered relative  to  their costs. As  a
result, the possibility of material financial loss remains in spite  of  the Company’s significant ERM
efforts. An investor should carefully consider  the risks  and all of the  other  information set forth in this
annual report, including the discussions included in  ‘‘Item 1A—Risk Factors,’’ ‘‘Item 7A—Quantitative
and Qualitative Disclosures About Market Risk,’’ and ‘‘Item 8—Financial Statements and
Supplementary Data.’’

OTHER INFORMATION

Customer Concentration

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 material adverse  effect on  the Company,  and no one customer or group of
affiliated  customers accounts for 10% or more  of the Company’s consolidated revenues.

Employees

At December 31, 2012, the Company  had approximately 30,500 employees. The  Company believes
that its employee relations are satisfactory. None  of the Company’s employees  are subject to collective
bargaining agreements.

34

Sources of Liquidity

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 the Company’s consolidated
financial statements.

Taxation

For a  discussion of tax matters affecting the  Company and its operations, see  note 12 of  notes to

the Company’s consolidated financial statements.

Financial Information about Reportable Business  Segments

For financial information regarding reportable  business segments of the  Company, see  ‘‘Item 7—
Management’s Discussion and Analysis of Financial Condition and Results  of  Operations,’’ and note  2
of notes to the Company’s 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.’’

Company Website  and Availability of SEC Filings

The Company’s Internet website is www.travelers.com. Information on the Company’s website  is not

incorporated by reference herein and is not a  part  of  this Form 10-K. The  Company makes available
free of charge on its website or provides  a link on  its  website to the Company’s  Annual  Report on
Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any  amendments
to those reports filed or furnished pursuant to Section 13(a)  or  15(d)  of the Securities Exchange  Act of
1934, as soon as reasonably practicable after those reports  are electronically filed with, or  furnished to,
the SEC. To access these filings, go to the  Company’s website, then  click on ‘‘SEC Filings’’ under the
‘‘For Investors’’ heading.

From time to time, the Company may use its website as  a channel  of distribution of material

company information. Financial and  other  material information regarding the Company is routinely
posted on and accessible at http://investor.travelers.com.  In addition, you may  subscribe  to  receive e-mail
alerts and other information about the Company by providing your e-mail  address in  the ‘‘E-mail Alert
Service’’ section at http://investor.travelers.com.

Glossary of Selected Insurance Terms

Accident year . . . . . . . . . . . . . . The annual calendar accounting period in which loss  events

occurred, regardless of when the losses are actually reported,
booked or paid.

Adjusted unassigned surplus . . . Unassigned surplus as  of the most recent statutory annual report

reduced by twenty-five percent of that year’s unrealized
appreciation in value or revaluation of assets  or unrealized profits
on investments, as defined in that report.

Admitted insurer . . . . . . . . . . . A company licensed to transact insurance business within a state.

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Agent

. . . . . . . . . . . . . . . . . . . A  licensed individual who sells and services insurance policies,

receiving a commission from the insurer  for selling the business and
a fee for servicing it. An independent  agent represents multiple
insurance companies and searches the  market  for the best  product
for its client.

Annuity . . . . . . . . . . . . . . . . . . A  contract that pays a periodic benefit over the remaining life of a

person (the annuitant), the lives of two  or more persons  or for a
specified period of time.

Assigned risk pools . . . . . . . . . . Reinsurance pools which cover risks for  those unable to purchase

insurance in the voluntary market. Possible  reasons for  this  inability
include the risk being too great or the profit being too small under
the required insurance rate structure. The costs of the risks
associated with these pools are charged back  to  insurance  carriers
in proportion to their direct writings.

Assumed reinsurance . . . . . . . .

Insurance risks acquired from a ceding company.

Average value analysis . . . . . . . A conventional actuarial method used to  estimate ultimate  losses
for a given cohort of claims such as an  accident year/product  line
component. If the paid-to-date losses  are then subtracted from the
estimated ultimate losses, the result is an  indication of  the unpaid
losses.

The basic premise of the method is that average claim values are
stable and predictable over time for  a particular cohort of claims.
The method is utilized most often where  ultimate claim counts are
known or reliably estimable fairly early after  the start of an  accident
year and average values are expected to be fairly predictable from
one year  to the next.

The method comes up with an estimate  of ultimate claims counts by
accident year cohort, and multiplies it by an estimate  of average
claim value by accident year cohort,  with multiple  methods  used  to
estimate these average claim values.

Book value per share . . . . . . . . Total common shareholders’ equity divided by  the number of

common shares outstanding.

Bornhuetter-Ferguson method . . A conventional  actuarial method to estimate ultimate  losses for  a

given cohort of claims such as an accident year/product line
component. If the paid-to-date losses  are then subtracted from the
estimated ultimate losses, the result is an  indication of  the
outstanding losses.

36

The basic premise of the method is that the historical ratio of
additional claim activity to earned premium for a given product  line
component/age-to-age period is stable and predictable.  It implicitly
assumes that the actual activity to date for past periods for that
cohort is not a credible predictor of  future activity  for  that cohort,
or at least is not credible enough to  override  the ‘‘a priori’’
assumption as to future activity. It may be applied to either  paid or
case incurred claim data. It is used most often where the  claim data
is sparse and/or volatile and for relatively young cohorts  with low
volumes and/or data credibility.

To illustrate, the method may assume that the ratio of additional
paid losses from the 12 to 24 month  period for an accident year is
10% of the original ‘‘a priori’’ expected losses for  that accident
year. The original ‘‘a priori’’ expected  losses are typically  based on
the original loss ratio assumption for that  accident year, with
subsequent adjustment as facts develop.

The ultimate losses equal actual activity to date  plus the expected
values for future periods.

Broker . . . . . . . . . . . . . . . . . . . One who negotiates contracts of insurance  or reinsurance on behalf

of an  insured party, receiving a commission from the insurer  or
reinsurer for placement and other services rendered.

Capacity . . . . . . . . . . . . . . . . . . The percentage of surplus, or the dollar amount of exposure, that
an insurer or reinsurer is willing or able to place at risk. Capacity
may apply to a single risk, a program, a line of business or  an entire
book of business. Capacity may be constrained by  legal restrictions,
corporate restrictions or indirect restrictions.

Captive . . . . . . . . . . . . . . . . . . A  closely-held insurance company whose primary purpose is to

provide insurance coverage to the company’s owners  or their
affiliates.

Case-incurred development

method . . . . . . . . . . . . . . . . . A  conventional actuarial method to estimate ultimate  losses for a

given cohort of claims such as an accident year/product line
component. If the paid-to-date losses  are then subtracted from the
estimated ultimate losses, the result is an  indication of  the unpaid
losses.

The approach is the same as that described in this glossary under
the ‘‘paid loss development method,’’ but  based on  the growth in
cumulative case-incurred losses (i.e., the sum  of  claim-adjustor
incurred estimates for claims in the cohort) rather than  paid  losses.
The basic premise of the method is that cumulative  case incurred
losses for a given cohort of claims will grow  in a  stable,  predictable
pattern from year-to-year, based on the age of the cohort.

Case reserves . . . . . . . . . . . . . . Claim department estimates of anticipated future  payments to be

made on each specific individual reported claim.

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Casualty insurance . . . . . . . . . .

Insurance which is primarily concerned with the losses caused by
injuries to third persons, i.e., not the insured,  and  the legal  liability
imposed on the insured resulting therefrom. It  includes, but is not
limited to, employers’ liability, workers’ compensation, public
liability, automobile liability, personal liability and  aviation  liability
insurance. It excludes certain types of  losses  that by law or custom
are considered as being exclusively within  the scope of other types
of insurance, such as fire or marine.

Catastrophe . . . . . . . . . . . . . . . A  severe loss, resulting from a variety of  events, including, among
others, hurricanes, tornadoes and other windstorms, earthquakes,
hail, wildfires, severe winter weather, floods, tsunamis and volcanic
eruptions. Catastrophes can also result  from a terrorist attack
(including those involving nuclear, biological, chemical or
radiological events), explosions, infrastructure failures  or as  a
consequence of political instability. Each  catastrophe has unique
characteristics and catastrophes are not predictable  as to timing  or
amount. Their effects are included in net and operating income  and
claims and claim adjustment expense  reserves  upon occurrence. A
catastrophe may result in the payment of reinsurance reinstatement
premiums and assessments from various pools.

Catastrophe loss . . . . . . . . . . . . Loss and directly identified loss adjustment expenses from

catastrophes, and related reinsurance reinstatement premiums.

Catastrophe reinsurance . . . . . . A form of excess-of-loss reinsurance which, subject to a  specified

limit, indemnifies the ceding company  for the  amount  of loss in
excess  of a specified retention with respect to an accumulation of
losses resulting from a catastrophic event. The actual  reinsurance
document is called a ‘‘catastrophe cover.’’  These  reinsurance
contracts are typically designed to cover  property insurance losses
but can be written to cover casualty insurance losses such  as from
workers’ compensation policies.

Cede; ceding company . . . . . . . When an insurer reinsures its liability with another  insurer  or a
‘‘cession,’’ it ‘‘cedes’’ business and is  referred to as the  ‘‘ceding
company.’’

Ceded reinsurance . . . . . . . . . .

Insurance risks transferred to another company as  reinsurance. See
‘‘Reinsurance.’’

Claim . . . . . . . . . . . . . . . . . . . . Request by an insured for indemnification by an  insurance company

for loss incurred from an insured peril.

Claim adjustment expenses . . . .

See ‘‘Loss adjustment expenses (LAE).’’

Claims and claim adjustment

expenses . . . . . . . . . . . . . . . .

See ‘‘Loss’’ and ‘‘Loss adjustment expenses (LAE).’’

Claims and claim adjustment

expense reserves . . . . . . . . . .

See ‘‘Loss reserves.’’

Cohort . . . . . . . . . . . . . . . . . . . A  group of items or individuals that share a particular  statistical or

demographic characteristic. For example, all claims  for a  given
product in a given market for a given  accident year would represent
a cohort of claims.

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Commercial multi-peril policies . Refers to policies which cover both property and third-party  liability

exposures.

Commutation agreement . . . . . . An  agreement between a reinsurer and a ceding company whereby

the reinsurer pays an agreed-upon amount  in exchange for a
complete discharge of all obligations, including future  obligations,
between the parties for reinsurance losses  incurred.

Debt-to-total capital ratio . . . . . The ratio of debt to total capitalization.

Debt-to-total capital ratio

excluding net unrealized gain
(loss) on investments . . . . . . . The ratio of debt to total capitalization  excluding the after-tax

impact of net unrealized investment gains  and  losses.

Deductible . . . . . . . . . . . . . . . . The amount of loss that an insured retains.

Deferred acquisition costs . . . . . Primarily commissions and premium-related taxes that vary  with,
and are primarily related to, the production of new contracts  and
are deferred and amortized to achieve a matching of revenues  and
expenses when reported in financial statements prepared in
accordance with U.S. Generally Accepted Accounting Principles
(GAAP).

Deficiency . . . . . . . . . . . . . . . . With regard to reserves for a given liability, a deficiency  exists when

Demand  surge . . . . . . . . . . . . .

it is estimated or determined that the reserves are insufficient to
pay the ultimate settlement value of the related  liabilities. Where
the deficiency is the result of an estimate,  the estimated amount of
deficiency (or even the finding of whether or not a deficiency exists)
may change as new information becomes available.

Significant short-term increases in building material and labor  costs
due to a sharp increase in demand for those  materials  and services,
commonly as a result of a large catastrophe resulting in significant
widespread property damage.

Direct  written premiums . . . . . . The amounts charged by an insurer to insureds in exchange  for

coverages provided in accordance with the  terms of an  insurance
contract. The amounts exclude the impact of all reinsurance
premiums, either assumed or ceded.

Earned premiums or premiums

earned . . . . . . . . . . . . . . . . . That portion of property casualty premiums  written  that  applies  to

the expired portion of the policy term.  Earned  premiums are
recognized as revenues under both Statutory Accounting Practices
(SAP) and GAAP.

Excess liability . . . . . . . . . . . . . Additional casualty coverage above a layer of insurance  exposures.

Excess-of-loss reinsurance . . . . . Reinsurance that indemnifies the reinsured  against all or a specified

portion of losses over a specified dollar  amount  or ‘‘retention.’’

Expense ratio . . . . . . . . . . . . . .

See ‘‘Underwriting expense ratio.’’

Exposure . . . . . . . . . . . . . . . . . The measure of risk used in the pricing of an  insurance product.
The change in exposure is the amount of change in premium on
policies that renew attributable to the change  in portfolio risk.

39

Facultative reinsurance . . . . . . . The reinsurance of all or a portion of  the insurance provided by  a

single policy. Each policy reinsured is  separately negotiated.

Fair Access to Insurance

Requirements (FAIR) Plan . . A residual market mechanism which  provides property insurance  to

those unable to obtain such insurance through the regular
(voluntary) market. FAIR plans are set up on a state-by-state basis
to cover only those risks in that state. For more  information, see
‘‘residual market (involuntary business).’’

Fidelity and surety programs . . . Fidelity insurance  coverage  protects an insured for  loss due to

embezzlement or misappropriation of funds by an employee. Surety
is a three-party agreement in which the  insurer  agrees  to  pay a
third party or make complete an obligation in  response  to the
default, acts or omissions of an insured.

GAAP combined ratio . . . . . . . The sum of the loss and LAE ratio and  the underwriting  expense

ratio. A  combined ratio under 100% generally indicates  an
underwriting profit. A combined ratio over 100%  generally  indicates
an underwriting loss.

GAAP combined ratio excluding
incremental impact of direct
to consumer initiative . . . . . . The GAAP combined ratio adjusted to exclude the direct, variable

impact of the Company’s direct-to-consumer initiative in the
Personal Insurance segment.

Gross written premiums . . . . . . The direct and assumed contractually  determined amounts charged

to the policyholders for the effective  period of the  contract based
on the terms and conditions of the insurance contract.

Ground-up analysis . . . . . . . . . . A method to estimate ultimate claim costs  for  a given cohort of

claims such as an accident year/product  line component. It involves
analyzing the exposure and claim activity at an individual  insured
level and then through the use of deterministic  or stochastic
scenarios and/or simulations, estimating the ultimate losses for those
insureds. The total losses for the cohort are then the sum  of  the
losses for each individual insured.

In practice, the method is sometimes  simplified by performing  the
individual insured analysis only for the larger insureds, with the
costs for the smaller insureds estimated  via sampling  approaches
(extrapolated to the rest of the smaller insured population) or
aggregate approaches (using assumptions consistent with the
ground-up larger insured analysis).

Guaranteed cost products . . . . . An insurance policy where the premiums charged will not be
adjusted for actual loss experience during the covered period.

Guaranty fund . . . . . . . . . . . . . A state-regulated mechanism that is financed by assessing insurers

doing business in those states. Should insolvencies occur, these
funds are available to meet some or all of the insolvent insurer’s
obligations to policyholders.

Holding company liquidity . . . . . Total cash, short-term invested assets and other readily marketable

securities held by the holding company.

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Incurred but not reported

(IBNR) reserves . . . . . . . . . . Reserves for estimated losses and LAE  that have been incurred but

not yet  reported to the insurer. This  includes  amounts for
unreported claims, development on known cases, and re-opened
claims.

Inland marine . . . . . . . . . . . . . . A  broad type of insurance generally covering articles  that may be
transported from one place to another, as well as bridges, tunnels
and other instrumentalities of transportation. It  includes goods in
transit, generally other than transoceanic, and  may include policies
for movable objects such as personal effects, personal  property,
jewelry, furs, fine art and others.

IRIS ratios . . . . . . . . . . . . . . . . Financial ratios calculated by the NAIC to assist  state insurance

departments in monitoring the financial condition of insurance
companies.

Large deductible policy . . . . . . . An insurance policy where the customer assumes at  least $25,000 or

more of each loss. Typically, the insurer is responsible for paying
the entire loss under those policies and then seeks reimbursement
from the insured for the deductible amount.

Lloyd’s . . . . . . . . . . . . . . . . . . . An  insurance marketplace based in London,  England,  where

brokers, representing clients with insurable risks, deal with Lloyd’s
underwriters, who represent investors. The  investors are grouped
together into syndicates that provide capital to insure the risks.

Loss . . . . . . . . . . . . . . . . . . . . . An  occurrence that is the basis for submission and/or payment of a

claim. Losses may be covered, limited or excluded from coverage,
depending on the terms of the policy.

Loss adjustment expenses

(LAE) . . . . . . . . . . . . . . . . . The expenses of settling claims, including  legal and other fees and
the portion of general expenses allocated to claim settlement costs.

Loss and LAE ratio . . . . . . . . . For SAP, it is the ratio of incurred  losses and loss  adjustment

expenses to net earned premiums. For GAAP, it is the ratio of
incurred losses and loss adjustment expenses reduced by an
allocation of fee income to net earned premiums.

Loss reserves . . . . . . . . . . . . . . Liabilities established by insurers and reinsurers  to  reflect the

estimated cost of claims incurred that  the insurer or reinsurer will
ultimately be required to pay in respect of insurance or  reinsurance
it has written. Reserves are established for losses and for LAE,  and
consist of case reserves and IBNR reserves. As the  term is used in
this document, ‘‘loss reserves’’ is meant to include reserves for  both
losses and LAE.

Loss reserve development . . . . . The increase or decrease in incurred  claims and claim adjustment

expenses as a result of the re-estimation  of claims and  claim
adjustment expense reserves at successive valuation dates  for  a
given group of claims. Loss reserve development may be related to
prior year or current year development.

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Losses incurred . . . . . . . . . . . . The total losses sustained by an insurance company under a  policy

or policies, whether paid or unpaid. Incurred losses include a
provision for IBNR.

National Association of

Insurance Commissioners
(NAIC) . . . . . . . . . . . . . . . . An  organization of the insurance commissioners or directors of all

50 states, the District of Columbia and the five U.S. territories
organized to promote consistency of  regulatory practice and
statutory accounting standards throughout the United  States.

Net written premiums . . . . . . . . Direct written premiums plus assumed reinsurance premiums less
premiums ceded to reinsurers.

New business volume . . . . . . . . The amount of written premium related to new policyholders and

additional products sold to existing policyholders.

Operating income (loss) . . . . . . Net income (loss) excluding the after-tax  impact of net realized

investment gains (losses), discontinued operations and cumulative
effect of changes in accounting principles when applicable.

Operating income (loss) per

share . . . . . . . . . . . . . . . . . . Operating income (loss) on a per share basis.

Operating return on equity . . . . The ratio of operating income to average equity  excluding net

unrealized investment gains and losses and discontinued operations,
net of tax.

Paid development method . . . . . A conventional actuarial method to estimate ultimate  losses for a

given cohort of claims such as an accident year/product line
component. If the paid-to-date losses  are then subtracted from the
estimated ultimate losses, the result is an  indication of  the unpaid
losses.

The basic premise of the method is that cumulative  paid  losses for
a given cohort of claims will grow in  a stable,  predictable pattern
from year-to-year, based on the age of the  cohort. These  age-to-age
growth factors are sometimes called ‘‘link ratios.’’

For example, if cumulative paid losses for a product line XYZ for
accident year 2004 were $100 as of December 31, 2004 (12 months
after the start of that accident year), then grew  to  $120 as of
December 31, 2005 (24 months after  the start), the  link ratio for
that accident year from 12 to 24 months would  be  1.20. If  the link
ratio for other recent accident years  from 12  to  24 months for that
product line were also at or around 1.20,  then the method would
assume a similar result for the most recent accident year, i.e., that it
too would have its cumulative paid losses grow 120% from the
12 month to 24 month valuation.

This is repeated for each age-to-age period into the future  until the
age-to-age link ratios for future periods are assumed to be 1.0
(i.e., the age at which cumulative losses are assumed to have
stopped growing).

42

A given accident year’s cumulative losses are then projected to
ultimate by multiplying current cumulative losses  by  successive
age-to-age link ratios up to that future age where growth  is
expected to end. For example, if growth is expected to end at
60 months, then the ultimate indication for an accident  year with
cumulative losses at 12 months equals those losses times  a 12 to
24 month link ratio, times a 24 to 36  month link ratio, times  a 36  to
48 month link ratio, times a 48 to 60  month link ratio.

Advanced applications of the method include  adjustments for
changing conditions during the historical period and anticipated
changes in the future.

Policyholders’ surplus . . . . . . . . As determined under SAP, the amount remaining after all  liabilities,

including loss reserves, are subtracted  from all admitted assets.
Admitted assets are assets of an insurer prescribed or permitted  by
a state to be recognized on the statutory balance  sheet.
Policyholders’ surplus is also referred to as  ‘‘surplus’’ or  ‘‘statutory
surplus’’ for statutory accounting purposes.

Pool . . . . . . . . . . . . . . . . . . . . . An  organization of insurers or reinsurers through which particular
types of risks are underwritten with premiums, losses and expenses
being shared in agreed-upon percentages.

Premiums . . . . . . . . . . . . . . . . . The amount charged during the year on  policies  and contracts

issued, renewed or reinsured by an insurance company.

Property insurance . . . . . . . . . .

Insurance that provides coverage to a person  or business  with an
insurable interest in tangible property for  that person’s or  business’s
property loss, damage or loss of use.

Quota  share reinsurance . . . . . . Reinsurance wherein the insurer cedes an  agreed-upon fixed
percentage of liabilities, premiums and losses for  each policy
covered on a pro rata basis.

Rates . . . . . . . . . . . . . . . . . . . . Amounts charged per unit of insurance.

Redundancy . . . . . . . . . . . . . . . With regard to reserves for a given liability, a redundancy exists
when it is estimated or determined that the  reserves are greater
than what will be needed to pay the ultimate  settlement value of
the related liabilities. Where the redundancy is the  result of  an
estimate, the estimated amount of redundancy (or even  the finding
of whether or not a redundancy exists) may change as new
information becomes available.

Reinstatement premiums . . . . . . Additional premiums payable to reinsurers  to  restore coverage

limits that have been exhausted as a result of reinsured losses under
certain excess-of-loss reinsurance treaties.

Reinsurance . . . . . . . . . . . . . . . The practice whereby one insurer, called the reinsurer, in
consideration of a premium paid to that insurer, agrees to
indemnify another insurer, called the ceding company, for part or
all of the liability of the ceding company under one or  more
policies or contracts of insurance which it has issued.

Reinsurance agreement . . . . . . . A contract specifying the terms of a reinsurance transaction.

43

Renewal premium change . . . . . The estimated change in average premium on  policies that renew,
including rate and exposure changes. Such statistics are  subject  to
change  based on a number of factors, including changes in actuarial
estimates.

Renewal rate change . . . . . . . . . The estimated change in average premium on  policies that renew,

excluding exposure changes. Such statistics are subject to change
based on  a number of factors, including changes in  actuarial
estimates.

Reported claim development

method . . . . . . . . . . . . . . . . . A  conventional actuarial method to estimate ultimate  claim  counts

Residual market (involuntary

business) . . . . . . . . . . . . . . . .

for a given cohort of claims such as an  accident year/product  line
component. If the reported-to-date counts are then subtracted from
the estimated ultimate counts, the result is an  indication of the
IBNR counts.

The approach is the same as that described in this glossary under
the ‘‘paid loss development method’’, but  based on  the growth in
cumulative claim counts rather than paid losses.  The  basic  premise
of the method is that cumulative claim counts for a  given cohort  of
claims will grow in a stable, predictable  pattern from year-to-year,
based on  the age of the cohort.

Insurance market which provides coverage for risks for those unable
to purchase insurance in the voluntary  market.  Possible reasons for
this inability include the risks being too great  or the profit potential
too small under the required insurance rate structure. Residual
markets are frequently created by state legislation either because  of
lack of available coverage such as: property coverage in  a
windstorm prone area or protection of  the accident victim as in  the
case of workers’ compensation. The costs of the residual market are
usually charged back to the direct insurance carriers  in proportion
to the carriers’ voluntary market shares  for the  type of coverage
involved.

Retention . . . . . . . . . . . . . . . . . The amount of exposure a policyholder company retains on any one

risk or group of risks. The term may  apply to an insurance  policy,
where the policyholder is an individual, family  or business, or a
reinsurance policy, where the policyholder is an insurance company.

Retention rate . . . . . . . . . . . . . The percentage of prior period premiums (excluding renewal

premium changes), accounts or policies available for renewal in the
current period that were renewed. Such statistics are subject to
change  based on a number of factors, including changes in actuarial
estimates.

Retrospective premiums . . . . . . Premiums related to retrospectively rated  policies.

Retrospective rating . . . . . . . . . A plan or method which permits adjustment  of the final premium

or commission on the basis of actual loss  experience, subject  to
certain minimum and maximum limits.

44

Return on equity . . . . . . . . . . . The ratio of net income (loss) less preferred dividends  to  average

shareholders’ equity.

Risk-based capital (RBC) . . . . . A measure adopted by the NAIC and enacted  by  states for

determining the minimum statutory policyholders’ surplus
requirements of insurers. Insurers having  total  adjusted capital less
than that required by the RBC calculation  will be subject to varying
degrees of regulatory action depending on the level  of capital
inadequacy.

Risk retention group . . . . . . . . . An  alternative form of insurance in which members of a  similar

profession or business band together  to  self insure their risks.

Runoff business . . . . . . . . . . . . An  operation which has been determined to be nonstrategic;

includes non-renewals of in-force policies  and  a cessation of writing
new business, where allowed by law.

Salvage . . . . . . . . . . . . . . . . . . The amount of money an insurer recovers through the  sale of

property transferred to the insurer as a result of a loss  payment.

S-curve method . . . . . . . . . . . . A mathematical function which depicts  an initial slow change,

followed by a rapid change and then ending in a  slow change  again.
This results in an ‘‘S’’ shaped line when depicted  graphically. The
actuarial application of these curves fit  the reported data to  date
for a particular cohort of claims to an  S-curve to project future
activity for that cohort.

Second-injury fund . . . . . . . . . . The employer of an injured, impaired  worker  is responsible only for

the workers’ compensation benefit for the most  recent  injury;  the
second-injury fund would cover the cost  of  any  additional benefits
for aggravation of a prior condition. The cost  is shared by  the
insurance industry and self-insureds,  funded through assessments  to
insurance companies and self-insureds based on  either premiums  or
losses.

Self-insured retentions . . . . . . . That portion of the risk retained by a person for its own account.

Servicing carrier . . . . . . . . . . . . An  insurance company that provides, for a fee, various services

including policy issuance, claims adjusting and customer service for
insureds in a reinsurance pool.

Statutory accounting practices

(SAP) . . . . . . . . . . . . . . . . . . The practices and procedures prescribed or permitted  by  domiciliary

state insurance regulatory authorities in  the United States for
recording transactions and preparing  financial statements. Statutory
accounting practices generally reflect a modified going concern basis
of accounting.

Statutory basis surplus . . . . . . . . The excess of an insurance company’s assets over its liabilities in

accordance with the statutory accounting practices required by  state
laws and regulations.

Structured settlements . . . . . . . . Periodic payments to an injured person  or survivor for  a determined

number of years or for life, typically  in settlement of a claim under
a liability policy, usually funded through the  purchase  of  an  annuity.

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Subrogation . . . . . . . . . . . . . . . A  principle of law incorporated in insurance policies,  which enables

an insurance company, after paying a claim under a policy, to
recover the amount of the loss from another person or  entity  who is
legally liable for it.

Third-party liability . . . . . . . . . . A liability owed to a claimant (third party) who  is not one of  the
two parties to the insurance contract. Insured liability claims are
referred to as third-party claims.

Total capitalization . . . . . . . . . . The sum of total shareholders’ equity and debt.

Treaty reinsurance . . . . . . . . . . The reinsurance of a specified type or category of  risks defined in a

reinsurance agreement (a ‘‘treaty’’) between  a primary insurer or
other reinsured and a reinsurer. Typically, in  treaty reinsurance,  the
primary insurer or reinsured is obligated  to  offer and the  reinsurer
is obligated to accept a specified portion of all that type or category
of risks originally written by the primary insurer or reinsured.

Umbrella coverage . . . . . . . . . . A form of insurance protection against losses in excess of amounts
covered by other liability insurance policies  or amounts not covered
by the usual liability policies.

Unassigned surplus . . . . . . . . . . The undistributed and unappropriated  amount of policyholders’

Underlying GAAP combined

surplus.

ratio . . . . . . . . . . . . . . . . . . . The sum of the underlying loss and LAE ratio and  the underlying

underwriting expense ratio.

Underlying loss and LAE ratio . The  ratio  of incurred losses and loss adjustment expenses,  reduced
by an allocation of fee income, to net earned premiums, excluding
the impact of catastrophe losses and prior year reserve
development.

Underlying underwriting

expense ratio . . . . . . . . . . . . . The ratio of underwriting expenses incurred, reduced by an

Underlying underwriting margin

allocation of fee income and billing and policy fees, to net earned
premiums, excluding the impact of catastrophe losses.

Net  earned  premiums and fee  income less claims  and claim
adjustment expenses (excluding catastrophe losses and prior year
reserve development) and insurance-related expenses.

Underwriter . . . . . . . . . . . . . . . An  employee of an insurance company who examines,  accepts or

rejects  risks and classifies accepted risks in order to charge an
appropriate premium for each accepted risk. The underwriter is
expected to select business that will produce an average risk of loss
no greater than that anticipated for the  class of business.

Underwriting . . . . . . . . . . . . . . The insurer’s or reinsurer’s process of reviewing applications for

insurance coverage, and the decision as to whether to accept all  or
part of the coverage and determination of the  applicable  premiums;
also refers to the acceptance of that  coverage.

46

Underwriting expense ratio . . . . For SAP, it is the ratio of underwriting  expenses incurred  less other

income to net written premiums. For GAAP,  it  is the ratio of
underwriting expenses incurred reduced by an allocation of fee
income and billing and policy fees to  net earned  premiums.

Underwriting gain or loss . . . . . Net earned premiums and fee income less claims and claim

adjustment expenses and insurance-related expenses.

Unearned premium . . . . . . . . . . The portion of premiums written that is allocable to the  unexpired

portion of the policy term.

Voluntary market . . . . . . . . . . . The market in which a person seeking insurance obtains coverage

without the assistance of residual market  mechanisms.

Wholesale broker . . . . . . . . . . . An  independent or exclusive agent that represents both admitted

and nonadmitted insurers in market areas, which  include standard,
non-standard, specialty and excess and surplus lines of insurance.
The wholesaler does not deal directly with  the insurance consumer.
The wholesaler deals with the retail agent or broker.

Workers’ compensation . . . . . . . A system (established under state and federal  laws)  under which

employers provide insurance for benefit payments  to  their
employees for work-related injuries, deaths and diseases, regardless
of fault.

Item 1A. RISK FACTORS

You should carefully consider the following risks  and  all  of the  other information  set forth in  this

report, including our consolidated financial statements and  the  notes thereto.

Catastrophe losses could materially and adversely affect our results of operations, our financial
position and/or liquidity, and could adversely impact our ratings,  our ability to  raise capital and  the
availability and cost of reinsurance. Our property and casualty insurance operations  expose us to
claims arising out of catastrophes. Catastrophes can  be  caused by various natural  events, including,
among others, hurricanes, tornadoes and other windstorms, earthquakes, hail, wildfires,  severe winter
weather, floods, tsunamis and volcanic  eruptions. Catastrophes  can  also be man-made, such as a
terrorist attack (including those involving nuclear, biological,  chemical or  radiological events),
explosions, infrastructure failures or a  consequence  of political  instability.  The  geographic distribution
of our business subjects us to catastrophe  exposures  in the United  States, which include, but  are not
limited to: hurricanes from Maine through  Texas; tornadoes throughout the  Central,  Mid-Atlantic and
Southeastern regions of the United States; earthquakes  in California, the New  Madrid  region and the
Pacific Northwest region of North America; wildfires,  particularly  in the  Southwest; and  terrorism  in
major cities in the United States. In addition,  our international operations  subject us to catastrophe
exposures in the United Kingdom, Canada and  the Republic of Ireland, as well  as to a variety of
world-wide catastrophe exposures through our Lloyd’s operations, and in Brazil through  our  joint
venture investment.

The incidence and severity of catastrophes  are inherently unpredictable, and  it is possible that both

the  frequency  and  severity  of  natural  and  man-made  catastrophic  events  could  increase.  Moreover,  we
could experience more than one highly  severe catastrophic event in  any given period.

Some scientists believe that in recent  years changing climate conditions have added to the
unpredictability and frequency of natural  disasters and  created additional uncertainty  as to future
trends  and exposures. For example, in  recent  years  hurricane activity has impacted areas  further inland
than previously experienced, thus expanding  our  overall  hurricane exposure. Additionally,  both  the
frequency and severity of tornadoes and hail storms have increased  in recent years.

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All of the catastrophe modeling tools that we use, or that we rely on  from outside parties, to help
manage certain of our catastrophe exposures  are based on assumptions and judgments that are  subject
to error and mis-estimation and may  produce estimates that are materially  different than actual results.
In addition, compared to models for  hurricanes, models  for earthquakes  are less reliable  due  to  there
being a more limited number of significant historical events to analyze, while models  for tornadoes and
hail storms are newer and may be even less reliable  due to the highly random geographic nature and
size of these events. As a result, models for  earthquakes and especially  for  tornado and  hail storms may
have even greater difficulty predicting  risks and estimating losses. Further,  changes in climate
conditions could cause our underlying  modeling data to be less predictive,  thus limiting our ability to
effectively evaluate and manage catastrophe risk. See ‘‘We may be adversely affected  if  our pricing and
capital models provide materially different indications than actual  results’’ below as  well as ‘‘Item  7—
Management’s Discussion and Analysis of Financial Condition and Results  of  Operations—Catastrophe
Modeling’’ and ‘‘—Changing Climate Conditions.’’

The extent of losses from a catastrophe is  a function of both the  total amount of insured  exposure

in the area affected by the event and the severity of the event. Increases in  the value  and geographic
concentration of insured property and the effects of inflation could increase the severity  of  claims from
catastrophic events in the future. For example, the specific geographic location impacted by tornadoes
is inherently random and unpredictable  and the  specific location impacted by a tornado  may or may
not be highly populated and may or may not  have a high concentration of our insured  exposures.

States have from time to time passed legislation,  and regulators have  taken  action, that have the

effect of limiting the ability of insurers to manage catastrophe risk, such  as legislation prohibiting
insurers from reducing exposures or  withdrawing from catastrophe-prone  areas or mandating that
insurers participate in residual markets.  Participation in  residual  market  mechanisms has resulted in,
and may continue  to result in, significant losses or assessments  to  insurers, including  us, and,  in certain
states, those losses or assessments may not be commensurate with  our direct catastrophe exposure in
those states. If our competitors leave  those states having residual market mechanisms, remaining
insurers, including us, may be subject  to  significant increases in  losses  or assessments following a
catastrophe. In addition, following catastrophes, there are sometimes legislative and administrative
initiatives and court decisions that seek to expand insurance coverage for catastrophe  claims  beyond the
original intent of the policies or seek to prevent the  application of deductibles. Also, our  ability to
adjust terms, including deductible levels, or to increase pricing  to  the extent necessary to offset  rising
costs of catastrophes, particularly in the  Personal Insurance segment, requires  approval of regulatory
authorities of certain states. Our ability or our  willingness  to  manage  our catastrophe exposure  by
raising prices, modifying underwriting  terms or  reducing  exposure to certain geographies  may be limited
due to considerations of public policy, the  evolving  political  environment, changes  in the general
economic climate and/or social responsibilities. We also may choose to write business in  catastrophe-
prone areas that we might not otherwise  write for strategic  purposes, such as  improving our access to
other underwriting activities.

There are also factors that impact the estimation  of ultimate  costs  for catastrophes.  For example,

the estimation of claims and claim adjustment expense  reserves related to  hurricanes can be affected by
the inability to access portions of the impacted areas,  the complexity of factors  contributing  to  the
losses, the legal and regulatory uncertainties and the nature of the information available  to  establish
the claims and claim adjustment expense reserves. Complex factors include,  but are  not  limited  to:
determining whether damage was caused by  flooding  versus wind; evaluating general liability and
pollution exposures; estimating additional living expenses; the impact of demand surge; infrastructure
disruption; fraud; the effect of mold  damage; business interruption costs; and  reinsurance collectability.
In recent  years, increased late reporting  of weather-related losses by claimants,  particularly losses from
hail damage, has led to higher costs  than we previously expected. The timing of  a catastrophe’s
occurrence, such as at or near the end of  a reporting  period,  can  also affect  the information  available
to us in estimating claims and claim adjustment  expense reserves  for  that  reporting period.  The

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estimates related to catastrophes are adjusted as actual claims emerge and additional information
becomes available.

Exposure to catastrophe losses or actual  losses resulting from a  catastrophe could adversely affect

our  financial strength and claims-paying ratings and could impair our ability to raise capital on
acceptable terms or at all. Also, as a  result of our exposure  to  catastrophe  losses or actual  losses
following a catastrophe, rating agencies may further increase  capital requirements, which may  require
us to raise capital to maintain our ratings or adversely affect our ratings.  A ratings  downgrade could
hurt our ability to compete effectively  or  attract new  business. In addition, catastrophic events could
cause  us to exhaust our available reinsurance limits and  could adversely  impact  the cost and availability
of reinsurance. Such events can also impact  the credit  of  our reinsurers. For  a discussion of our
catastrophe reinsurance coverage, see ‘‘Item 1—Business—Reinsurance—Catastrophe Reinsurance.’’
Catastrophic events could also adversely impact  the credit  of the  issuers of securities,  such as  states or
municipalities, in whom we have invested.

In addition, coverage in our reinsurance program for terrorism is  limited. Although the  Terrorism

Risk Insurance Program (the Program) provides benefits  in  the event of  certain  acts  of terrorism, those
benefits are subject to a deductible and other limitations. Under  this  Program, once our losses  exceed
20% of our commercial property and  casualty  insurance premium for the  preceding calendar year, the
federal government will reimburse us  for 85%  of our losses  attributable  to certain acts of terrorism
which  exceed this deductible up to a total  industry program  cap of  $100 billion.  Our estimated
deductible under the program is $2.26 billion for  2013. In addition, because the interpretation of  this
law is untested, there is substantial uncertainty as to how it  will be applied to specific circumstances. It
is also possible that future legislative  action could change the Program. The Program  is due to expire at
the end of 2014, unless extended.

Because of the risks set forth above, catastrophes such as those caused by various natural events or

man-made events such as a terrorist attack, including ‘‘unconventional’’ acts of terrorism involving
nuclear, biological, chemical or radiological events, could materially  and adversely affect  our results of
operations, financial position and/or  liquidity.  Further, while we  seek to manage our exposure  to
man-made catastrophic events involving  conventional  means, there can be no assurance that we  would
have sufficient resources to respond to  claims arising out of one  or more man-made catastrophic events
involving nuclear, biological, chemical  or radiological means.

During or following a period of financial market disruption or economic  downturn, our business
could be materially and adversely affected. Over the past six years, worldwide financial markets  have
experienced significant disruptions and,  during  a portion of this period,  the United  States  and many
other economies experienced a prolonged  economic downturn,  resulting in heightened credit risk,
reduced valuation of investments and decreased economic  activity.  While  economic conditions  have
generally stabilized, there is continued uncertainty regarding the  duration and strength of  any economic
recovery. Even if growth continues, it may be at  a slow rate for  an extended period of time, and other
economic conditions, such as the residential and commercial real estate environment  and employment
rates, may continue to be weak.

In addition, while inflation has recently been limited and  that  trend may continue, it is  possible

that steps taken by the federal government to stabilize  financial  markets and improve economic
conditions could lead to an inflationary  environment. Furthermore, financial markets may again
experience significant and prolonged disruption.

Economic uncertainty has been exacerbated in recent years  by the increased potential for  default
by one or more European sovereign  debt  issuers, the potential  partial or complete dissolution  of  the
Eurozone and its common currency and  the  negative impact of such events on global financial
institutions and capital markets generally.  Actions  or inactions of European  governments may  impact
these actual or perceived risks. In the  U.S. during 2011, one rating agency downgraded the U.S.’s

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long-term debt credit rating from AAA.  Future actions or  inactions of the  United States government,
including a failure to increase the government debt limit or  a shutdown of the  federal government,
could increase the actual or perceived risk  that  the U.S.  may not ultimately pay  its obligations  when
due and may disrupt financial markets, including capital markets. Further, general  uncertainty regarding
the U.S.  Federal budget and taxes has  added to the uncertainty regarding economic conditions
generally.

If economic conditions remain weak  or deteriorate,  or if financial markets experience significant

disruption, it could materially adversely affect  our  results of operations, financial  position and/or
liquidity. Several of the risk factors discussed below identify risks that result  from, or are exacerbated
by, an economic slowdown or financial disruption.  These include risks discussed below related  to  our
investment portfolio, reinsurance arrangements, other credit  exposures, our estimates  of  claims and
claim adjustment expense reserves, emerging claim and coverage  issues,  the  competitive environment,
regulatory developments and the impact  of rating agency  actions.  You should also refer  to  ‘‘Item 7—
Management’s Discussion and Analysis of Financial Condition and Results  of  Operation’’, particularly
the ‘‘Outlook’’ section.

Many of these risks could materialize, and our financial results could be negatively  impacted,  even

after the end of an economic downturn  or financial  disruption. During or  following an  economic
downturn, lower levels of economic activity could reduce (and historically have reduced) exposure
changes at renewal. They also could adversely impact (and historically have  adversely impacted)  audit
premium adjustments, policy endorsements and mid-term cancellations after policies are written,
particularly in our business units within  Business  Insurance, which could  adversely impact our written
premiums. In addition, because earned premiums lag written premiums,  our results can  be  adversely
affected after general economic conditions have improved. An inflationary  environment (which may
follow government efforts to stabilize the economy)  may also, as we discuss below, adversely impact our
loss costs and could adversely impact the  valuation  of our investment  portfolio.  Finally, as  a result of
financial market disruption, we may, as  discussed below,  face increased  regulation.

If actual claims exceed our claims and claim adjustment expense reserves, or if  changes in  the
estimated level of claims and claim adjustment expense reserves  are necessary, our financial results
could be materially and adversely affected. Claims and claim adjustment expense  reserves do  not
represent an exact calculation of liability, but instead  represent management  estimates of  what the
ultimate settlement and administration  of claims will cost, generally utilizing actuarial  expertise and
projection techniques, at a given accounting date.

The process of estimating claims and claim adjustment expense reserves involves  a high degree of
judgment and is subject to a number  of  variables. These  variables can be affected by both internal and
external  events, such as: changes in claims handling procedures;  adverse changes in loss cost  trends,
including inflationary pressures on medical costs  and auto and home  repair costs; economic conditions
including general inflation; legal trends and legislative changes;  and  varying judgments and viewpoints
of the individuals involved in the estimation  process, among others. The impact of many  of these  items
on ultimate costs for claims and claim  adjustment  expenses is difficult to estimate. Claims and claim
adjustment expense reserve estimation difficulties  also differ significantly  by product line due to
differences in claim complexity, the volume of claims,  the potential severity of individual claims,  the
determination of occurrence date for  a claim and reporting lags  (the  time between the  occurrence of
the policyholder event and when it is  actually reported to the insurer).

As discussed above, it is possible that  steps taken by the  federal government  to  stabilize  the
economy  could lead to an inflationary environment, which could in turn lead to an increase in our loss
costs. The impact of inflation on loss costs could be more  pronounced for those lines of business that
are considered ‘‘long tail’’, such as general liability, as  they require a  relatively long period  of time  to
finalize and settle claims for a given  accident year. In addition, inflationary  pressures in medical costs

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may be increased by the healthcare reform legislation.  The estimation  of  claims and  claim  adjustment
expense reserves may also be more difficult during times  of  adverse or uncertain  economic conditions
due to unexpected changes in behavior  of  claimants and policyholders, including an increase in
fraudulent reporting of exposures and/or losses, reduced maintenance of insured properties or  increased
frequency of small claims or delays in the  reporting of claims.

We  continually refine our claims and claim adjustment expense reserve estimates in a regular,
ongoing process as historical loss experience develops, additional claims are  reported and  settled and
the legal, regulatory and economic environment evolves.  Business  judgment is  applied throughout the
process, including the application of various individual experiences and expertise to multiple  sets of
data and analyses. Different experts may  choose different assumptions  when faced with  material
uncertainty, based on their individual  backgrounds, professional  experiences  and areas  of focus. Hence,
such experts may at times produce estimates  materially different  from each other. This risk may be
exacerbated in the context of an acquisition.  Experts providing input to the  various estimates  and
underlying assumptions include actuaries, underwriters,  claim personnel and  lawyers, as  well as other
members of management. Therefore, management may have to consider varying  individual viewpoints
as part of its estimation of claims and claim adjustment expense reserves.

We  attempt to consider all significant facts and circumstances known at the time claims and claim

adjustment expense reserves are established  or reviewed. Due to the inherent uncertainty underlying
claims and claim adjustment expense  reserve estimates, the final resolution  of the estimated liability for
claims and claim adjustment expenses will  likely be higher or  lower than the related claims and  claim
adjustment expense reserves at the reporting date.  Therefore, actual paid losses  in the future may yield
a materially different amount than is  currently reserved.

Because of the uncertainties set forth above, additional  liabilities  resulting from one insured event,

or an accumulation of insured events, may  exceed the  current  related  reserves. In addition, our
estimate of claims and claim adjustment expenses may change. These additional  liabilities or increases
in estimates, or a range of either, cannot now  be  reasonably estimated and could materially  and
adversely affect our results of operations  and/or our financial  position.

For a  discussion of claims and claim adjustment expense reserves by product  line, including
examples  of common factors that can  affect required reserves, see ‘‘Item  7—Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates—Claims
and Claim Adjustment Expense Reserves.’’

Our investment portfolio may suffer reduced returns or material  realized or unrealized losses.
Investment returns are an important part  of our overall profitability.  Fixed maturity  and short-term
investments comprised approximately 93% of the  carrying  value  of our  investment portfolio as of
December 31, 2012. Changes in interest rates caused  by  inflation or other factors (inclusive of  credit
spreads) affect the carrying value of our  fixed  maturity investments  and returns on  our fixed maturity
and short-term investments. A decline in  interest  rates  reduces  the returns available on  short-term
investments and new fixed maturity investments  (including those purchased  to  re-invest maturities  from
the existing portfolio), thereby negatively impacting our net investment income, while rising interest
rates reduce the market value of existing fixed maturity  investments.  Interest rates  in recent periods
have been at  or near historically low  levels,  and  it is  possible  that rates may remain at  low levels  for a
prolonged period. The value of our fixed maturity and short-term  investments is subject to the risk that
certain investments may default or become  impaired due to a deterioration in the financial condition of
one or more issuers of the securities  held in our portfolio, or  due to a deterioration in  the financial
condition of an insurer that guarantees an issuer’s  payments of such investments.  Such  defaults and
impairments could reduce our net investment income and result in  realized  investment losses. During
an economic downturn, fixed maturity and  short-term investments could be subject to a  higher risk of
default.

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Our fixed maturity investment portfolio  is invested,  in substantial part, in  obligations of states,

municipalities and political subdivisions  (collectively referred to as  the municipal bond portfolio).
Notwithstanding the relatively low historical rates of default on many of these obligations and
notwithstanding that we typically seek  to  invest in  high-credit-quality securities (including those with
structural protections such as being secured by dedicated or pledged sources of revenue), our municipal
bond portfolio could be subject to default or  impairment. In particular:

(cid:127) The prolonged economic downturn that  began in 2008, and the limited economic recovery  that
has followed, has resulted in many states  and  local governments operating under  deficits or
projected deficits. The severity and duration of these deficits could have  an adverse impact on
the collectability and valuation of our municipal bond portfolio. These deficits may be
exacerbated by the impact of unfunded pension  plan obligations or by  declining municipal tax
bases and revenues in times of financial stress.

(cid:127) Some issuers may be unwilling to increase tax  rates, or to reduce spending, to fund interest  or
principal payments on their municipal  bonds, or may be unable  to  access the municipal bond
market to fund such payments. The risk of widespread defaults  may increase if some issuers
voluntarily choose to default, instead of implementing  difficult fiscal measures,  and the  actual or
perceived consequences (such as reduced access to capital markets)  are  less severe than
expected.

(cid:127) The risk of widespread defaults may also increase if there are changes  in legislation  that  permit
states, municipalities and political subdivisions  to  file for bankruptcy  protection where they  were
not permitted before. In addition, the collectability and valuation of municipal  bonds may be
adversely affected if there are judicial  interpretations in  a bankruptcy or other proceeding  that
lessen the value of structural protections.  For example, debtors may challenge the effectiveness
of structural protections thought to be provided by municipal securities backed by a  dedicated
source of revenue. The collectability and valuation  may  also be adversely  affected  if there are
judicial interpretations in a bankruptcy or other  proceeding  that question the payment  priority of
municipal bonds.

Our portfolio has also benefited from  tax exemptions  and certain other tax laws, including, but not

limited to, those governing dividends-received deductions and tax credits (such as foreign  tax credits).
Changes in these laws could adversely  impact the value of  our investment portfolio. See ‘‘Changes in
U.S. tax laws or in the tax laws of other  jurisdictions in  which we operate  could  adversely impact us’’
below.

Our investment portfolio includes: residential  mortgage-backed securities;  collateralized mortgage
obligations; pass-through securities and asset-backed securities collateralized  by  sub-prime mortgages;
commercial mortgage-backed securities;  and wholly-owned  real estate, real estate partnerships and
mortgage loans, all of which could be adversely impacted by further declines  in real estate valuations
and/or financial market disruption. In addition, the potential for protracted disruption and/or
suspension of foreclosure practices could also impact the returns on certain of these portfolios.

We  also invest a portion of our assets in  equity securities,  private  equity limited partnerships,
hedge funds, and real estate partnerships. From time  to  time, we may also invest in other  types of non-
fixed maturity investments, including  commodities. All of these asset classes are subject to greater
volatility in their investment returns  than  fixed maturity investments. General economic  conditions,
changes in applicable tax laws and many other factors beyond  our control can  adversely affect the  value
of our non-fixed maturity investments and the realization  of net  investment  income,  and/or result  in
realized investment losses. As a result of these factors, we may realize reduced  returns on these
investments, incur  losses on sales of  these investments  and be required to write down the  value of these
investments, which could reduce our  net investment income and result in realized investment losses.

52

Our investment portfolio is also subject  to  increased valuation uncertainties when investment
markets are illiquid. The valuation of  investments is more subjective when  markets  are illiquid, thereby
increasing the risk that the estimated fair  value (i.e., the carrying amount)  of  the portion of the
investment portfolio that is carried at  fair  value as  reflected in  our financial  statements  is not reflective
of prices at which actual transactions could occur.

Given that economic and market conditions are highly uncertain, we may, depending on

circumstances in the future, make changes to the mix of  investments  in our  investment portfolio. These
changes may impact the duration, volatility  and  risk of  our investment portfolio.

Because of the risks set forth above, the value of  our investment portfolio could decrease,  we
could experience reduced net investment  income  and we could  experience realized and/or unrealized
investment losses, which could materially and adversely  affect our  results of  operations, financial
position and/or liquidity.

Our business could be harmed because of  our potential  exposure to  asbestos and environmental

claims and related litigation.

With regard to asbestos claims, we have received and continue to receive  a significant  number of

asbestos claims from policyholders (including others  seeking coverage under a policy). Factors
underlying these claim filings include intensive  advertising  by lawyers  seeking asbestos  claimants and
the continued focus by plaintiffs on previously peripheral defendants. The focus on  these  defendants is
primarily the result of the number of  traditional  asbestos defendants who have  sought bankruptcy
protection in previous years. The bankruptcy of many  traditional defendants  has prompted plaintiffs to
aggressively seek out potential new defendants and has caused  increased settlement demands  against
those policyholders who are not in bankruptcy but who remain in the tort system.  Currently,  in many
jurisdictions, those who allege very serious  injury  and  who can present credible medical evidence of
their injuries are receiving priority trial settings in  the courts, while  those who  have not shown any
credible disease manifestation are having  their hearing  dates  delayed  or  placed  on an  inactive  docket.
This trend of prioritizing claims involving credible  evidence of injuries,  along with the focus on
previously peripheral defendants, contributes to the  claims  and claim adjustment expense payments
experienced by us.

We  also continue to be involved in coverage litigation concerning a number of policyholders, some

of whom have filed for bankruptcy, who in some instances have asserted that all or  a portion of their
asbestos-related claims are not subject to aggregate limits on coverage. In  these instances, policyholders
also may assert that each individual bodily injury claim should be treated as  a separate  occurrence
under the policy. It is difficult to predict  whether these policyholders will be successful on both  issues.
To the extent both issues are resolved  in  a  policyholder’s favor and our  other defenses are not
successful, our coverage obligations under  the policies at  issue would be materially increased and
bounded only by the applicable per-occurrence limits and the number  of asbestos  bodily injury claims
against the policyholders. Accordingly,  although we have seen a  moderation  in the overall risk
associated with these lawsuits, it remains  difficult to predict the ultimate cost of these claims.

Further, in addition to asbestos claims against policyholders, proceedings have been  launched
directly against insurers, including us,  by individuals challenging  insurers’  conduct with respect to the
handling of past asbestos claims and  by  individuals seeking damages arising  from alleged asbestos-
related bodily injuries. It is possible that the filing of  other direct actions  against insurers, including  us,
could be made in the future. It is not  possible  to  predict the  outcome  of these proceedings,  including
whether the plaintiffs will be able to  sustain these  actions against  insurers based on  novel legal  theories
of liability.

With  regard  to  environmental  claims,  we  have  received  and  continue  to  receive  claims  from

policyholders who allege that they are  liable for injury or damage  arising  out of their alleged
disposition of toxic substances. Mostly, these claims are due to various legislative  as well as regulatory

53

efforts aimed at environmental remediation. For  instance, the Comprehensive Environmental  Response,
Compensation and Liability Act (CERCLA), enacted  in 1980 and later modified,  enables private  parties
as well as federal and state governments  to take action with  respect  to  releases and threatened releases
of hazardous substances. This federal statute permits the recovery of response costs from some liable
parties and may require liable parties to undertake their  own  remedial action. Liability under CERCLA
may be joint and several with other responsible parties.

The Company has been, and continues to be, involved in litigation involving insurance coverage

issues pertaining to environmental claims. The Company  believes that some court decisions have
interpreted the insurance coverage to  be  broader than the original intent of  the insurers and
policyholders. These decisions continue to be inconsistent  and vary from jurisdiction to jurisdiction.

Uncertainties surrounding the final resolution of these asbestos  and environmental  claims continue,

and it is difficult to estimate our ultimate liability for such claims and related  litigation. As a  result,
these reserves are subject to revision as  new information becomes available  and as  claims develop. The
continuing uncertainties include, without  limitation:

(cid:127) the risks and lack of predictability  inherent in complex  litigation;

(cid:127) any impact from the bankruptcy protection sought by various  asbestos producers and other

asbestos defendants;

(cid:127) a further increase in the cost to resolve,  and/or the  number of, asbestos and  environmental

claims beyond that which is anticipated;

(cid:127) the role of any umbrella or excess policies  we have issued;

(cid:127) the resolution or adjudication of disputes pertaining to the  amount  of  available coverage for
asbestos and environmental claims in  a manner inconsistent with  our previous assessment  of
these claims;

(cid:127) the number and outcome of direct  actions against us;

(cid:127) future  developments pertaining to our  ability to recover  reinsurance for asbestos  and

environmental claims;

(cid:127) the unavailability of other insurance sources potentially available to policyholders, whether

through exhaustion of policy limits or through the insolvency of other  participating insurers;  and

(cid:127) uncertainties arising from the insolvency or  bankruptcy  of  policyholders and other defendants.

It  is also not possible to predict changes  in the legal, regulatory and  legislative environment and

their impact on the future development  of asbestos and  environmental  claims. This environment could
be affected by changes in applicable legislation and future court and  regulatory  decisions and
interpretations, including the outcome  of  legal  challenges to  legislative and/or  judicial reforms
establishing medical criteria for the pursuit  of asbestos claims. It is  also  difficult to predict  the ultimate
outcome of complex coverage disputes  until settlement  negotiations  near completion and  significant
legal questions are resolved or, failing  settlement, until the dispute  is adjudicated.  This is particularly
the case with policyholders in bankruptcy where negotiations often involve a large  number of  claimants
and other parties and require court approval  to  be  effective.

While the ongoing evaluation of asbestos  and  environmental claims  and associated liabilities
considers the inconsistencies of court decisions as  to  coverage, plaintiffs’ expanded  theories of liability
and the risks inherent in complex litigation  and  other  uncertainties, it  is possible that the outcome  of
the continued uncertainties regarding these claims  could result in liability in future periods that differs
from current reserves by an amount that could materially  and adversely  affect our results of  operations.
See the ‘‘Asbestos Claims and Litigation’’  and ‘‘Environmental Claims and  Litigation’’ sections of
‘‘Item 7—Management’s Discussion and  Analysis of Financial Condition and Results  of Operations.’’
Also see ‘‘Item 3—Legal Proceedings.’’

54

We are exposed to, and may face adverse  developments involving, mass tort claims such as those

In addition to asbestos and

relating to exposure to potentially harmful products or substances.
environmental claims, we face exposure  to  other types of mass tort  claims, including  claims  related to
exposure to potentially harmful products or substances, including lead  paint,  silica and welding rod
fumes. Establishing claims and claim adjustment expense reserves for mass tort claims is subject to
uncertainties because of many factors,  including expanded theories of liability,  disputes  concerning
medical causation with respect to certain  diseases, geographical concentration  of  the lawsuits asserting
the claims and the potential for a large  rise in the total number of claims without underlying
epidemiological developments suggesting an increase in disease rates.  Moreover, evolving judicial
interpretations regarding the application  of  various tort theories  and  defenses, including application of
various theories of joint and several liabilities, as well as the application of insurance  coverage  to  these
claims, make it difficult to estimate our  ultimate liability for such claims.

Because of the uncertainties set forth above, additional  liabilities  may  arise for amounts in excess
of the current related reserves. In addition,  our  estimate of claims and claim  adjustment expenses  may
change, and such change could be material. These additional liabilities  or increases  in estimates, or a
range of either, cannot now be reasonably estimated and could  materially and adversely affect  our
results of operations.

The effects of emerging claim and coverage issues on our business are uncertain. As industry

practices and legal, judicial, social and other environmental conditions change, unexpected and
unintended issues related to claim and coverage may emerge. These issues may adversely  affect our
business by either extending coverage beyond our underwriting intent  or by increasing the number or
size of claims. Examples of emerging  claims  and coverage  issues include, but  are not limited to:

(cid:127) judicial expansion of policy coverage  and the  impact of new theories of liability;

(cid:127) plaintiffs targeting property and casualty  insurers,  including us,  in purported class action

litigation relating to claims-handling and other practices;

(cid:127) claims relating to construction defects, which  often  present complex  coverage  and damage

valuation questions;

(cid:127) claims under directors’ & officers’ insurance policies relating to losses from  involvement in
financial market activities, such as mortgage or  financial product  origination,  distribution,
structuring or servicing and foreclosure  procedures; failed financial institutions; fraud, including
those related to investment management businesses; possible  accounting  irregularities; and
corporate governance issues;

(cid:127) the assertion of ‘‘public nuisance’’  or similar theories of liability, pursuant to which plaintiffs

seek to recover monies spent to administer  public health  care programs, abate hazards to public
health and safety and/or recover damages purportedly attributable to a  ‘‘public nuisance’’;

(cid:127) claims relating to molestation by an  employee of an  insured;

(cid:127) medical developments that link health  issues to particular causes (for  example, cumulative

trauma),  resulting in liability or workers’ compensation claims;

(cid:127) claims relating to unanticipated consequences of current or new technologies; and

(cid:127) claims relating to potentially changing climate conditions, including higher frequency and  severity

of weather-related events.

In some instances, these emerging issues  may not become apparent  for  some time after we have

issued the affected insurance policies.  As a result, the full extent of liability  under our insurance
policies may not be known for many years  after the policies are issued.

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In addition, the potential passage of  new  legislation designed to expand the right to sue, to remove
limitations on recovery, to deem by statute the existence of a covered occurrence, to extend the statutes
of limitations or otherwise to repeal or  weaken  tort reforms  could have an adverse impact on our
business.

The effects of these and other unforeseen emerging claim and coverage issues  are extremely hard

to predict and could harm our business and materially  and  adversely affect our results of  operations.

The intense competition that we face  could harm our ability to  maintain or increase our  business
volumes and our profitability. The property and casualty insurance industry is highly competitive, and
we believe that it will remain highly competitive for  the foreseeable future. We  compete with  both
domestic and foreign insurers which  may  offer products  at prices and on  terms that are  not  consistent
with our economic standards in an effort  to  maintain or increase their business. The competitive
environment in which we operate could  also be impacted by  current general economic conditions,
which  could reduce the volume of business available to us as well  as to our competitors. In addition,
the competitive environment could be impacted by changes in  customer preferences, including customer
demand for direct distribution channels.  See ‘‘Item  7—Management’s Discussion  and Analysis of
Financial Condition and Results of Operation—Outlook.’’

In Personal Insurance, the use of comparative rating  technologies has impacted, and  may continue

to impact, our business as well as the industry as a whole. A substantial amount of the Company’s
Personal Insurance new business is written after an agent compares quotes using comparative rating
technologies, a cost-efficient means of  obtaining quotes from multiple companies.  Because the use of
this  technology, whether by agents or directly by customers,  facilitates the process of generating
multiple quotes, the technology has increased price comparison  on new business and,  increasingly, on
renewal business. It also has resulted  in  an increase in the level of quote activity and  a lower
percentage of quotes that result in new business  from customers, and these trends may  continue or
accelerate. If we are not able to operate with  a competitive  cost structure  or accurately estimate and
price for claims and claim adjustment expenses, our underwriting margins  could  be  adversely affected
over time. Additionally, there is potential  for similar technology to be used to access comparative  rates
for small commercial business. Agents, brokers  or other third parties may also  create alternate
distribution channels for personal or  commercial business, such as insurance exchanges, that may
adversely impact product differentiation  and pricing.

Other technological changes may present competitive risks.  For example, innovations, such as

telematics and other usage-based methods  of determining premiums, can impact product  design and
pricing and may become an increasingly  important competitive  factor. Other potential  technological
changes, such as driverless cars, could disrupt the  demand for our products from current  customers,
and we may not be able to respond effectively. In addition, our competitive position could be impacted
by our ability to deploy, in a cost effective manner, technology that collects and analyzes a wide variety
of data points (so-called ‘‘big data’’ analysis) to make underwriting or other decisions.  See also ‘‘Our
business success and profitability depend, in part, on effective information technology  systems and on
continuing to develop and implement improvements in technology’’ below.

In recent years, we have undertaken  various  actions to improve our  underwriting margins on many

of our insurance products, and competitive  dynamics may impact the  success of these efforts. These
efforts include seeking improved rates, as well as improved terms and conditions, and also  include
other initiatives, such as reducing operating expenses and acquisition costs.  These efforts  may not be
successful and/or may result in lower  retention and new business  levels and therefore  lower business
volumes. In addition, if our underwriting  is  not  effective, efforts to increase rates could also  lead to
‘‘adverse selection’’, whereby accounts retained have  higher losses, and are less profitable, than
accounts lost. For more detail, see ‘‘Item 7—Management’s Discussion and Analysis of Financial
Condition and Results of Operation—Outlook.

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In particular, in our Agency Automobile line of business, we have undertaken various actions to

improve our underwriting margins, which have been negatively  impacted by various factors.  These
factors include (i) changes in customer preferences and demand for direct distribution channels,
(ii) utilization of comparative rating technologies by agents, (iii) other technological changes, as
described above, and (iv) loss cost increases  that  have exceeded earned  rate  increases. If  our strategies
to increase profitability through the actions described above  are  not effective,  we may  need to explore
other actions or initiatives to improve  our competitive position and  profitability in  this  line of business.

Overall,  our  competitive  position  in  our  various  businesses  is  based  on  many  factors,  including  but

not limited to our:

(cid:127) ability to profitably price our business, retain existing customers and  obtain new business;

(cid:127) premiums charged, contract terms  and conditions, products  and services offered (including the

ability to design customized programs);

(cid:127) agent,  broker and client relationships;

(cid:127) ability to keep pace relative to our competitors with changes in technology  and information

systems;

(cid:127) speed of claims payment;

(cid:127) ability to provide our products and services in a  cost effective manner;

(cid:127) perceived overall financial strength and  corresponding ratings  assigned by independent rating

agencies;

(cid:127) reputation, experience and qualifications  of employees;

(cid:127) geographic scope of business; and

(cid:127) local presence.

We  may have difficulty in continuing  to compete  successfully on any of these bases in the future.  If

competition limits our ability to retain existing business or write new business at adequate  rates,  our
results of operations could be materially  and adversely affected. See ‘‘Competition’’ sections of the
discussion on business segments in ‘‘Item 1—Business.’’

We may not be able to collect all amounts due to  us from  reinsurers and reinsurance coverage
may not be available to us in the future  at commercially reasonable rates  or  at all. Although the
reinsurer is liable to us to the extent of the  ceded reinsurance,  we remain liable as the direct insurer on
all risks reinsured. As a result, ceded reinsurance arrangements  do not eliminate our obligation to pay
claims. Accordingly, we are subject to credit  risk  with respect  to  our ability to recover amounts due
from reinsurers.

In the past, certain reinsurers have ceased writing business and entered  into  runoff. Some  of  our

reinsurance claims may be disputed by the  reinsurers, and  we may ultimately receive partial or no
payment. This is a particular risk in the case of claims that relate to insurance policies written many
years ago, including those relating to  asbestos  and environmental  claims. In addition, in  a number  of
jurisdictions, particularly the European  Union  and the  United Kingdom, a  reinsurer  is permitted to
transfer a reinsurance arrangement to another reinsurer, which may  be  less creditworthy,  without a
counterparty’s consent, provided that the transfer has been approved  by the applicable regulatory
and/or court authority.

Included in reinsurance recoverables  are certain amounts  related  to  structured settlements.
Structured settlements comprise annuities purchased from various life insurance companies to settle
certain personal physical injury claims, of which workers’ compensation  claims  comprise a significant

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portion. In cases where we did not receive a  release from the claimant, the  structured settlement is
included in reinsurance recoverables  as we retain the contingent liability to the claimant.  In  the event
that the life insurance company fails  to  make the  required annuity payments, we would be required to
make such payments if and to the extent  not  paid  by  state guaranty associations.

Many reinsurance companies and life  insurance companies were negatively impacted by the

financial markets disruption and the  economic downturn over  the past several years. A number  of these
companies, including certain of those with  which  we conduct business  or to which we otherwise  have
credit exposure, were downgraded by  various  rating agencies during this time period. For a discussion
of our top reinsurance groups by reinsurance recoverable and the top five groups  by  amount  of
structured settlements provided, see ‘‘Item 7—Management’s  Discussion and Analysis of Financial
Condition and Results of Operations—Reinsurance Recoverables.’’

The availability and cost of reinsurance are subject to prevailing  market  conditions, both in terms

of price and available capacity. The availability of reinsurance capacity can  be  impacted  by  general
economic conditions and conditions in  the reinsurance  market, such  as the occurrence of significant
reinsured events. The availability and  cost of reinsurance could affect our business volume and
profitability.

Because of the risks set forth above, we may not be able to  collect  all amounts  due  to  us  from

reinsurers, and reinsurance coverage may  not be available to us in the  future at commercially
reasonable rates or at all, and/or life  insurance  companies may fail  to  make required annuity payments,
and thus our results of operations could  be materially and adversely affected.

We are exposed to credit risk in certain  of our business operations.

In addition to exposure to
credit risk related to our investment portfolio  and  reinsurance recoverables (discussed above), we are
exposed  to credit risk in several other areas of our business  operations, including credit risk relating to
policyholders, independent agents and brokers.

We  are exposed to credit risk in our  surety  insurance operations,  where we guarantee to a third
party that our customer will satisfy certain performance obligations (e.g., a  construction contract)  or
certain financial obligations. If a customer of ours defaults, we may suffer losses and not be reimbursed
by that customer. In addition, it is customary  practice in the surety  business for  multiple insurers to
participate as co-sureties on large surety  bonds. Under  these arrangements,  the co-surety obligations
are typically joint and several, in which case we are also exposed to credit risk  with respect to our
co-sureties.

In addition, a portion of our business is written with large deductible  insurance policies. Under

workers’ compensation insurance contracts  with deductible features, we are obligated to pay the
claimant the full amount of the claim. We are subsequently reimbursed by the  contractholder for the
deductible amount, and, as a result, we are exposed  to  credit risk  to  the policyholder. Moreover,
certain policyholders purchase retrospectively rated workers’ compensation policies (i.e., policies in
which  premiums are adjusted after the policy period  based on the actual loss  experience  of the
policyholder during the policy period). Retrospectively rated policies  expose us to additional credit  risk
to the extent that the adjusted premium is greater than  the original premium.

Our efforts to mitigate the credit risk that we have to our insureds  may not be successful. To

reduce such credit risk, we require certain insureds  to  post  collateral for some or  all  of these
obligations, often in the form of pledged securities such as money  market funds  or letters  of  credit
provided by banks. In cases where we  receive pledged securities  and the insureds are unable  to  honor
their obligations, we may be exposed  to  credit  risk  on the securities pledged and/or  the risk  that  our
access to that collateral may be stayed  during an insured’s  bankruptcy. In cases where we receive letters
of credit from banks and the insureds  are  unable  to  honor their obligations, we  are exposed to the
credit risk of the banks that issued the letters  of credit.

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In accordance with industry practice,  when  policyholders purchase insurance policies from  us
through independent agents and brokers,  the premiums relating  to  those policies are  often  paid to the
agents and brokers for payment to us.  In most jurisdictions, the premiums will be deemed to have  been
paid to us whether or not they are actually received by us. Consequently,  we  assume a degree of credit
risk associated with amounts due from independent agents and brokers.

To a large degree, the credit risk we face is  a function  of the  economy; accordingly,  we face a
greater risk in an economic downturn. While we attempt to manage the risks discussed  above through
underwriting and investment guidelines, collateral requirements  and other oversight mechanisms, our
efforts may not be successful. For example, collateral obtained may subsequently  have little or no value.
As a result, our exposure to the above  credit risks  could materially  and  adversely affect our results of
operations.

Within the United States, our businesses  are  heavily  regulated  by the states in  which  we conduct
business,  including licensing and supervision,  and changes in regulation  may reduce our profitability
and limit our growth. These regulatory systems are generally  designed to protect the interests of
policyholders, and not necessarily the  interests  of insurers, their  shareholders and  other  investors.  For
example, to protect policyholders whose insurance  company  becomes financially insolvent, guaranty
funds have been established in all 50 states to pay the covered claims  of policyholders in the event of
an insolvency of an insurer, subject to applicable state limits. The funding of guaranty  funds is provided
through  assessments levied against remaining insurers in the marketplace. As a result,  the insolvency of
one or more insurance companies could result in additional assessments levied  against us.

These regulatory systems also address authorization for lines of business,  policyholders’ surplus
requirements, limitations on the types and amounts  of certain  investments, underwriting limitations,
transactions with affiliates, dividend limitations, changes  in control,  premium rates and  a variety  of
other  financial and non-financial components of  an insurer’s business.

In recent years, the state insurance regulatory framework  has come  under  increased scrutiny, and

some state legislatures have considered or enacted laws  that  may alter or increase state authority to
regulate insurance companies and insurance holding companies.  Further, the NAIC and state insurance
regulators continually reexamine existing  laws and regulations, specifically focusing on modifications to
holding company regulations, interpretations  of existing laws and the development of  new laws and
regulations. In a time of financial uncertainty or a prolonged  economic downturn or otherwise,
regulators may choose to adopt more  restrictive  insurance laws and regulations. For example, insurance
regulators may choose to restrict the ability of insurance subsidiaries  to  make  payments to their parent
companies or reject rate increases due to the economic  environment. The state insurance regulators
may also increase the statutory capital requirements for our insurance subsidiaries.

In addition, state tax laws that specifically impact  the  insurance  industry,  such as  premium taxes  or

other  taxes, may be enacted or changed by states  to  raise revenues.

State laws or regulations that are adopted or  amended may be more  restrictive than current laws

or regulations and may result in lower revenues and/or higher costs of  compliance and thus  could
materially and adversely affect our results  of operations and limit our growth.

Changes in federal regulation could impose  significant  burdens on  us  and  otherwise adversely
impact our results. While the U.S. federal government has not historically regulated the insurance
business, in 2010 the Dodd-Frank Wall  Street  Reform  and  Consumer Protection Act (the Dodd-Frank
Act) established a Federal Insurance Office within the U.S.  Department of the Treasury. The Federal
Insurance Office has limited regulatory  authority and is  empowered to gather data and information
regarding the insurance industry and insurers, including conducting  a study for submission to the  U.S.
Congress on how to modernize and improve insurance regulation  in the U.S. Further, the Dodd-Frank
Act gives the Federal Reserve supervisory  authority over a  number of  nonbank financial  services

59

holding companies, including insurance companies, if they are  designated  by  a two-thirds vote of a
Financial Stability Oversight Council (the Council) as ‘‘systemically important financial institutions’’
(SIFI). Based on rules and interpretive  guidance adopted by the Council, we do  not  expect that we will
be designated as a SIFI. Nonetheless,  it  is possible that the Council may change its rules or
interpretations in the future and conclude  that we  are a  SIFI.  If we were  designated  as ‘‘systemically
important,’’ the Federal Reserve’s supervisory authority could include the ability to impose heightened
financial regulation and could impact requirements regarding our capital,  liquidity and  leverage as  well
as our business and investment conduct.  As a result of the foregoing, the Dodd-Frank Act,  or other
additional federal regulation that is adopted in the future, could impose significant burdens on us,
including impacting the ways in which we  conduct our business,  increasing  compliance costs and
duplicating state regulation, and could  result in a  competitive disadvantage, particularly relative to
other insurers that may not be subject to the same  level of regulation.

Even if we are not subject to additional regulation  by  the federal government, significant  financial

sector regulatory reform, including the Dodd-Frank Act,  could have  a  significant impact on us. For
example, regulatory reform could have  an  unexpected impact on our  rights as a  creditor or on our
competitive position. In particular, the  Dodd-Frank Act authorizes assessments to pay for the resolution
of systemically important financial institutions  that have become  insolvent. We (as a financial company
with more than $50 billion in assets) could be assessed, and,  although any  such assessment is required
to be risk weighted (i.e., riskier firms  pay more), such costs could be material to us and are  not
currently estimable.

Other potential changes in U.S. federal  legislation, regulation and/or  administrative policies,

including the potential repeal of the  McCarran-Ferguson Act  (which exempts insurance  from most
federal regulation) and potential changes in federal  taxation,  could also significantly harm the  insurance
industry, including us.

A downgrade in our claims-paying and financial strength ratings  could adversely impact our

business  volumes, adversely impact our  ability to access the capital markets and increase our
borrowing costs. Claims-paying and financial strength ratings are  important to an insurer’s competitive
position. Rating agencies periodically  review  insurers’  ratings and change  their ratings criteria;
therefore, our current ratings may not be maintained in the future. A downgrade  in one or more  of our
ratings could negatively impact our business volumes  because demand for certain  of  our  products may
be reduced, particularly because many  customers may require that we  maintain  minimum ratings  to
enter into or renew business with us. Additionally, we may find it more difficult to access the capital
markets and we may incur higher borrowing  costs. If significant losses, including, but not limited to,
those resulting from one or more major  catastrophes,  or significant reserve additions or significant
investment losses were to cause our capital  position  to  deteriorate  significantly, or if one or more  rating
agencies substantially increase their capital  requirements, we  may need to  raise equity  capital in the
future (which we may not be able to do at  a reasonable cost or  at all, especially  at a time of financial
market disruption) in order to maintain  our ratings or limit the extent  of a downgrade. A continued
trend of more frequent and severe weather-related catastrophes or a  prolonged financial market
disruption or economic downturn may  lead rating agencies to substantially increase  their capital
requirements. See also ‘‘During or following  a period  of  financial  market  disruption  or economic
downturn, our business could be materially and  adversely affected.’’ For further discussion  about our
ratings, see, ‘‘Item 1—Business—Ratings.’’

The inability of our insurance subsidiaries to pay dividends to our  holding company in sufficient

amounts would harm our ability to meet  our obligations,  pay future  shareholder  dividends or make
future share repurchases. Our holding company relies on dividends  from our insurance subsidiaries to
meet our obligations for payment of interest and principal  on outstanding debt,  to  pay dividends to
shareholders, to make contributions to our qualified domestic pension plan, to pay other corporate
expenses and to make share repurchases.  The ability  of  our insurance subsidiaries  to  pay dividends to

60

our  holding company in the future will depend  on their statutory surplus, earnings and regulatory
restrictions.

We  are subject to regulation by some states as  an insurance holding company system. Our

insurance subsidiaries are subject to various regulatory  restrictions that limit the maximum amount of
dividends available to be paid to their parent without prior approval of insurance regulatory authorities.
In a time of prolonged economic downturn  or otherwise,  regulators  may  choose to further restrict the
ability of insurance subsidiaries to make payments  to  their parent companies. The ability of our
insurance subsidiaries to pay dividends  to  our  holding  company is also restricted by regulations that set
standards of solvency that must be met and maintained.

The inability of our insurance subsidiaries to pay dividends  to  our holding  company in an  amount

sufficient to meet our debt service obligations and  other cash requirements could harm our ability to
meet our obligations, to pay future shareholder dividends and to make share  repurchases.

Disruptions to our relationships with our independent agents  and  brokers could  adversely affect

us. We  market our insurance products primarily  through independent agents  and brokers. An
important part of our business is written  through less than  a  dozen  such intermediaries.  Further,  there
has been a trend of increased consolidation by agents and brokers, which  could  impact  our
relationships with and fees paid to some  agents and brokers. Loss of all or a  substantial portion of the
business provided through such agents and brokers could materially  and adversely affect  our future
business volume and results of operations.

We  may also seek to develop new product distribution channels, including our current efforts to

establish a direct-to-consumer platform  in the Personal Insurance  segment. In  addition,  agents and
brokers may create alternate distribution  channels for commercial business, such as insurance
exchanges, that may adversely impact product differentiation and pricing. Our  efforts or their efforts
with respect to alternate distribution channels could adversely impact  our business relationship with
independent agents and brokers who  currently  market  our products,  resulting in a  lower volume  of
business generated from these sources.

We  rely  on internet applications for the marketing and sale of certain  of our products,  and we may

increasingly rely on internet applications and toll-free numbers for distribution. In some  instances, our
agents and brokers are required to access separate business  platforms  to  execute the sale of our
personal insurance or commercial insurance products.  Should internet disruptions  occur, or frustration
with our business platforms or distribution initiatives  develop among our  independent  agents and
brokers, any resulting loss of business  could  materially and adversely affect our future business volume
and results of operations. See ‘‘If we  experience  difficulties with technology, data security and/or
outsourcing relationships, our ability  to conduct our business  could be negatively impacted’’ below.

Our efforts to develop new products  or expand in targeted markets may not be  successful  and

may create enhanced risks. A number of our recent and  planned business initiatives involve
developing new products or expanding  existing products in  targeted  markets. This  includes the
following efforts, from time to time,  to protect  or grow market share:

(cid:127) We may develop products that insure  risks  we have  not  previously insured  or contain new

coverage or coverage terms.

(cid:127) We may refine our underwriting processes. For  example,  in certain of our businesses in recent

years, we have substantially increased the volume of business that flows through  our  automated
underwriting and pricing systems.

(cid:127) We may seek to expand distribution channels, such  as our efforts  to  develop a direct-to-

consumer platform in Personal Insurance.

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(cid:127) We may focus on geographic markets within or outside  of the  United States where we  have had

relatively little or no market share.

We  may not be successful in introducing new products or  expanding in targeted markets and, even

if we are successful, these efforts may  create enhanced risks. Among  other risks:

(cid:127) Demand for new products or in new markets may not meet  our expectations.

(cid:127) To the extent we are able to market new products or  expand  in new markets, our risk  exposures

may change, and the data and models we use to manage such exposures may  not  be  as
sophisticated as those we use in existing  markets  or with  existing  products. This, in turn, could
lead to losses in excess of our expectations.

(cid:127) Models underlying automated underwriting and pricing decisions may not be effective.

(cid:127) Efforts to develop new products or  markets have the potential to create or increase  distribution
channel conflict, such as described above under ‘‘—Disruptions to our  relationships with our
independent agents and brokers could adversely affect us.’’

(cid:127) In  connection with the conversion  of existing policyholders to a new product, some

policyholders’ pricing may increase, while the pricing for other policyholders may  decrease, the
net impact of which could negatively  impact retention  and margins.

(cid:127) To develop new  products or markets, we  may need  to  make substantial capital and operating

expenditures, which may also negatively  impact results in  the near term.

If our efforts to develop new products or  expand in targeted markets  are not successful,  our  results

of operations could be materially and adversely  affected.

Changes in U.S. tax laws or in the tax laws of other jurisdictions in which we operate  could
adversely impact us. Tax laws may change in ways that adversely impact us. For example, federal tax
legislation could be enacted to reduce the  existing  statutory U.S. federal corporate income tax rate
from 35%, which would, accordingly, reduce any  U.S. deferred tax asset. The amount of any net
deferred tax asset is volatile and significantly impacted  by changes in unrealized investment  gains and
losses. The effect of a reduction in a  tax  rate on  net deferred tax assets  is required to be recognized, in
full, as a reduction of income from continuing operations in the  period when enacted and, along  with
other  changes in the tax rules that may  increase the Company’s actual tax  expense, could materially  and
adversely affect our results of operations.

Our investment portfolio has benefited from tax exemptions and certain other tax  laws,  including,

but not limited to, those governing dividends-received deductions and  tax  credits  (such  as foreign tax
credits). Federal and/or state tax legislation could  be  enacted in connection  with deficit reduction or
various types of fundamental  tax reform that would lessen or eliminate some or all of the tax
advantages currently benefiting us and therefore could materially and adversely impact our results of
operations. In addition, such legislation  could adversely affect the value of our investment portfolio,
particularly changes to the taxation of interest from municipal  bonds (which comprise 52% of our
investment portfolio as of December 31,  2012) could  materially and adversely impact the  value of  those
bonds.

Other tax law changes could adversely impact us. The  size of the federal deficit,  as well as  the
budget constraints faced by many states and localities, increases  the likelihood that Congress and  state
and  local governments will raise revenue  by enacting legislation increasing the taxes  paid by individuals
and  corporations.

We  may be adversely affected if our pricing  and capital models provide materially  different
indications than actual results. The profitability of our property and casualty business substantially
depends on the extent to which our actual claims experience is  consistent with the  assumptions we use

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in pricing our policies. We utilize third-party  and  proprietary models to help us price  business  in a
manner that is intended to be consistent, over time, with  actual  results and return objectives. We
incorporate the Company’s historical loss experience, external  industry data and economic indices  into
our  modeling processes, and we use various methods, including  predictive modeling, forecasting and
sophisticated simulation modeling techniques, to analyze loss trends and the  risks associated with our
assets and liabilities. We also use these  modeling  processes, analyses  and methods in  making
underwriting, pricing and reinsurance  decisions as  part of  managing our exposure to catastrophes  and
other extreme adverse events. These  modeling processes incorporate  numerous assumptions and
forecasts about the future level and variability  of: interest rates, inflation, capital requirements, and
frequency and severity of losses, among others, that are  difficult to make  and may differ materially
from actual results.

Whether we use a proprietary or third-party model, future  experience may be materially  different
from past and current experience incorporated in a model’s  forecasts or simulations. This includes the
likelihood of events occurring or continuing or the correlation among events.  Third party  models may
provide substantially different indications than what  our  proprietary modeling processes provide.  As a
result, third-party model estimates of losses can be, and often have  been, materially different for similar
events in comparison to our proprietary estimates. The differences between  third-party model estimates
and our proprietary estimates are driven by the  use of different data  sets as  well as different
assumptions and forecasts regarding the  frequency  and  severity of  events  and claims arising from the
events.

If we  fail to appropriately price the risks we  insure, or fail to  change  our  pricing model to

appropriately reflect our current experience, or  if our claims experience is more  frequent or severe  than
our  underlying risk assumptions, our  profit margins  may be negatively affected.  If we  underestimate  the
frequency and/or severity of extreme  adverse events occurring, our financial condition may  be  adversely
affected. If we overestimate the risks  we  are  exposed to, we may overprice our products, and  new
business growth and retention of our existing business may be adversely affected.  As we expand  into
different markets and geographies, we will write more policies in markets and geographical areas  where
we have less data specific to these new markets  and geographies, and, accordingly, we  may be more
susceptible to error in our models and strategy.  See ‘‘Item  7—Management’s Discussion  and Analysis
of Financial Condition and Results of Operations—Catastrophe  Modeling.’’

Our business success and profitability depend,  in part, on effective  information technology systems

and on continuing to develop and implement  improvements in technology. We depend in large part
on our technology systems for conducting  business and processing  claims,  as well as  for providing the
data and analytics we utilize to manage our  business, and thus our business success is dependent on
maintaining the effectiveness of existing technology  systems  and  on continuing to develop and enhance
technology systems that support our business processes and  strategic  initiatives  in a cost and  resource
efficient manner. Some system development projects are  long-term in  nature, may negatively impact
our  expense ratios as we invest in the  projects and may cost more than we  expect to complete.  In
addition, system development projects  may not deliver the  benefits we  expect  once they are complete,
or may be replaced or become obsolete more quickly  than expected, which could result  in accelerated
recognition of expenses. If we do not  effectively and efficiently manage and upgrade our  technology
portfolio, or if the costs of doing so are  higher than we expect, our ability to provide  competitive
services to new and existing customers  in a  cost effective  manner and our  ability to implement our
strategic initiatives could be adversely  impacted.

If we experience difficulties with technology,  data security  and/or outsourcing  relationships, our

ability  to conduct our business could be  negatively impacted. While technology can streamline many
business processes and ultimately reduce the  cost of operations, technology initiatives present significant
risks. Our business is highly dependent upon our employees’ ability to perform, in an  efficient  and
uninterrupted fashion, necessary business functions.  A shut-down of,  or  inability to access,  one  or more

63

of our facilities (including our primary  data  processing  facility); a power outage; or a failure of one or
more of our information technology, telecommunications or  other  systems could significantly impair our
ability to perform such functions on  a  timely  basis, particularly if such  an interruption lasts for  an
extended period of time. In the event  of a disaster such as a natural catastrophe, terrorist attack or
industrial accident, or due to a computer  virus, our systems could  be  inaccessible for an extended
period of time. In addition, because  our information technology and telecommunications systems
increasingly interface with and depend  on third-party systems, we could  experience service denials  or
failures of controls if demand for our  service exceeds capacity  or a third-party system  fails or
experiences an interruption. If our business continuity plans did not  sufficiently address such  a business
interruption, system failure or service  denial, this  could  result  in a  deterioration  of our  ability to write
and process new and renewal business, provide customer  service, pay claims  in a timely manner or
perform other necessary business functions.

Our operations rely on the reliable and secure processing,  storage  and transmission of confidential

and other information in our computer systems and  networks. Computer viruses, hackers,  employee
misconduct and other external hazards could  expose our data systems to security breaches, cyber-
attacks or other disruptions. In addition, we routinely  transmit  and  receive personal, confidential  and
proprietary information by e-mail and other electronic means. While we attempt to develop secure
transmission capabilities with third-party  vendors  and others with  whom we do business, we may be
unable to put in place secure capabilities with all of such  vendors and  third parties and, in addition,
these third parties may not have appropriate controls in  place  to  protect the confidentiality of the
information.

Our computer systems have been and will likely  continue to  be,  subject to computer viruses or

other malicious codes, unauthorized access,  cyber-attacks  or other computer-related penetrations.
While, to date, we are not aware that  we have experienced a  material  breach  of  cyber security,
administrative and technical controls  as  well  as other preventative actions we  take to reduce the risk of
cyber incidents and protect our information may be insufficient to prevent  physical and electronic
break-ins, cyber-attacks or other security breaches  to  our  computer systems  or those  of  third  parties
with whom we do business. In addition,  new  technology that  could result in  greater  operational
efficiency  may  further  expose  our  computer  systems  to  the  risks  of  cyber-attacks.  We  may  forego  the
implementation of such new technology to limit  this  additional risk.

These increased risks, and expanding  regulatory requirements regarding data security, could expose

us to data loss, disruption of service, monetary and reputational damages and  significant increases in
compliance costs and costs to improve  the security  and  resiliency  of our computer systems. As a  result,
our  ability to conduct our business might  be adversely  affected.

We  have increasingly outsourced certain technology  and business  process functions to third parties
and may continue  to do so in the future.  If  we do not effectively develop, implement  and monitor  our
outsourcing relationships, third party  providers  do not  perform as anticipated or  we experience
technological or other problems with  a  transition,  we may  not realize  expected productivity
improvements or cost efficiencies and may  experience  operational difficulties,  increased costs and a loss
of business. Our outsourcing of certain  technology and business  process functions to third parties may
expose us to increased risk related to data security or  service disruptions,  which could result  in
monetary and reputational damages. In addition,  our ability to receive services from third party
providers outside of the United States  might be impacted by cultural differences, political instability,
unanticipated regulatory requirements or  policies inside  or  outside of the United States. As a result,
our  ability to conduct our business might  be adversely  affected.

64

We are subject to a number of risks  associated  with  our  business  outside the United  States. We
conduct business outside the United States  primarily in the  United Kingdom, Canada and  the Republic
of Ireland. In addition, we have a joint venture  in Brazil and may also explore opportunities  in other
countries, including Latin American countries and other emerging markets such as India  and China.

While our business outside of the United States currently constitutes a relatively small portion of

our  revenues, in conducting such business  we are  subject to a number  of  significant risks, particularly in
emerging economies. These risks include restrictions such  as  price controls, capital  controls, currency
exchange limits, ownership limits and  other  restrictive or anti-competitive governmental actions, which
could have an adverse effect on our  business  and our reputation. Our investments  outside the  United
States may also subject us to currency  risk and, in  some markets, it may  be  difficult to effectively hedge
that risk. In addition, in some markets,  we  may invest as part of  a joint venture with a local
counterparty. Because our governance rights may be limited, we may  not  have control over the  ability
of the joint venture to make certain decisions and/or mitigate  risks  it faces, and significant
disagreements with a joint venture counterparty  may adversely impact our  investment. Investments
outside the United States also subject  us  to  additional domestic  and foreign laws and  regulations,
including the Foreign Corrupt Practices Act and  similar laws  in other countries that prohibit  the
making of improper payments to foreign officials. Although we have policies and controls in place that
are designed to ensure compliance with these  laws, if  those  controls are  ineffective and  an employee or
intermediary fails to comply with applicable laws and regulations, we could suffer civil and criminal
penalties and our business and our reputation could be adversely affected.  Some countries, particularly
emerging economies, have laws and regulations that  lack  clarity and, even with  local expertise and
effective controls, it can be difficult to determine the exact requirements  of, and potential liability
under, the local laws. For example, in some jurisdictions, including Brazil, parties to a joint venture
may, in some circumstances, have liability  for some  obligations  of  the venture and that liability may
extend beyond the capital invested. Failure to comply with local  laws in a  particular  market  may result
in substantial liability and could have a significant and negative effect not only on our  business  in that
market but also on our reputation generally.

New regulations outside of the U.S., including in the  European Union, could  adversely impact our

results of operations and limit our growth.
amended in jurisdictions outside the U.S. may be more  restrictive  than current laws or regulations  and
may result in lower revenues and/or  higher costs of compliance and thus could materially and adversely
affect our results of operations and limit  our growth.

Insurance laws or regulations that are  adopted  or

In particular, the European Union’s executive body,  the European Commission, is implementing

new capital adequacy and risk management  regulations called Solvency II  that  would apply  to  our
businesses in the European Union beginning as soon as  January 1,  2014;  however, the effective
implementation date may be delayed.  Under Solvency  II, it  is possible that  the direct  or indirect  parent
of a European Union subsidiary (including a U.S. parent  company) could be subject  to  certain  Solvency
II requirements if  the regulator determines  that the subsidiary’s capital  position is dependent  on an
affiliated  or parent company and the affiliated or  parent company is not already subject  to  regulations
deemed ‘‘equivalent’’ to Solvency II.  In  addition, regulators in countries where we have operations are
working with the International Association  of  Insurance Supervisors (IAIS) (and in the U.S., with  the
NAIC) to consider changes to insurance  company  supervision,  including group  supervision.

The IAIS is working with the Financial Stability Board  (FSB) created  by the  G-20  and is
developing a methodology for determining whether and which, if any, insurance companies pose  a
systemic risk to the global economy. Such insurers would be designated ‘‘global systemically important
insurers’’ (G-SIIs) and would likely be  subject to higher capital requirements,  enhanced  supervision or
both. The IAIS has released for comment proposed  methodology for identifying potential G-SIIs but
has not yet decided upon the criteria for,  or  the consequences  of, such  designation. Upon finalizing  the

65

assessment methodology and determining  the consequences  of  a  G-SII designation, the  FSB  along with
national authorities expect to publish the  list of  G-SIIs in  April  2013.

While it is not yet known how these  actions will impact us,  such regulation  could  result in
increased costs of compliance, increased disclosure  and less flexibility in our capital  management.

Acquisitions and integration of acquired businesses may result in operating  difficulties and  other
unintended consequences. From time to time we may investigate and pursue acquisition opportunities
if we believe that such opportunities are  consistent with  our long-term objectives and that the potential
rewards of an acquisition justify the risks.  The process  of  integrating  an acquired company or business
can be complex and costly, however, and  may create unforeseen operating difficulties and expenditures.
For example, acquisitions may present significant risks, including:

(cid:127) the potential disruption of our ongoing business;

(cid:127) the ineffective integration of underwriting, claims handling and actuarial practices;

(cid:127) the uncertainty of an acquiree’s reserve  estimates;

(cid:127) the diversion of  management time and resources  to  acquisition integration  challenges;

(cid:127) the loss of key employees;

(cid:127) the cultural challenges associated with integrating  employees; and

(cid:127) the impact of an acquisition on our  financial  position  and/or  credit ratings.

The acquired business may not perform as projected,  and any cost savings and other synergies

anticipated from the acquisition may  not materialize. There  is no guarantee that any  businesses
acquired in the future will be successfully integrated, and the ineffective integration  of our  businesses
and processes may result in substantial  costs  or delays  and adversely  affect our ability to compete.

Changes to existing accounting standards may adversely impact  our reported  results. As a U.S.-

based SEC reporting company, we are  currently required to  prepare our financial statements in
accordance with U.S. Generally Accepted Accounting Principles (GAAP), as  promulgated  by  the
Financial Accounting Standards Board  (FASB).  During  the last several  years, the  Securities  and
Exchange Commission (SEC) has been  evaluating whether, when and how  International Financial
Reporting Standards (IFRS) should be  incorporated into the U.S. financial  reporting system, including
for companies such as us. The FASB and the International Accounting Standards Board (IASB) have
also embarked on a long-term project to converge  GAAP and IFRS. Additionally,  the IASB  and the
FASB are in the process of developing a global insurance  standard that may  involve  methodologies for
valuing  insurance contract liabilities that  may be significantly different from the methodologies required
by current GAAP. In June 2012, the  FASB  issued a statement  that indicated that based  on the  nature
and totality of differences between the FASB’s  and  IASB’s  views, it is not likely that the two boards will
achieve convergence on this project. The  FASB  further noted that the  FASB and IASB  have very
different perspectives on the project, given that  the U.S.  has existing guidance on insurance contracts
whereas there is currently no comprehensive IFRS insurance standard for insurance  contracts. As a
result of this, it is currently unclear what  changes, if any, may  be  made to the  accounting for  insurance
contracts under GAAP as a result of  this project, and we are not able to  predict whether we will
choose to, or be required to, adopt IFRS  or how the  adoption of  IFRS  (or the convergence of GAAP
and IFRS, including the project for valuing  insurance contract liabilities) may  impact  our financial
statements in the future. Changes in  accounting standards, particularly those that specifically apply to
insurance company operations, may impact the content  and presentation  of  our  reported financial
results and could have adverse consequences to our reported financial results, including  lower reported
results of operations and shareholders’  equity and increased volatility and decreased comparability of
our  reported results with other insurers.

66

We could be adversely affected if our  controls designed to ensure compliance  with guidelines,
policies and legal and regulatory standards are not effective. Our business is highly dependent on our
ability to engage on a daily basis in a large number of insurance underwriting, claim processing and
investment activities, many of which are highly complex.  These activities  often  are subject to internal
guidelines and policies, as well as legal and regulatory standards. A control system, no matter  how well
designed and operated, can provide only  reasonable assurance that the control  system’s objectives will
be met. If our controls are not effective, it could lead to financial loss,  unanticipated risk  exposure
(including underwriting, credit and investment risk) or damage to our  reputation.

In addition, ineffective controls could lead  to  litigation or regulatory  action.  The volume of  claims
and amount of damages and penalties claimed  in litigation  and regulatory proceedings against  various
types of financial institutions have increased  in recent years following the  recent economic downturn
and market disruption. Substantial legal liability or significant regulatory action against us could have a
material adverse financial impact. See  note  16 of notes  to  our consolidated financial statements for a
discussion of certain legal proceedings in  which we are involved.

Our businesses may be adversely affected  if we are unable to hire and  retain qualified employees.

There is  significant competition from  within the property  and casualty insurance industry and from
businesses outside the industry for qualified employees, especially those in key positions and those
possessing highly specialized underwriting knowledge. Our  performance is largely dependent  on the
talents, efforts and proper conduct of  highly-skilled individuals,  including  our  senior executives, many of
whom have decades of experience in  the insurance  industry. See  ‘‘Item 10—Directors,  Executive
Officers and Corporate Governance’’  for  more information  relating to our executive officers. Our
continued ability to compete effectively  in  our businesses and to expand into new business areas
depends on our ability to attract new  employees and to retain and motivate our existing employees. If
we are not able to successfully attract, retain and motivate our employees,  our  business,  financial
results and reputation could be materially and adversely  affected.

Loss of or significant restriction on the use  of credit scoring in the pricing and underwriting of

Personal Insurance products could reduce  our future profitability.
credit scoring as a factor in pricing decisions where allowed by state  law.  Some consumer groups and
regulators have questioned whether the  use of credit scoring unfairly discriminates against  people with
low incomes, minority groups and the  elderly and are calling  for the  prohibition or restriction on  the
use of credit scoring in underwriting and  pricing. Laws  or regulations that significantly curtail the  use
of credit scoring, if enacted in a large number of states, could adversely  affect our future profitability.

In Personal Insurance, we use

Item 1B. UNRESOLVED STAFF COMMENTS

NONE.

Item 2. PROPERTIES

The Company leases its principal executive offices in New York,  New York,  as well as  200 field
and claim offices totaling approximately  4.8 million square feet throughout the  United States under
leases or subleases with third parties.  The Company also  leases  offices in  the United  Kingdom, Canada,
India, China, Singapore and the Republic  of  Ireland that house operations (primarily for  the Financial,
Professional & International Insurance segment) in those locations.  The Company  owns six  buildings in
Hartford, Connecticut, consisting of approximately 1.8  million square feet of  office space. The
Company also owns office buildings located at  385 Washington Street and 130  West Sixth Street  in
St. Paul, Minnesota. These buildings are adjacent to one another and  consist of approximately
1.1 million square feet of gross floor  space. The Company  also owns other real  property, including  an
office building in Fall River, Massachusetts, and a data center  located in Norcross, Georgia.

67

The Company owns a building in London, England, which houses a portion  of  its  Financial,

Professional & International Insurance segment’s operations in the United Kingdom.

The Company, through its subsidiaries, owns an  investment portfolio of  income-producing

properties and real estate funds. Included in this portfolio  are four  office buildings in which the
Company holds a 50% ownership interest located  in New  York, New York, which collectively accounted
for approximately 12% of the carrying  value of the  property portfolio at December 31, 2012.

In the opinion of the Company’s management, the  Company’s  properties  are adequate and  suitable

for its business as presently conducted  and are  adequately maintained.

Item 3. LEGAL PROCEEDINGS

The information required with respect to this  item can be  found under  ‘‘Contingencies’’  in note  16

of notes to the Company’s consolidated financial statements in this annual report  and is incorporated
by reference into this Item 3.

Item 4. MINE SAFETY DISCLOSURES

NONE.

EXECUTIVE OFFICERS OF THE REGISTRANT

Information about the Company’s executive officers is incorporated by  reference from Part III,

Item 10 of this annual report.

68

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY,  RELATED SHAREHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY  SECURITIES

The Company’s common stock is traded  on the New York Stock Exchange  under the  symbol
‘‘TRV.’’ The number of holders of record, including individual owners, of  the Company’s common stock
was 65,297 as of February 11, 2013. This  is not the actual number of  beneficial  owners of the
Company’s common stock, as shares  are  held  in ‘‘street name’’ by brokers and others on behalf of
individual owners. The following table sets forth the high  and low closing sales prices  of the Company’s
common stock for each quarter during the last  two  fiscal  years and the amount of cash dividends
declared per share.

2012
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2011
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

High

Low

Cash
Dividend
Declared

$61.59
64.77
68.61
74.33

$60.92
64.05
59.11
59.68

$56.87
57.75
60.89
68.07

$53.33
56.68
47.12
46.80

$0.41
0.46
0.46
0.46

$0.36
0.41
0.41
0.41

The Company paid cash dividends per  share of $1.79  in 2012 and  $1.59 in  2011. Future dividend

decisions will be based on, and affected  by, a number  of factors, including the operating  results and
financial requirements of the Company  and  the impact  of dividend restrictions. For information on
dividends, as well as restrictions on the ability of certain  of the  Company’s subsidiaries to transfer funds
to the Company in the form of cash  dividends or otherwise, see  ‘‘Item  7—Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.’’
Dividends will be paid by the Company  only  if declared  by its board of directors  out of funds legally
available, and subject to any other restrictions that may be applicable  to  the Company.

69

SHAREHOLDER RETURN PERFORMANCE GRAPH

The following graph shows a five-year comparison of the cumulative total return to shareholders

for the Company’s common stock and  the common stock of companies included in the S&P  500 Index
and the S&P Property & Casualty Insurance Index, which the Company believes is  the most
appropriate comparative index.

COMPARISON OF CUMULATIVE FIVE  YEAR TOTAL RETURN TO SHAREHOLDERS(1)

$200

$150

100.00

$100

$50

$0

2007

112.19

91.68

86.39

122.59

93.61

86.18

152.89

108.59
103.51

97.77

79.67

79.30

86.24

70.59

63.00

2008

2009

2010

2011

2012

The Travelers Companies, Inc. (2)

S&P 500 Index

S&P 500 Property & Casualty Insurance (3)

9FEB201312011091

(1) The cumulative return to shareholders is a concept used to compare  the performance of  a

company’s stock over time and is the ratio of the net  stock price  change plus the  cumulative
amount of dividends over the specified time period (assuming dividend reinvestment), to the stock
price at the beginning of the time period.

(2) Assumes $100 invested in common shares of The Travelers Companies,  Inc. on December 31,

2007.

(3) Companies in the S&P Property-Casualty Index as  of December 31, 2012 were  the following: The
Travelers Companies, Inc., The Chubb Corporation, Cincinnati Financial Corporation, Progressive
Corporation, Allstate Corporation, XL  Group, plc., ACE Ltd. and Berkshire Hathaway,  Inc.

Returns of each of the companies included  in this  index have been  weighted according to their
respective market capitalizations.

70

ISSUER PURCHASES OF EQUITY SECURITIES

The table below sets forth information regarding  repurchases  by the  Company of its common stock

during the periods indicated.

Period  Beginning

Period Ending

Total number
of shares
purchased

Average
price paid
per share

Total number of
shares purchased
as part of
publicly announced
plans or programs

Oct. 1, 2012
Nov. 1, 2012
Dec. 1, 2012

Oct. 31, 2012 . . . . . . . . . .
Nov. 30, 2012 . . . . . . . . .
Dec. 31, 2012 . . . . . . . . . .

1,552,888
15,152
3,937,605

Total . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,505,645

$71.30
$70.93
$73.66

$72.99

1,547,146
—
3,932,635

5,479,781

Approximate
dollar value of
shares that may
yet be  purchased
under the
plans or programs

$2,448,899,277
$2,448,899,277
$2,159,219,303

$2,159,219,303

The Company’s board of directors has approved common share repurchase authorizations  under

which  repurchases may be made from  time to time  in the open market, pursuant to pre-set trading
plans meeting the requirements of Rule  10b5-1 under the Securities Exchange Act of 1934,  in private
transactions or otherwise. The authorizations do not have a stated  expiration date. The timing and
actual number of shares to be repurchased in the  future will depend on a variety of factors, including
the Company’s financial position, earnings, common  share  price, catastrophe losses, funding of the
Company’s qualified pension plan, capital requirements of the Company’s  operating subsidiaries, legal
requirements, regulatory constraints,  other investment  opportunities (including mergers and
acquisitions), market conditions and other factors.

The Company acquired 25,864 shares  during  the three months  ended  December  31, 2012 that were

not part of the publicly announced share repurchase authorization. These  shares consisted of shares
retained to cover payroll withholding  taxes in connection with the vesting of restricted  stock awards and
shares used by employees to cover the exercise price of certain stock options that were  exercised.

Information relating to compensation plans under which the Company’s  equity securities  are

authorized for issuance is set forth in Part III—Item  12 of this  Report.

71

Item 6. SELECTED FINANCIAL DATA

At and for the year ended December 31,

2012

2011

2010

2009

2008

Total revenues . . . . . . . . . . . . . . . . . . . . . . . .

$ 25,740

(in millions, except per share amounts)
$ 24,680
$ 25,112
$ 25,446

$ 24,477

Net income . . . . . . . . . . . . . . . . . . . . . . . . . .

$

2,473

$

1,426

$

3,216

$

3,622

$

2,924

Total investments . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Claims and claim adjustment expense  reserves .
Total long-term debt . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . .

$ 73,838
104,938
50,922
5,750
79,533
25,405

$ 72,701
104,575
51,392
6,255
80,098
24,477

$ 72,722
105,631
51,581
6,502
80,156
25,475

$ 74,965
110,013
53,580
6,154
82,598
27,415

$ 70,738
110,088
55,179
5,939
84,769
25,319

Net income per share(1):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year-end common shares outstanding . . . . . . .

Per common share amounts:
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . .

Book value . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

$

$

6.35

6.30

377.4

1.79

67.31

$

$

$

$

3.40

3.36

392.8

1.59

62.32

$

$

$

$

6.69

6.62

434.6

1.41

58.47

$

$

$

$

6.38

6.33

520.3

1.23

52.54

$

$

$

$

4.87

4.81

585.1

1.19

43.12

(1) On January 1, 2009, the Company adopted the FASB’s updated  accounting guidance related to
earnings per share. The impact of the adoption of this guidance was a reduction of previously
reported basic and diluted earnings per share for  the year ended  December 31, 2008 by $0.03  per
share and $0.01 per share, respectively.

72

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following is a discussion and analysis of the Company’s financial condition and  results of

operations.

FINANCIAL HIGHLIGHTS

2012 Consolidated Results of Operations

(cid:127) Net income of $2.47 billion, or $6.35 per share basic and $6.30 diluted

(cid:127) Net earned premiums of $22.36 billion

(cid:127) Catastrophe losses of $1.86 billion ($1.21 billion after-tax)

(cid:127) Net favorable prior year reserve development  of  $940 million ($622 million after-tax)

(cid:127) GAAP combined ratio of 97.1%

(cid:127) Net investment income of $2.89 billion ($2.32 billion  after-tax)

(cid:127) Operating cash flows of $3.23 billion

2012 Consolidated Financial Condition

(cid:127) Total investments of $73.84 billion; fixed maturities and short-term securities comprise 93% of

total investments

(cid:127) Total assets of $104.94 billion

(cid:127) Total debt of $6.35 billion, resulting in a debt-to-total capital ratio of 20.0% (22.2% excluding

net unrealized investment gains, net of tax)

(cid:127) Repurchased 22.4 million common  shares for  total cost of $1.45 billion under  share repurchase

authorization

(cid:127) Shareholders’ equity of $25.41 billion

(cid:127) Book value per common share of $67.31

(cid:127) Holding company liquidity of $2.03 billion

73

CONSOLIDATED OVERVIEW

Consolidated Results of Operations

(for the year ended December 31, in millions except per  share amounts)

2012

2011

2010

Revenues
Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fee  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$22,357
2,889
323
51
120

$22,090
2,879
296
55
126

$21,432
3,059
287
264
70

Total  revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25,740

25,446

25,112

Claims and expenses
Claims and claim adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred acquisition  costs . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total  claims and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,676
3,910
3,610
378

22,574

3,166
693

16,276
3,876
3,556
386

24,094

1,352
(74)

13,210
3,802
3,406
388

20,806

4,306
1,090

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,473

$ 1,426

$ 3,216

Net income per share

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

6.35

6.30

$

$

3.40

$ 6.69

3.36

$ 6.62

GAAP combined ratio

Loss and loss adjustment expense ratio . . . . . . . . . . . . . . . . . . . . . . .
Underwriting expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

64.9%
32.2

72.9% 61.0%
32.2

32.2

GAAP combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

97.1% 105.1% 93.2%

Incremental impact of direct to consumer initiative on  GAAP

combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.8%

0.9%

0.8%

The following discussions of the Company’s net income and segment  operating income (loss) are
presented on an after-tax basis. Discussions of  the components  of  net income and  segment operating
income are presented on a pretax basis, unless otherwise  noted. Discussions of earnings per common
share are presented on a diluted basis.

Overview

Diluted net income per share in 2012 was  $6.30, an increase of 88% over diluted  net income per
share of $3.36 in 2011. Net income in 2012 was  $2.47 billion,  an increase  of 73% over net income of
$1.43 billion in 2011. The higher rate of  increase in diluted  net income per  share reflected the  impact
of common share repurchases. The improvement in  net income in  2012 compared  with 2011 primarily
reflected the pretax impact of (i) higher  underwriting  margins excluding catastrophe losses  and prior
year reserve development (‘‘underlying  underwriting margins’’) primarily resulting from  lower
non-catastrophe weather-related losses  in  the Business Insurance  and Personal  Insurance  segments and
the impact of earned pricing that exceeded  loss cost trends in the Business Insurance and Financial,
Professional & International Insurance segments, (ii) a decline  in catastrophe losses  and (iii) higher net

74

favorable prior year reserve development. Partially offsetting these pretax  improvements were their
related tax expense. The effective tax rate  in  2012 increased from the prior year due to interest on
municipal bonds, which is effectively  taxed at a rate that is lower than the corporate tax rate  of  35%,
comprising a lower percentage of pretax income. Net income in 2011  benefited from a reduction in
income tax expense of $104 million resulting from the  favorable resolution of various  prior year tax
matters. Catastrophe losses in 2012 were  $1.86 billion, compared with $2.56 billion in 2011.  Net
favorable prior year reserve development in  2012 was $940 million,  compared with $715 million in
2011.

Diluted net income per share in 2011 was  $3.36, a decrease of 49%  from diluted  net income per
share of $6.62 in 2010. Net income in 2011 was  $1.43 billion,  a  decrease of 56% from net income of
$3.22 billion in 2010. The lower rate  of decline in diluted net income per share  reflected  the impact of
common share repurchases. The decline in net income in 2011 compared with 2010  primarily  reflected
the pretax impact of (i) a significant increase in  catastrophe  losses, (ii) lower  net favorable prior  year
reserve  development, (iii) lower underlying underwriting margins related to earned  pricing and loss cost
trends  and higher non-catastrophe weather-related  losses,  (iv) lower  net investment income and
(v) lower net realized investment gains. Partially offsetting  these pretax declines were their  related tax
benefit. The effective tax rate in 2011 decreased from  the prior year  due  to  interest on municipal
bonds, which is effectively taxed at a rate  that  is lower  than the corporate tax rate  of  35%, comprising
a higher percentage of pretax income.  These factors were  partially offset  by  a $104 million benefit
resulting from the favorable resolution  of  various  prior year tax matters. Catastrophe  losses in 2011  and
2010 were $2.56 billion and $1.11 billion, respectively.  Net favorable prior  year reserve development  in
2011 and 2010 was $715 million and $1.25 billion,  respectively.

Revenues

Earned Premiums

Earned premiums in 2012 were $22.36  billion, $267  million or 1%  higher  than  in 2011. In the

Business Insurance segment, earned premiums in  2012 increased by 3%  over 2011. In the Financial,
Professional & International Insurance segment, earned premiums  in 2012 decreased by 4%  from 2011.
In the Personal Insurance segment, earned premiums in 2012 increased by less than  1% over 2011.

Earned premiums in 2011 were $22.09  billion, $658  million or 3%  higher  than  in 2010. In the

Business Insurance segment, earned premiums in  2011 increased by 5%  over 2010. In the Financial,
Professional & International Insurance segment, earned premiums  in 2011 decreased by 4%  from 2010.
In the Personal Insurance segment, earned premiums in 2011 increased by 3% over  2010.

Factors contributing to the changes in  earned premiums  in  each segment in 2012 and  2011
compared with the respective prior year  are  discussed  in more detail in  the segment discussions that
follow.

75

Net Investment Income

The following table sets forth information regarding  the Company’s investments.

(for the year ended December 31, in millions)

2012

2011

2010

Average investments(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pretax net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After-tax net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average pretax yield(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average after-tax yield(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$69,863
2,889
2,316

$70,471
2,879
2,330

$71,637
3,059
2,468

4.1%
3.3%

4.1%
3.3%

4.3%
3.4%

(1) Excludes net unrealized investment  gains and  losses, net  of  tax,  and reflects cash,  receivables for

investment sales, payables on investment purchases and accrued investment  income.

(2) Excludes net realized investment gains and losses and net unrealized  investment gains and losses.

Net investment income in 2012 was $2.89 billion,  $10 million or less than 1% higher than in 2011.

Net investment income from fixed maturity  investments was  $2.44 billion in 2012, a decrease of $104
million from 2011, primarily resulting  from lower long-term  reinvestment yields available in the market.
Net investment income generated by  non-fixed maturity investments was $476  million  in 2012, an
increase of $121 million over 2011, primarily  driven by improved results from the  Company’s real estate
partnerships and hedge fund investments.  On an  after-tax basis, net  investment income in 2012  was
$14 million or less than 1% lower than in 2011,  reflecting a higher  proportion of taxable net  investment
income in 2012 compared with 2011.

Net investment income in 2011 was $2.88 billion,  $180 million or 6% lower than in 2010. Net
investment income from fixed maturity  investments was  $2.54 billion in 2011,  a decrease of $167 million
from 2010, primarily resulting from lower  long-term reinvestment yields available in the  market, as well
as lower  average levels of fixed maturity  invested assets  due to the Company’s common share
repurchases. Net investment income generated by non-fixed maturity investments was  $355 million in
2011, a decrease of $15 million from 2010.

Fee Income

The National Accounts market in the  Business Insurance segment is the primary source of the
Company’s fee-based business. The $27 million  and  $9 million increases  in fee income in 2012  and
2011, respectively, compared with the respective prior years are described in the Business Insurance
segment discussion that follows.

Net Realized Investment Gains

The following table sets forth information regarding  the Company’s net pretax  realized investment

gains.

(for the year ended December 31, in millions)

Net Realized Investment Gains

2012

2011

2010

Other-than-temporary impairment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other net realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(15) $(25) $ (26)
290
80

66

Net realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 51

$ 55

$264

Other Net Realized Investment Gains—Other net  realized  investment gains in  2012 of $66  million

were primarily driven by $61 million  of  net  realized  investment gains related to fixed maturity
investments, $19 million of net realized  investment gains related to real estate and $8  million of  net

76

realized investment gains related to equity  securities. These  net  realized investment gains were partially
offset by $14  million of net realized investment  losses associated  with U.S. Treasury futures  contracts
(which require daily mark-to-market settlement and are used to shorten the duration of the Company’s
fixed maturity portfolio) and $8 million  of net  realized investment losses related to other investments.

Other net realized investment gains in 2011 of $80 million  were  primarily driven by $52 million of

net realized investment gains related  to  fixed  maturity investments, $46 million of net realized
investment gains related to equity securities and $41  million of net realized investment  gains related  to
other investments, partially offset by  net  realized  investment losses of  $62 million associated with U.S.
Treasury futures contracts.

Other net realized investment gains in 2010 of $290 million  were  primarily driven by a $205  million

gain resulting from the Company’s sale of  substantially all of its remaining  common stock holdings in
Verisk Analytics, Inc. (Verisk) for total  proceeds of approximately  $230 million  as part  of a secondary
public offering of Verisk. The 2010 total  also  included $96 million of  net  realized  investment gains
related to fixed maturity investments and $25  million of  net realized investment  gains related  to  equity
securities. These gains were partially  offset by $30  million of net realized  investment  losses related  to
U.S. Treasury futures contracts.

Other Revenues

Other revenues primarily consist of premium installment charges. In 2010, this  category  also
included $60 million of expenses related to the  Company’s  purchase  and retirement of $885 million of
its  $1.0 billion 6.25% fixed-to-floating  rate junior subordinated debentures.

Claims and Expenses

Claims and Claim Adjustment Expenses

Claims and claim adjustment expenses  in 2012  were $14.68 billion, $1.60 billion  or 10% lower  than

in 2011. The decrease primarily reflected (i) a decline  in catastrophe losses and, to a lesser extent,
(ii) lower levels of non-catastrophe weather-related losses and (iii) higher  net favorable prior  year
reserve  development, partially offset by  (iv) the impact of loss  cost trends. Catastrophe losses in  2012
and 2011 were $1.86 billion and $2.56  billion,  respectively. Catastrophe losses  in 2012 primarily resulted
from Storm Sandy, as well as multiple tornado,  wind and hail  storms in  several regions  of the United
States. Catastrophe losses in 2011 primarily  resulted from Hurricane Irene and  Tropical Storm  Lee,
multiple tornadoes and hail storms in the  Midwest and Southeast regions of  the United States  and
severe winter storms throughout the  United States. Catastrophe losses in  2011 also included losses  from
floods in Thailand and an earthquake in  Japan that impacted the Financial,  Professional &
International Insurance segment. Net  favorable  prior year reserve development  in 2012 and 2011 was
$940 million and $715 million, respectively. Factors contributing  to  net favorable  prior year reserve
development in each segment during these periods are  discussed in more  detail in note 7 of notes to
the Company’s consolidated financial statements.

Claims and claim adjustment expenses  in 2011  were $16.28 billion, $3.07 billion  or 23% higher
than in 2010. The increase primarily  reflected (i) the significant  increase in catastrophe  losses, (ii)  the
decrease in net favorable prior year reserve development, (iii)  the impact of loss  cost trends  and
(iv) higher non-catastrophe weather-related  losses.  Catastrophe  losses  in 2011  and 2010 were  $2.56
billion and $1.11 billion, respectively. Catastrophe losses in  2010 primarily resulted from  several severe
wind and hail storms, as well as severe winter storms. In addition,  catastrophe losses in 2010 included
losses from an earthquake in Chile that  impacted the Financial, Professional & International  Insurance
segment. Net favorable prior year reserve development in 2011 and 2010  was $715 million  and $1.25
billion, respectively. Factors contributing to net favorable prior year reserve  development in each
segment are discussed in note 7 of notes to the Company’s consolidated financial statements.

77

Amortization of Deferred Acquisition Costs

The amortization of deferred acquisition costs in 2012  was $3.91 billion, $34  million  or 1% higher

than in 2011. The amortization of deferred acquisition costs in 2011  was  $3.88 billion, $74 million or
2% higher than in 2010. Changes in the  amortization of deferred acquisition costs in both 2012 and
2011 were generally consistent with the increase in  earned premiums compared  with the respective
prior year.

General and Administrative Expenses

General and administrative expenses  in 2012 were  $3.61 billion, $54 million or  2% higher than in
2011. General and administrative expenses in 2011 were $3.56 billion, $150 million  or 4% higher than
in 2010. General and administrative expenses are discussed in more detail in the  segment discussions
that follow.

Interest Expense

Interest expense in 2012, 2011 and 2010 was $378 million, $386  million  and $388 million,

respectively. The decline in 2012 compared with 2011 reflected the repayment of $258  million of  debt
in the second quarter of 2012.

Income Tax Expense (Benefit)

The Company’s consolidated income  tax  expense in 2012 was $693  million,  compared to an income

tax benefit of $74 million in 2011. The increase in  income tax expense of  $767 million in 2012  from
2011 primarily reflected the $1.77 billion  improvement in  underwriting  margins in  2012 (including the
favorable impacts of a decrease in catastrophe  losses  and  an increase in net favorable prior year reserve
development) over 2011 and, to a lesser  extent, the  $121 million increase  in net investment  income
from non-fixed maturity investments  over 2011. The change  in income tax expense (benefit) in 2012
from 2011 was also impacted by the $104  million benefit recorded in 2011 resulting from  the favorable
resolution of various prior year tax matters.

The Company’s consolidated income  tax  benefit in 2011 was $74  million,  compared to an income
tax expense of $1.09 billion in 2010. The  decrease in income tax  expense  of $1.16  billion in 2011 from
2010 primarily reflected the $2.59 billion  decrease in underwriting margins in 2011 (including the
unfavorable impacts of an increase in catastrophe losses  and a decrease in net favorable  prior year
reserve  development) from 2010 and, to a  lesser  extent, the decrease in  net realized  investment gains of
$209 million from  2010. The change in income  tax  expense (benefit) in 2011 from 2010 was also
impacted by the $104 million benefit recorded in  2011 resulting from the  favorable resolution of
various prior  year tax matters.

The Company’s effective tax rate was 22%, (5%) and 25% in 2012, 2011  and 2010,  respectively.

The Company’s effective tax rates in  2012  and 2010  were lower than the  statutory rate of 35%
primarily due to the impact of tax-exempt investment  income on the calculation of the Company’s
income tax provision. In addition to the  impact of tax-exempt income, the  Company’s effective tax rate
of (5%) in 2011 also reflected the impact  of the Company’s significant underwriting loss that primarily
resulted from catastrophe losses and the $104 million  benefit resulting from  the favorable resolution of
various prior  year tax matters recorded  in  the first  quarter of 2011.

GAAP Combined Ratios

The consolidated GAAP combined ratio of  97.1% in 2012 was  8.0 points lower  than the

consolidated GAAP combined ratio of 105.1%  in 2011.

78

The consolidated loss and loss adjustment expense ratio of 64.9% in 2012 was  8.0 points  lower

than the consolidated loss and loss adjustment expense ratio of 72.9% in 2011. Catastrophe  losses
accounted for 8.3 points and 11.6 points  of the 2012 and 2011 loss and  loss  adjustment expense ratios,
respectively. The 2012 and 2011 loss and  loss adjustment  expense ratios included 4.2  points and 3.2
points of benefit from net favorable prior  year reserve development, respectively.  The  consolidated
2012 loss and loss adjustment expense  ratio excluding catastrophe losses and prior year reserve
development (‘‘underlying loss and loss adjustment expense ratio’’)  was 3.7 points  lower than  the 2011
ratio on the same  basis, primarily reflecting the factors  discussed above.

The consolidated underwriting expense ratio of 32.2% in 2012  was  level  with the consolidated

underwriting expense ratio of 32.2% in 2011.

The consolidated GAAP combined ratio of  105.1% in 2011 was  11.9 points higher than the

consolidated GAAP combined ratio of 93.2%  in 2010.

The consolidated loss and loss adjustment expense ratio of 72.9% in 2011 was  11.9 points  higher
than the loss and loss adjustment expense  ratio of 61.0% in 2010. Catastrophe losses accounted  for 11.6
points and 5.2 points of the 2011 and  2010  loss and loss adjustment expense ratios, respectively. The
2011 and 2010 loss and loss adjustment expense ratios included 3.2  points and 5.8 points of benefit
from net favorable prior year reserve  development, respectively. The consolidated 2011  underlying  loss
and loss adjustment expense ratio was  2.9 points higher  than the 2010 ratio on  the same basis,
reflecting the factors discussed above.

The consolidated underwriting expense ratio of 32.2% in 2011  was  level  with the underwriting

expense ratio in 2010.

Written Premiums

Consolidated gross and net written premiums were as follows:

(for the year ended December 31, in millions)

Gross Written Premiums

2012

2011

2010

Business Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial, Professional & International Insurance . . . . . . . . . . . . . . . . . .
Personal Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$13,111
3,275
7,923

$12,418
3,408
8,061

$11,891
3,534
7,877

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$24,309

$23,887

$23,302

(for the year ended December 31, in millions)

Net Written Premiums

2012

2011

2010

Business Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial, Professional & International Insurance . . . . . . . . . . . . . . . . . .
Personal Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$11,872
2,981
7,594

$11,340
3,102
7,745

$10,857
3,211
7,567

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$22,447

$22,187

$21,635

Gross and net written premiums in 2012 increased by 2% and 1%, respectively, over 2011. Gross

and net written premiums in 2011 both increased by  3% over 2010. Factors contributing to the changes
in gross and net written premiums in each  segment in 2012 and  2011 as compared with  the respective
prior year are discussed in more detail  in  the segment discussions that follow.

79

RESULTS OF OPERATIONS BY SEGMENT

Business  Insurance

Results of the Company’s Business Insurance  segment were as  follows:

(for the year ended December 31, in millions)

2012

2011

2010

Revenues:

Earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . .
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . .

$11,691
2,090
322
40

$11,327
2,041
295
31

$10,766
2,156
285
28

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . .

$14,143

$13,694

$13,235

Total claims and expenses . . . . . . . . . . . . . . . . . . . . .

$11,761

$12,206

$10,157

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,843

$ 1,354

$ 2,301

Loss and loss adjustment expense ratio . . . . . . . . . . . .
Underwriting expense ratio . . . . . . . . . . . . . . . . . . . .

65.9%
31.5

73.1% 59.1%
31.6

32.2

GAAP combined ratio . . . . . . . . . . . . . . . . . . . . .

97.4% 104.7% 91.3%

Overview

Operating income in 2012 was $1.84 billion, $489 million or 36% higher  than  operating income of

$1.35 billion in 2011. The improvement  in operating  income in 2012 compared with  2011 primarily
reflected the pretax impact of (i) higher  underlying underwriting margins  primarily resulting from
earned pricing that exceeded loss cost trends, lower non-catastrophe weather-related losses and  higher
business volume, (ii) a decline in catastrophe losses, (iii) an increase in  net favorable prior year  reserve
development and (iv) an increase in net investment income. Partially offsetting these pretax
improvements were their related tax  expense.  The  effective tax rate in  2012 increased from the prior
year due to interest on municipal bonds,  which  is effectively taxed  at  a  rate  that  is lower  than the
corporate tax rate of 35%, comprising a  lower  percentage  of pretax income.  Operating income in 2011
included a $76 million benefit resulting  from  the favorable resolution of  various prior year tax matters.
Catastrophe losses in 2012 were $794 million, compared  with $1.02 billion in  2011. Net favorable prior
year reserve development in 2012 was $467 million, compared  with $245 million in  2011.

Operating income in 2011 was $1.35 billion, $947 million or 41% lower than in 2010. The decline
in operating income in 2011 compared with 2010 primarily reflected the pretax  impact  of (i) lower net
favorable prior year reserve development, (ii) a significant increase in catastrophe losses, (iii) lower
underlying underwriting margins related  to  earned pricing and  loss cost trends, partially offset by higher
business volume, and (iv) lower net investment income. Partially offsetting these net pretax declines
were their related net tax benefit. The effective tax rate in 2011  decreased from  the prior year due to
interest on municipal bonds, which is effectively  taxed  at a rate  that is lower than the  corporate tax rate
of 35%, comprising a higher percentage of pretax  income. These factors  were partially offset  by  the
$76 million benefit resulting from the favorable  resolution of various prior year tax matters. Net
favorable prior year reserve development was  $245 million in 2011,  compared with $901 million in
2010. Catastrophe losses in 2011 were $1.02 billion, compared  with $437 million in 2010.

80

Revenues

Earned Premiums

Earned premiums in 2012 were $11.69  billion, $364  million or 3%  higher  than  in 2011. Earned

premiums in 2011 were $11.33 billion,  $561 million or  5% higher than in 2010.  The increases in  both
years primarily reflected the impact of  increases in net  written premiums  over the preceding  twelve
months. Earned premiums in 2012 and  2011 also benefited from positive  audit premium adjustments
related to increased insured exposures  for existing policyholders, compared with negative  audit
premium adjustments in 2010 related  to  decreased insured exposures  for existing policyholders.

Net Investment Income

Net investment income in 2012 was $2.09 billion,  $49 million or 2% higher  than in  2011, primarily

due to higher net investment income generated by  non-fixed maturity investments,  partially  offset by
lower net investment income from fixed maturity investments. Net investment income in 2011 was $2.04
billion, $115 million or 5% lower than in  2010,  primarily due  to  lower  net  investment income generated
by fixed maturity investments. Refer to the ‘‘Net Investment  Income’’ section of the ‘‘Consolidated
Results of Operations’’ discussion herein  for a description of the factors  contributing  to  the changes in
the Company’s consolidated net investment income in  2012  and  2011 compared with  the respective
prior years. In addition, refer to note  2 of notes to the  Company’s  consolidated  financial statements
herein for a discussion of the Company’s net investment income allocation methodology.

Fee Income

National Accounts is the primary source of fee  income  due to its service businesses,  which include

claim and loss prevention services to  large companies that  choose to self-insure  a portion of their
insurance risks, as well as claims and policy management services  to  workers’  compensation  residual
market pools. Fee income in 2012 increased by $27 million or 9%  over 2011. Fee income in 2011
increased by $10 million or 4% over 2010.  The increases in both years primarily reflected higher
serviced premium volume in workers’  compensation residual market pools.

Claims and Expenses

Claims and Claim Adjustment Expenses

Claims and claim adjustment expenses  in 2012  were $7.86 billion, $590 million or 7%  lower than  in

2011, primarily reflecting (i) a decline  in  catastrophe losses, (ii)  lower  non-catastrophe  weather-related
losses and (iii) an increase in net favorable prior year  reserve development, partially offset  by  (iv) the
impact of loss cost trends. Catastrophe losses  in 2012 were  $794 million, compared with $1.02 billion in
2011. Net favorable prior year reserve  development in 2012 was  $467 million,  compared with  $245
million in 2011. Factors contributing to net  favorable prior year reserve development are discussed in
more detail in note 7 of notes to the  Company’s consolidated financial statements.

Claims and claim adjustment expenses  in 2011  were $8.45 billion, $1.94 billion  or 30% higher than

in 2010. The increase in 2011 primarily  reflected (i) a significant  decline in net favorable prior year
reserve  development, (ii) a significant  increase  in catastrophe losses and (iii) the  impact  of loss  cost
trends  that included slightly higher than  expected loss costs in the  workers’  compensation and
commercial auto product lines. Net favorable  prior year reserve development  in 2011 was $245 million,
compared with $901 million in 2010.  Factors contributing to net favorable prior year reserve
development are discussed in more detail  in  note 7 of notes to the Company’s  consolidated  financial
statements. Catastrophe losses in 2011  were  $1.02 billion, compared  with $437 million in  2010.

81

Amortization of Deferred Acquisition Expenses

The amortization of deferred acquisition costs in 2012  was $1.88 billion, $69  million  or 4% higher

than in 2011. The amortization of deferred acquisition costs in 2011  was  $1.82 billion, $66 million or
4% higher than in 2010. The increases in  both 2012 and 2011  were generally consistent with the
increases in earned premiums compared to the respective prior year.

General and Administrative Expenses

General and administrative expenses  in 2012 were  $2.02 billion, $76 million or  4% higher than in

2011. The increase in 2012 included  the impact  of higher  employee-related costs. General and
administrative expenses in 2011 were $1.94  billion, $40 million or 2% higher than  in 2010, primarily
driven by a higher  level of state assessment expenses related to workers’ compensation business in New
York, which more than offset an overall reduction in operating expenses that was driven  by  lower
employee-related costs.

Income Tax Expense

Income tax expense in 2012 was $539 million, compared to $134 million in  2011. The increase  in
income tax expense of $405 million in 2012 from 2011  primarily  reflected the $836  million  improvement
in underwriting margins (including the  favorable impacts of  a decrease  in catastrophes and an increase
in net favorable prior year reserve development) over 2011  and, to a lesser degree, an increase  in net
investment income from non-fixed maturity investments  over  2011. The change in income tax expense
in 2012 from 2011 was also impacted  by the $76 million  benefit in 2011 resulting from the favorable
resolution of various prior year tax matters.

Income tax expense in 2011 was $134 million, compared to $777 million in  2010. The decrease  in
income tax expense of $643 million in 2011 from 2010  primarily  reflected the $1.48  billion decrease  in
underwriting margins (including the unfavorable impacts of an increase in catastrophes  and a  decrease
in net favorable prior year reserve development) from 2011. The change in  income  tax expense in 2011
from 2010 was also impacted by the $76  million benefit in 2011  resulting from the  favorable resolution
of various prior year tax matters.

GAAP Combined Ratios

The GAAP combined ratio of 97.4%  in 2012 was 7.3 points  lower  than  the GAAP  combined ratio

of 104.7% in 2011.

The loss and loss adjustment expense  ratio  of 65.9% in  2012 was 7.2 points  lower than  the loss  and

loss adjustment expense ratio of 73.1%  in  2011. Catastrophe losses in 2012 and 2011  accounted for
6.8 points and 9.0 points, respectively,  of  the loss  and  loss adjustment  expense ratio. Net favorable  prior
year reserve development in 2012 and  2011 provided 4.0 points and 2.2  points of benefit, respectively,
to the loss and loss adjustment expense  ratio. The 2012 underlying loss  and loss adjustment expense
ratio was 3.2 points lower than the 2011 ratio on the same basis,  reflecting the factors  discussed above.

The underwriting expense ratio of 31.5%  in 2012 was  0.1 points  lower  than the 2011  underwriting

expense ratio of 31.6%.

The GAAP combined ratio of 104.7% in 2011 was 13.4 points  higher than the GAAP combined

ratio of 91.3% in 2010.

The loss and loss adjustment expense  ratio  of 73.1% in  2011 was 14.0 points  higher than  the loss

and loss adjustment expense ratio of  59.1% in 2010. Catastrophe losses  in 2011 and 2010 accounted  for
9.0 points and 4.1 points, respectively,  of  the loss  and  loss adjustment  expense ratio. Net favorable  prior
year reserve development in 2011 and  2010 provided 2.2 points and 8.4  points of benefit, respectively,
to the loss and loss adjustment expense  ratio. The 2011 underlying loss  and loss adjustment expense
ratio was 2.9 points higher than the 2010 ratio  on the same basis, reflecting the factors discussed above.

82

The underwriting expense ratio of 31.6%  in 2011 was  0.6 points  lower  than the 2010  underwriting

expense ratio, primarily reflecting the impact  of  higher earned  premiums.

Written Premiums

The Business Insurance segment’s gross and net written premiums by market were  as follows:

(for the year ended December 31, in millions)

Gross Written Premiums

2012

2011

2010

Select Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Accounts . . . . . . . . . . . . . . . . . . . . . . . .
National Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industry-Focused Underwriting . . . . . . . . . . . . . . . . . .
Target Risk Underwriting . . . . . . . . . . . . . . . . . . . . . .
Specialized Distribution . . . . . . . . . . . . . . . . . . . . . . .

$ 2,827
3,280
1,387
2,627
2,116
876

Total Business Insurance Core . . . . . . . . . . . . . . . .
Business Insurance Other . . . . . . . . . . . . . . . . . . . . . .

13,113
(2)

$ 2,830
3,076
1,112
2,473
2,035
886

12,412
6

$ 2,758
2,753
1,111
2,368
2,008
883

11,881
10

Total Business Insurance . . . . . . . . . . . . . . . . . . . .

$13,111

$12,418

$11,891

(for the year ended December 31, in millions)

Net Written Premiums

2012

2011

2010

Select Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Accounts . . . . . . . . . . . . . . . . . . . . . . . .
National Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industry-Focused Underwriting . . . . . . . . . . . . . . . . . .
Target Risk Underwriting . . . . . . . . . . . . . . . . . . . . . .
Specialized Distribution . . . . . . . . . . . . . . . . . . . . . . .

$ 2,775
3,101
907
2,554
1,666
870

Total Business Insurance Core . . . . . . . . . . . . . . . .
Business Insurance Other . . . . . . . . . . . . . . . . . . . . . .

11,873
(1)

$ 2,784
2,890
782
2,407
1,587
880

11,330
10

$ 2,718
2,576
806
2,299
1,573
872

10,844
13

Total Business Insurance . . . . . . . . . . . . . . . . . . . .

$11,872

$11,340

$10,857

In 2012, gross and  net written premiums  increased  by  6% and 5%, respectively, over 2011. The

increases in gross and net written premiums were concentrated  in Commercial  Accounts,  Industry-
Focused Underwriting, National Accounts  and Target  Risk Underwriting, and were largely driven by
rate increases and positive audit premium  adjustments (which were higher than in 2011). Overall
business retention rates remained strong  in 2012 but were lower than  in 2011. Both components of
renewal premium changes—renewal  rate  changes and insured  exposure growth—remained positive in
2012, and renewal premium changes  increased  over 2011. New business levels in  2012 declined  from
2011.

In 2011, gross and  net written premiums  both increased  by 4% over 2010. The increase  in gross
and net written premiums in 2011 was concentrated in  Commercial Accounts  and Industry-Focused
Underwriting and, to a lesser extent, in Select Accounts.  Gross and net written premiums  were
favorably impacted by positive audit premium adjustments in  2011, as compared with negative
adjustments in 2010. Overall business  retention rates  remained strong in 2011  and were consistent  with
2010. Both components of renewal premium changes—renewal rate changes and insured exposure
growth—were positive in 2011 and increased over  2010. New business levels in 2011  declined modestly
from 2010.

Select Accounts. Net written premiums of $2.78 billion in 2012 were virtually level  with 2011.

Business retention rates in 2012 remained strong but were lower  than in 2011. Renewal premium
changes remained positive in 2012 and increased over 2011,  primarily  due to renewal rate  increases.
New business volume in 2012 declined from 2011. Net written premiums  in 2012  were favorably
impacted by positive audit premium adjustments. Net written premiums of $2.78 billion in 2011

83

increased by 2% over 2010. Business  retention rates  remained strong and were  consistent with  2010.
Renewal premium changes in 2011 improved over  2010 due  to  growth in both renewal rate  changes and
insured  exposures. New business volume in 2011  declined from 2010.

Commercial Accounts. Net written premiums of $3.10 billion in 2012 increased by 7%  over 2011.

Business retention rates remained strong but were lower than  in 2011. Renewal premium  changes
remained positive in 2012 and increased over  2011, primarily due to renewal rate  increases. New
business volumes in 2012 declined compared with 2011. Net written premiums in  2012 were  favorably
impacted by positive audit premium adjustments (which were higher  than in  2011).  Net written
premiums of $2.89 billion in 2011 increased by  12% over 2010. The increase  was partially  due  to  the
benefit of positive audit premium adjustments, compared with negative  adjustments in 2010.  Business
retention rates remained strong, decreasing  slightly  in 2011 compared with 2010. Renewal premium
changes were positive in 2011 and increased over 2010, primarily  driven by positive renewal rate
changes. New business volume in 2011  declined slightly from 2010.

National Accounts. Net written premiums of $907 million in  2012 increased by 16% over 2011.
Business retention rates remained high in  2012 and  were level with 2011. Renewal  premium changes
were positive and increased over 2011,  driven by payroll exposure  growth. New business volumes  in
2012 also increased over 2011. In addition, growth in workers’  compensation residual market pools
contributed to premium growth in 2012. Net  written premiums of $782 million in  2011 decreased by
3% from 2010, primarily reflecting negative  retrospective  premium adjustments  related to prior  year
policies. Business retention rates remained high  in 2011 and increased slightly over 2010,  while renewal
premium changes in 2011 also increased over 2010. New business volume  in 2011 declined slightly from
2010.

Industry-Focused Underwriting. Net written premiums of $2.55 billion in 2012  increased by  6%

over 2011. Premium increases in 2012 were driven by  growth in the Construction, Oil  & Gas and
Technology business units. Business retention rates in  2012 remained  strong and were  virtually level
with 2011. Renewal premium changes  remained  positive in 2012 and increased over 2011,  primarily  due
to renewal rate increases. New business volume in 2012 declined from  2011. Net written premiums of
$2.41 billion in 2011 increased by 5% over 2010,  primarily  driven  by growth in Construction, Oil  & Gas
and Technology.

Target  Risk Underwriting. Net written premiums of $1.67 billion in  2012  increased by  5% over

2011. Premium increases in 2012 were concentrated in the National Property and Inland Marine
business units. Business retention rates  in  2012 remained strong but declined from  2011. Renewal
premium changes remained positive in 2012 and increased over 2011, primarily due to renewal  rate
increases. New business volume in 2012  declined from  2011. Net written premiums  of $1.59 billion  in
2011 increased slightly over 2010, as  premium growth  in Inland Marine and Excess  Casualty  was largely
offset by a decline in National Property.

Specialized Distribution. Net written premiums of $870 million in  2012 decreased  by  1% from
2011. Premium decreases in the Northland business unit were  largely offset by premium  growth in the
National Programs business unit. Business retention  rates  in 2012 remained strong  but declined  from
2011. Renewal premium changes remained positive in 2012  and increased over  2011, primarily due to
renewal rate increases. New business  volume in 2012 declined from  2011. Net written premiums of
$880 million in 2011 increased slightly  over 2010, driven by  growth in the National Programs business
unit.

84

Financial, Professional & International Insurance

Results of the Company’s Financial, Professional  &  International Insurance segment were  as

follows:

(for the year ended December 31, in millions)

2012

2011

2010

Revenues:

Earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . .
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,045
395
1
26

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,467

$3,174
414
1
26

$3,615

$3,317
439
2
27

$3,785

Total claims and expenses . . . . . . . . . . . . . . . . . . . . . . .

$2,570

$2,738

$2,920

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 642

$ 647

$ 620

Loss and loss adjustment expense ratio . . . . . . . . . . . . . .
Underwriting expense ratio . . . . . . . . . . . . . . . . . . . . . .

GAAP combined ratio . . . . . . . . . . . . . . . . . . . . . . . .

42.8%
41.3

84.1%

46.4% 50.9%
39.4

36.8

85.8% 87.7%

Overview

Operating income in 2012 was $642 million, $5 million  or 1%  lower than operating income in
2011. The decline in operating income  in  2012  compared with 2011 primarily reflected the  pretax
declines in net favorable prior year reserve development and net investment income, largely  offset by
higher  underlying underwriting margins resulting from  the pretax impact  of (i) lower levels of what the
Company defines as large losses and (ii) earned pricing  that exceeded  loss  cost trends,  partially offset
by (iii) the impact of lower business volumes. The  effective  tax rate in 2012 increased  slightly from the
prior year, reflecting the impact of a  $14 million benefit  in  2011 resulting  from the favorable  resolution
of various prior year tax matters. Net favorable prior year reserve  development in 2012 was
$298 million, compared with $360 million  in  2011. Catastrophe losses in  2012 were  $50 million,
compared with $55 million in 2011.

Operating income in 2011 was $647 million, $27 million  or  4%  higher than operating income in
2010. The improvement in operating income in  2011 compared with  2010 primarily reflected a pretax
increase in underwriting margins, partially offset by  a pretax decline in net  investment income. The
increase in underwriting margins was  driven by  the pretax impact of (i) higher  net favorable prior  year
reserve  development and (ii) declines in catastrophe and non-catastrophe weather-related losses,
partially offset by the impact of (i) lower business volume, (ii) higher  general  and administrative
expenses and (iii) a higher level of large losses.  The  effective tax rate in  2011 decreased slightly from
the prior year, reflecting the impact of  a $14 million  benefit in 2011 resulting from the favorable
resolution of various prior year tax matters. Net favorable prior year  reserve  development in 2011  was
$360 million, compared with $259 million  in  2010. Catastrophe losses in  2011 were  $55 million,
compared with $82 million in 2010.

Revenues

Earned Premiums

Earned premiums in 2012 were $3.05  billion, $129  million or 4%  lower than  in 2011, primarily
reflecting the impact of lower construction surety premium volumes over the  preceding twelve months,
intentional underwriting actions undertaken in the  Company’s  operations at Lloyd’s  intended to
improve risk and reward (particularly in the catastrophe-exposed lines  of business),  the impact of the
termination of an exclusive broker relationship  in the Republic  of  Ireland, the Company’s withdrawal
from personal insurance business in the Republic  of  Ireland, competitive  market  conditions and,  to  a
lesser extent, foreign currency rates of exchange.

85

Earned premiums in 2011 were $3.17  billion, $143  million or 4%  lower than  in 2010. The  decline
primarily reflected the impact of the termination of an exclusive broker relationship in the Republic  of
Ireland, lower construction surety premium volumes over the preceding  twelve months, intentional
underwriting actions undertaken in the Company’s operations  at  Lloyd’s intended  to  improve risk  and
reward (particularly in the catastrophe-exposed  lines  of  business) and competitive  market  conditions.
Earned premiums in 2011 benefited slightly from the favorable impact  of foreign currency exchange
rates. In addition, earned premiums in 2010  benefited from  the impact of a  reduction in  surety
reinsurance costs associated with prior year reinsurance  treaties.

Net Investment Income

Net investment income in 2012 was $395 million, $19 million or 5% lower than in 2011, primarily

due to lower net investment income from  fixed  maturity  investments, partially  offset by higher  net
investment income generated by non-fixed  maturity investments.  Net investment  income  in 2011 was
$414 million, $25 million or 6% lower  than  in 2010. Included in the  Financial, Professional &
International Insurance segment are certain legal entities whose  invested assets and  related net
investment income are reported exclusively in this segment and not allocated among all business
segments. As a result, reported net investment  income in the Financial, Professional & International
Insurance segment reflects a significantly  smaller proportion of allocated net  investment income,
including that from the Company’s non-fixed maturity investments that  experienced an increase  in
investment income in 2012 and 2011. Refer to the  ‘‘Net Investment Income’’ section of the
‘‘Consolidated Results of Operations’’  discussion herein for a description of the  factors contributing to
the changes in the Company’s consolidated net investment income  in 2012  and 2011 compared with the
respective prior years. In addition, refer  to note  2 of notes to the  Company’s consolidated financial
statements herein for a discussion of  the Company’s net investment income allocation methodology.

Claims and Expenses

Claims and Claim Adjustment Expenses

Claims and claim adjustment expenses  in 2012  were $1.31 billion, $173 million or 12%  lower than

in 2011, primarily reflecting (i) lower  levels of large  losses  and (ii) the impact of lower  construction
surety premium volumes and intentional  underwriting  actions as  discussed above, partially offset by
(iii) a decline in net favorable prior year  reserve development.  Net favorable prior year reserve
development in 2012 was $298 million,  compared with  $360 million in  2011. Both Bond & Financial
Products and International contributed  to  net favorable prior year reserve development in  2012. Factors
contributing to net favorable prior year reserve  development are discussed in more  detail in note 7 of
notes to the Company’s consolidated  financial  statements.  Catastrophe  losses in 2012 were  $50 million,
compared with $55 million in 2011.

Claims and claim adjustment expenses  in 2011  were $1.49 billion, $213 million or 13%  lower than

in 2010, primarily reflecting (i) an increase in net favorable prior year reserve development, (ii) a
decline  in catastrophe losses, (iii) lower non-catastrophe weather-related  losses and  (iv) lower business
volume, partially offset by a higher level of large losses.  Net favorable prior  year  reserve development
was $360 million and $259 million in 2011 and 2010,  respectively.  Factors  contributing  to  net favorable
prior year reserve development are discussed in more  detail  in note  7 of notes to the Company’s
consolidated financial statements. Catastrophe  losses  in 2011 were $55 million, compared  with $82
million in 2010.

Amortization of Deferred Acquisition Costs

The amortization of deferred acquisition costs in 2012  was $589 million,  $14 million or 2% lower

than in 2011. The amortization of deferred acquisition costs was $603 million in  2011, $9 million or  1%

86

lower than in 2010. The decrease in 2012  was  generally consistent with the  decrease in earned
premiums, whereas the decrease in 2011  was less than the  decrease in earned premiums,  primarily due
to the increase to earned premiums in 2010 as a  result of a reduction  in surety reinsurance costs
associated with prior year reinsurance  treaties.

General and Administrative Expenses

General and administrative expenses  in 2012 were  $667 million, $19 million  or 3% higher than in

2011. General and administrative expenses were $648  million in 2011, $40 million or 7%  higher than in
2010. The increases in both 2012 and 2011 primarily reflected  increases in employee- and technology-
related costs to enhance operations and support future business growth.

Income Tax Expense

Income tax expense in 2012 was $255 million, compared to $230 million in  2011. The increase  in

income tax expense of $25 million in 2012 from 2011  primarily  reflected the impact of a  $14 million
benefit in 2011 from the favorable resolution  of various prior year tax matters and,  to  a lesser extent,
an increase in underwriting margins in 2012 from  2011.

Income tax expense in 2011 was $230 million, compared with  $245 million in 2010.  The decrease in

income tax of $15 million in 2011 from  2010 primarily  reflected the  impact  of  a $14 million benefit  in
2011 from the favorable resolution of various prior year tax matters.

GAAP Combined Ratios

The GAAP combined ratio of 84.1%  in 2012 was 1.7 points  lower  than  the GAAP  combined ratio

of 85.8% in 2011.

The loss and loss adjustment expense  ratio  of 42.8% in  2012 was 3.6 points  lower than  the loss  and

loss adjustment expense ratio of 46.4%  in  2011. The  2012 and 2011 ratios included 9.8 points and 11.3
points of benefit, respectively, from net  favorable  prior year reserve development.  Catastrophe losses in
2012 and 2011 accounted for 1.7 points  of the loss and loss adjustment expense ratio in each year. The
2012 underlying loss and loss adjustment  expense ratio was  5.1 points lower than  the 2011 ratio  on the
same basis, reflecting the factors discussed above.

The underwriting expense ratio of 41.3%  in 2012 was  1.9 points  higher than the underwriting
expense ratio of 39.4% in 2011, primarily  reflecting the impact of  a decline in earned premiums  and, to
a lesser extent, the impact of an increase  in general and administrative expenses.

The GAAP combined ratio of 85.8%  in 2011 was 1.9 points  lower  than  the GAAP  combined ratio

of 87.7% in 2010.

The loss and loss adjustment expense  ratio  of 46.4% in  2011 was 4.5 points  lower than  the 2010
ratio of 50.9%. Catastrophe losses in 2011 and 2010 accounted for 1.7 and 2.4 points of the loss and
loss adjustment expense ratio, respectively. Net favorable prior year reserve  development provided 11.3
points and 7.8 points of benefit to the  loss and loss  adjustment expense ratio in  2011 and  2010,
respectively. The 2011 underlying loss and  loss adjustment expense ratio was 0.3  points lower  than the
2010 ratio on the same basis, reflecting the  factors discussed above.

The underwriting expense ratio of 39.4%  in 2011 was  2.6 points  higher than the underwriting

expense ratio of 36.8% in 2010. The  increase in  2011 primarily reflected lower earned premium
volumes in International and construction  surety  and  the increase in general and  administrative
expenses discussed above.

87

Written Premiums

Financial, Professional & International Insurance  gross and net  written  premiums by market were

as follows:

(for the year ended December 31, in millions)

Gross Written Premiums

2012

2011

2010

Bond & Financial Products . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International

$2,059
1,216

$2,092
1,316

$2,133
1,401

Total Financial, Professional & International Insurance .

$3,275

$3,408

$3,534

(for the year ended December 31, in millions)

Net Written Premiums

2012

2011

2010

Bond & Financial Products . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International

$1,924
1,057

$1,953
1,149

$1,981
1,230

Total Financial, Professional & International Insurance .

$2,981

$3,102

$3,211

Gross and net written premiums in 2012 both decreased by  4% from 2011.  Gross and net written

premiums in 2011 decreased by 4% and 3%,  respectively, compared with 2010.

Net written premiums in Bond & Financial Products in 2012  were  $1.92 billion, $29 million  or 1%
lower than in 2011. The decrease was primarily  driven by lower business volume  in construction surety
due to the continued low levels of government construction  spending,  which was largely offset  by
growth in management liability business volume. Excluding the  surety line of  business,  for which the
following are not relevant measures,  business retention  rates in 2012 remained  strong and were slightly
higher  than in 2011. Renewal premium changes  in 2012  were positive and significantly higher than in
2011, primarily driven by positive renewal  rate changes. New  business  volume in  2012 was slightly lower
than in 2011.

Net written premiums in Bond & Financial Products in 2011  were  $1.95 billion, $28 million  or 1%

lower than in 2010, reflecting lower construction  surety premium volume due to the  continued
slowdown in construction spending, and  disciplined  underwriting.  The  decrease also  reflected  the
impact of reductions in surety reinsurance costs in 2010  associated with prior year reinsurance treaties.
Excluding the surety line of business,  for  which  the following are not relevant  measures, business
retention rates in 2011 remained strong  and  were higher than in  2010. Renewal premium changes  in
2011 were slightly positive (compared  with  slightly  negative  in 2010), as  the  modest growth  in insured
exposures exceeded negative renewal rate  changes. New business volume in 2011 increased considerably
over 2010.

Net written premiums in International  in 2012 were $1.06  billion,  $92 million  or 8% lower  than in

2011. The decrease in 2012 primarily reflected lower business  volume in  the Company’s  operations at
Lloyd’s, lower surety volumes in Canada, the  impact of the  Company’s withdrawal from personal
insurance business in the Republic of Ireland  and, to a  lesser extent, the  impact  of foreign currency
rates of exchange. Excluding the surety line of business, for which the following are  not  relevant
measures, business retention rates in  2012  were strong  and higher than in 2011. Renewal premium
changes in 2012 were negative and slightly lower than in 2011,  as positive  renewal rate changes were
more than offset by a decline in insured exposures. New business volumes in 2012  were slightly  lower
than in 2011.

Net written premiums in International  in 2011 were $1.15  billion,  $81 million  or 7% lower  than in
2010, primarily reflecting the impact  of the Company’s  termination of  an  exclusive  broker relationship
in the Republic of Ireland. Excluding the surety  line of  business, business  retention  rates  in 2011

88

declined from 2010, primarily as a result of  the Company’s withdrawal from  personal  insurance business
in the Republic of Ireland. New business volume  in International  in 2011 decreased from 2010,
primarily reflecting the Company’s withdrawal from  personal insurance business in the  Republic of
Ireland and intentional underwriting actions in the  Company’s  operations  at Lloyd’s.  Renewal premium
changes were flat in 2011 (compared  with slightly positive in 2010),  as positive renewal rate  changes
were offset by a decline in insured exposures.

Personal Insurance

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

(for the year ended December 31, in millions)

2012

2011

2010

Revenues:

Earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$7,621
404
66

$7,589
424
70

$7,349
464
75

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$8,091

$8,083

$7,888

Total claims and expenses . . . . . . . . . . . . . . . . . . . . . . . .

$7,842

$8,708

$7,314

Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . .

$ 217

$ (332) $ 440

Loss and loss adjustment expense ratio . . . . . . . . . . . . . .
Underwriting expense ratio . . . . . . . . . . . . . . . . . . . . . . .

72.3% 83.5% 68.1%
30.1
29.6

30.2

GAAP combined ratio . . . . . . . . . . . . . . . . . . . . . . . . .

101.9% 113.6% 98.3%

Incremental impact of direct to consumer initiative on

GAAP combined ratio . . . . . . . . . . . . . . . . . . . . . . .

2.3%

2.5% 2.2%

Overview

Operating income in 2012 was $217 million, $549 million  higher than the  operating loss of ($332)
million in 2011. The improvement in  operating  income in 2012 compared with 2011 primarily reflected
the pretax impact of (i) a decline in catastrophe losses, (ii) higher underlying  underwriting margins
resulting from lower non-catastrophe  weather-related losses and lower fire-related losses and (iii) an
increase in net favorable prior year reserve development. Partially offsetting  these pretax improvements
were their related tax expense. The effective tax rate in 2012 increased from  the prior year due to
interest on municipal bonds, which is effectively  taxed  at a rate  that is lower than the  corporate tax rate
of 35%, comprising a lower percentage of  pretax income. The operating  loss in 2011 included the
impact of a $10 million benefit resulting from the favorable resolution of various prior year  tax matters.
Catastrophe losses in 2012 were $1.02 billion, compared with $1.49 billion in 2011.  Net favorable  prior
year reserve development in 2012 was $175 million, compared  with $110 million in  2011.

An operating loss of ($332) million in 2011  compared with operating  income  of $440 million in

2010. The decline in operating income  in  2011  compared with 2010 primarily reflected the  pretax
impact of (i) a significant increase in catastrophe losses,  (ii) lower  underlying underwriting margins
related to earned pricing and loss cost  trends, higher non-catastrophe weather-related losses and an
increase in expenses related to the Company’s direct to consumer initiative, partially  offset by higher
business volumes,  and (iii) lower net  investment income.  Partially offsetting these  net pretax declines
were their related net tax benefit. The effective tax rate in 2011  decreased from  the prior year due to
interest on municipal bonds, which is effectively  taxed  at a rate  that is lower than the  corporate tax rate
of 35%, comprising a higher percentage of pretax  income. These factors  were partially offset  by  an
increase in net favorable prior year reserve development and a $10 million benefit resulting from the

89

favorable resolution of various prior  year tax  matters.  Catastrophe losses  in 2011 were $1.49 billion,
compared with $594 million in 2010.  Net  favorable prior year reserve development in 2011 was
$110 million, compared with $87 million  in 2010.

Revenues

Earned Premiums

Earned premiums in 2012 were $7.62  billion, $32  million or less than 1% higher than in 2011.

Earned premiums of $7.59 billion in  2011  were $240 million or 3% higher than in 2010.

Net Investment Income

Net investment income in 2012 was $404 million, $20 million or 5% lower than in 2011, primarily

due to lower net investment income from  fixed  maturity  investments, partially  offset by higher  net
investment income generated by non-fixed  maturity investments.  Net investment  income  in 2011 was
$424 million, $40 million or 9% lower  than  in 2010, primarily  due to lower net investment  income  from
fixed maturity investments. Refer to  the ‘‘Net Investment Income’’ section of ‘‘Consolidated Results  of
Operations’’ herein for a discussion of the change in  the Company’s net investment income in 2012 and
2011 as compared with the respective prior year. In addition, refer to note 2  of  notes to the  Company’s
consolidated financial statements herein for a  discussion of the Company’s net  investment income
allocation methodology.

Claims and Expenses

Claims and Claim Adjustment Expenses

Claims and claim adjustment expenses  in 2012  were $5.50 billion, $837 million or 13%  lower than

in 2011. The decrease primarily reflected (i) a decline  in catastrophe losses and, to a lesser extent,
(ii) lower non-catastrophe weather-related losses, (iii)  lower fire-related losses and (iv) higher  net
favorable prior year reserve development, partially offset by  (v)  the impact of loss cost trends, including
a higher number of severe bodily injury claims in the  automobile line  of business.  Catastrophe losses in
2012 were $1.02 billion, compared with  $1.49  billion in 2011. Net  favorable prior year  reserve
development in 2012 was $175 million,  compared with  $110 million in  2011. Factors contributing  to  net
favorable prior year reserve development are discussed  in more detail in note 7  of notes to the
Company’s consolidated financial statements.

Claims and claim adjustment expenses  in 2011  were $6.34 billion, $1.34 billion  or 27% higher than
in 2010. The increase primarily reflected  (i) the  significant increase in  catastrophe losses, (ii) the impact
of loss cost trends, (iii) higher non-catastrophe  weather-related losses and (iv)  higher business volumes.
These factors were partially offset by an  increase in net favorable prior year reserve  development.
Catastrophe losses in 2011 and 2010  were $1.49 billion  and  $594 million, respectively. Net favorable
prior year reserve development in 2011 and 2010 was $110  million  and  $87 million,  respectively. Factors
contributing to net favorable prior year reserve  development are discussed in more  detail in note 7 of
notes to the Company’s consolidated  financial  statements.

Amortization of Deferred Acquisition Costs

The amortization of deferred acquisition costs in 2012  was $1.44 billion, $21  million  or 1% lower
than in 2011. The amortization of deferred acquisition costs in 2011  was  $1.46 billion, $17 million or
1% higher than in 2010. The changes  in deferred acquisition  costs in both  2012 and  2011 differed from
the change in earned premiums, primarily reflecting an  increase in the number of agents reverting to a
contingent commission compensation  program (the costs of which  are classified in  ‘‘general and
administrative expenses’’) from a fixed-value compensation  program  (the costs of which  are classified in

90

‘‘amortization of deferred acquisition costs’’),  and growth in  the Company’s  direct to consumer  business
(for which no commission expense is incurred).

General and Administrative Expenses

General and administrative expenses  in 2012 were  $900 million, $8 million  or 1% lower  than in
2011. General and administrative expenses in 2011 were $908 million, $41 million or 5%  higher than in
2010. The increase in 2011 was primarily driven  by  costs associated with the  Company’s direct to
consumer initiative, as well as the increase in contingent commission expense  due  to  the increase in  the
number of agents reverting to a contingent  commission compensation program. The cost of the
contingent commission program is not subject  to  deferred  acquisition cost accounting  treatment and,
therefore, is expensed as incurred.

Income Tax Expense

Income tax expense in 2012 was $32  million, compared to an income  tax benefit  of  $293 million in
2011. The change in income tax expense of $325 million in 2012 from 2011 primarily reflected the $898
million decrease in underwriting loss (including the  favorable  impacts  of a decrease  in catastrophes and
an increase in net favorable prior year  reserve development) from 2011. The change in income tax
expense in 2012 from 2011 was also impacted  by  the $10 million  benefit in  2011 resulting from  the
favorable resolution of various prior  year tax  matters.

The income tax benefit in 2011 was $293 million, compared to income tax  expense of $134  million

in 2010. The change in income tax expense (benefit) of ($427)  million in  2011 from 2010  primarily
reflected the $1.15 billion decrease in  underwriting  margins (including the unfavorable  impacts  of an
increase in catastrophes and a decline  in net favorable prior year  reserve development) from 2011. The
change in income tax expense (benefit) was also  impacted by  the $10  million benefit  in 2011 resulting
from the favorable resolution of various  prior year  tax matters.

GAAP Combined Ratio

The GAAP combined ratio of 101.9% in 2012 was 11.7 points  lower  than  the GAAP combined

ratio of 113.6% in 2011.

The loss and loss adjustment expense  ratio  of 72.3% in  2012 was 11.2 points  lower than  the loss
and loss adjustment expense ratio of  83.5% in 2011. Catastrophe losses  accounted  for 13.4 points and
19.6 points of the loss and loss adjustment expense ratios in 2012 and 2011,  respectively. The loss and
loss adjustment expense ratio for 2012 and 2011 included 2.3 points and 1.5 points of  benefit,
respectively, from net favorable prior  year  reserve development. The 2012  underlying  loss and loss
adjustment expense ratio was 4.2 points  lower than the 2011 ratio  on the same basis, reflecting  the
factors discussed above.

The underwriting expense ratio of 29.6%  in 2012 was  0.5 points  lower  than the underwriting

expense ratio of 30.1% in 2011.

The GAAP combined ratio of 113.6% in 2011 was 15.3 points  higher than the GAAP combined

ratio of 98.3% in 2010.

The loss and loss adjustment expense  ratio  of 83.5% in  2011 was 15.4 points  higher than  the 2010

ratio of 68.1%. Catastrophe losses accounted for 19.6  and 8.1 points of the loss and  loss adjustment
expense ratio in 2011 and 2010, respectively. Net favorable  prior year reserve  development provided 1.5
points and 1.2 points of benefit to the  loss and loss  adjustment expense ratio in  2011 and  2010,
respectively. The 2011 underlying loss and  loss adjustment expense ratio was 4.2  points higher than the
2010 ratio on the same basis, reflecting the  factors discussed above.

91

The underwriting expense ratio of 30.1%  in 2011 was  0.1 points  lower  than the underwriting

expense ratio of 30.2% in 2010.

Agency Written Premiums

Gross and net written premiums by product line were  as follows for the Personal Insurance
segment’s Agency business, which comprises business written through agents, brokers and other
intermediaries and represents almost  all  of the  segment’s gross and net written premiums:

(for the year ended December 31, in millions)

Gross Written Premiums

2012

2011

2010

Agency Automobile . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agency Homeowners and Other . . . . . . . . . . . . . . . . . . .

$3,544
4,220

$3,706
4,221

$3,720
4,060

Total Agency Personal Insurance . . . . . . . . . . . . . . . . .

$7,764

$7,927

$7,780

(for the year ended December 31, in millions)

Net Written Premiums

2012

2011

2010

Agency Automobile . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agency Homeowners and Other . . . . . . . . . . . . . . . . . . .

$3,527
3,909

$3,688
3,923

$3,698
3,772

Total Agency Personal Insurance . . . . . . . . . . . . . . . . .

$7,436

$7,611

$7,470

In 2012, gross and  net written Agency written premiums both decreased 2%  from the respective

totals in 2011. In 2011, gross and net  Agency written premiums both increased 2%  over the respective
totals in 2010.

In the Agency Automobile line of business,  net written premiums in 2012 were  4% lower than in
2011. Business retention rates remained  strong but were lower than in 2011,  while new business levels
in 2012 declined from 2011, largely as a result of the Company’s pricing strategy and other profitability
improvement initiatives. Renewal premium changes  remained  positive in 2012 and increased over 2011.
Net written premiums in 2011 were slightly lower  than in  2010.  Business retention rates in 2011
remained strong, while new business  levels  declined from  2010. Renewal premium changes  remained
positive in 2011 and increased over 2010.

In the Agency Homeowners and Other line of business, net  written premiums  in 2012 were slightly

lower than in 2011. Business retention rates remained  strong but  were lower than in 2011, while  new
business levels in 2012 declined from 2011,  largely as a result of the  Company’s pricing strategy, higher
deductibles and other profitability improvement initiatives. Renewal premium changes remained
positive in 2012 and increased over 2011. Net written premiums in 2011 were 4% higher than  in 2010.
Business retention rates in 2011 remained  strong, while new business levels  were lower than in 2010.
Renewal premium changes in 2011 remained positive and  increased slightly over  2010.

For its Agency business, the Personal  Insurance segment had approximately 7.1  million and 7.7

million active policies at December 31, 2012 and 2011, respectively.

Direct to Consumer Written Premiums

In its direct to consumer business, net written premiums in 2012 were $158  million, $24 million  or
18% higher than in 2011. The increase  in  net written premiums in  2012 resulted from  a $15 million or
15% increase in automobile net written premiums and  a $9 million or 26%  increase in homeowners
and other net written premiums compared  to  2011. Net written premiums  in 2011 were $134  million,
$37 million or 38% higher than in 2010.  The increase  in net written premiums in 2011  resulted from a
$26 million or 35% increase in automobile  net written premiums and  an $11  million or  48% increase in

92

homeowners and other net written premiums compared  to 2010.  The  direct to consumer  business  had
160,000 and 140,000 active policies at December 31,  2012 and 2011, respectively.

Interest Expense and Other

(for the year ended December 31, in millions)

2012

2011

2010

Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(261) $(279) $(318)

The operating loss for Interest Expense  and Other in  2012 was $18 million lower than in 2011.
The  operating  loss  in  2011  was  $39  million  lower  than  in  2010,  primarily  reflecting  $39  million  of  after-
tax expenses related to the Company’s purchase and retirement  of  a significant portion of its 6.25%
fixed-to-floating rate junior subordinated  debentures in 2010. The operating loss  in 2010 also included  a
$12 million increase in tax expense associated with recent federal  health care  legislation and  an
increase in interest expense. After-tax  interest  expense in  2012, 2011 and  2010 was  $246 million, $251
million and $252 million, respectively.

ASBESTOS CLAIMS AND LITIGATION

The Company believes that the property and casualty insurance industry has suffered from  court
decisions and other trends that have  expanded  insurance coverage  for asbestos claims far  beyond the
original  intent  of  insurers  and  policyholders.  The  Company  has  received  and  continues  to  receive  a
significant number of asbestos claims  from  the Company’s policyholders  (which includes others  seeking
coverage under a policy). Factors underlying these claim filings include intensive advertising by lawyers
seeking asbestos claimants and the continued focus by plaintiffs  on previously peripheral defendants.
The focus on these defendants is primarily the  result of the  number of traditional  asbestos  defendants
who have sought bankruptcy protection in previous years. In  addition  to  contributing  to  the overall
number of claims, bankruptcy proceedings may increase the volatility of asbestos-related losses  by
initially delaying the reporting of claims and later by significantly  accelerating and increasing loss
payments by insurers, including the Company. The bankruptcy of many  traditional  defendants has also
caused increased settlement demands against those  policyholders  who are not in  bankruptcy  but that
remain in the tort system. Currently, in  many jurisdictions, those who  allege  very serious injury and  who
can present credible medical evidence of  their  injuries  are receiving priority  trial  settings  in the courts,
while those who have not shown any credible disease manifestation are having their hearing dates
delayed or placed on an inactive docket.  This trend of prioritizing claims  involving credible  evidence  of
injuries, along with the focus on previously peripheral defendants, contributes to the  claims and  claim
adjustment expense payments experienced by the  Company. The Company’s asbestos-related  claims and
claim adjustment expense experience  also  has been  impacted by  the  unavailability  of other insurance
sources  potentially available to policyholders, whether through exhaustion  of  policy  limits or through
the insolvency of other participating insurers.

The Company continues to be involved  in coverage litigation concerning a number of

policyholders, some of whom have filed for bankruptcy, who in some instances  have asserted that all or
a portion of their asbestos-related claims are not subject to aggregate limits on coverage. In these
instances, policyholders also may assert  that each individual bodily injury  claim should  be  treated  as a
separate occurrence under the policy. It  is  difficult  to  predict  whether these policyholders will  be
successful on both issues. To the extent both issues are resolved  in a policyholder’s favor and other
Company defenses are not successful,  the Company’s coverage obligations under the policies at issue
would be materially increased and bounded  only by  the applicable  per-occurrence  limits and  the
number of asbestos bodily injury claims  against  the policyholders. Accordingly, although  the Company
has seen a moderation in the overall risk  associated with  these  lawsuits, it remains difficult to predict
the ultimate cost of these claims.

93

Many coverage disputes with policyholders are  only resolved  through settlement agreements.
Because many policyholders make exaggerated  demands, it is difficult  to  predict the outcome of
settlement negotiations. Settlements involving bankrupt policyholders may include extensive releases
which  are favorable to the Company  but  which  could result in settlements  for larger amounts than
originally anticipated. There also may be instances where a  court  may  not  approve  a proposed
settlement, which may result in additional  litigation and potentially less beneficial outcomes for the
Company. As in the past, the Company  will  continue to pursue settlement opportunities.

In addition to claims against policyholders, proceedings have been launched  directly against
insurers, including the Company, by  individuals challenging insurers’ conduct with respect to the
handling of past asbestos claims and  by  individuals seeking damages arising  from alleged asbestos-
related bodily injuries. It is possible that the filing of  other direct actions  against insurers, including  the
Company, could be made in the future. It is difficult  to  predict the outcome  of these  proceedings,
including whether the plaintiffs will be  able to sustain these actions against insurers based on novel
legal theories of liability. The Company  believes  it  has meritorious  defenses to these  claims and  has
received favorable  rulings in certain jurisdictions.

Travelers Property Casualty Corp. (TPC), a wholly-owned subsidiary  of the Company, had  entered

into settlement agreements which are  subject to a  number  of contingencies, in  connection with  a
number of these direct action claims (Direct Action Settlements). For a full discussion of these
settlement agreements, see the ‘‘Asbestos Direct  Action Litigation’’ section of note  16 of notes to the
consolidated financial statements.

Because each policyholder presents different liability and coverage  issues, the  Company generally

reviews the exposure presented by each  policyholder at  least  annually. Among  the factors which the
Company may consider in the course of this review  are:  available insurance coverage, including  the role
of any umbrella or excess insurance the Company has  issued to the  policyholder; limits  and deductibles;
an analysis of the policyholder’s potential  liability; the jurisdictions  involved; past and anticipated  future
claim activity and loss development on pending claims; past settlement values of  similar claims;
allocated claim adjustment expense; potential role of other  insurance; the role, if any,  of  non-asbestos
claims or potential non-asbestos claims  in any  resolution process; and applicable coverage defenses or
determinations, if any, including the determination as to whether or not an  asbestos  claim  is a products/
completed operation claim subject to an aggregate limit  and the available coverage, if any, for that
claim.

In the third quarter of 2012, the Company completed its annual in-depth asbestos claim review. As
in prior years, the annual claim review considered active policyholders and litigation cases  for potential
product  and ‘‘non-product’’ liability. The  Company noted the following trends:

(cid:127) continued high level of litigation activity in certain  jurisdictions  involving individuals alleging

serious asbestos-related illness;

(cid:127) while overall payment patterns have been generally stable, there has  been an increase in severity

for certain policyholders due to the continued high  level of litigation activity;

(cid:127) continued moderate level of asbestos-related bankruptcy activity; and

(cid:127) the absence of new theories of liability or  new classes  of defendants.

While the Company believes that over the past several  years there has been  a reduction  in the
volatility associated with the Company’s overall asbestos exposure,  there nonetheless remains a high
degree of uncertainty with respect to future  exposure from asbestos claims.

During  2012, total gross and net asbestos-related payments decreased when  compared with  2011,

primarily resulting from a decline in  both  gross and net payments to policyholders with whom the
Company has entered into settlement agreements. The Home Office and Field Office  categories,  which

94

account for the vast majority of policyholders with active asbestos-related claims, experienced a modest
reduction in gross asbestos-related payments during 2012  when compared with 2011, while  net asbestos
payments were flat. Payments on behalf of  policyholders in these  categories continue  to  be  influenced
by the high level of litigation activity  in  a  limited number of jurisdictions where  individuals alleging
serious asbestos-related injury continue  to target previously peripheral defendants. The number of
policyholders tendering asbestos claims  for the  first  time in 2012  and the number  of  policyholders with
open asbestos claims both increased slightly when compared with 2011.

The Company’s quarterly asbestos reserve reviews include an analysis of  exposure and  claim
payment patterns by policyholder category, as well  as recent settlements, policyholder  bankruptcies,
judicial rulings and legislative actions. The  Company also  analyzes developing payment patterns among
policyholders in the Home Office, Field Office  and Assumed Reinsurance and Other  categories  as well
as projected reinsurance billings and recoveries.  In  addition, the Company  reviews its historical gross
and net loss and expense paid experience, year-by-year, to assess any emerging  trends, fluctuations,  or
characteristics suggested by the aggregate  paid activity. Conventional actuarial methods are not utilized
to establish asbestos reserves nor have  the Company’s evaluations  resulted in  any way of determining a
meaningful average asbestos defense  or indemnity  payment.

The completion of these reviews and analyses in 2012,  2011 and 2010 resulted in  $175 million,

$175 million and $140 million increases, respectively,  in the  Company’s net asbestos reserves in  each
period. In each year, the reserve increases  were primarily driven by  increases in the  Company’s
estimate of projected settlement and defense costs related to  a  broad  number of  policyholders in  the
Home Office category and by higher  projected  payments on assumed reinsurance accounts. The
increase in the estimate of projected  settlement and defense costs resulted  from payment trends that
continue to be moderately higher than previously  anticipated due to the impact of the  current litigation
environment discussed above. The increase in 2010 also  reflected  increases in costs of litigating
asbestos-related coverage matters and  was  partially offset by a $70 million benefit  from the reduction in
the allowance for uncollectible reinsurance resulting from  a  favorable  ruling related  to  a reinsurance
dispute. Notwithstanding these trends,  the Company’s overall  view of the  underlying  asbestos
environment is essentially unchanged  from recent periods, and there remains  a high degree of
uncertainty with respect to future exposure to asbestos claims.

Net asbestos losses paid in 2012, 2011 and  2010 were $236  million,  $284 million and  $350 million,

respectively. Approximately 6%, 19% and  32%  of  total net  paid  losses in 2012, 2011 and 2010,
respectively, related to policyholders  with  whom the Company  had  entered into settlement  agreements
limiting the Company’s liability.

The Company categorizes its asbestos reserves as follows:

Number of
Policyholders

Total Net Paid

Net Asbestos
Reserves

(at and for the year ended December 31, $ in millions)

2012

2011

2012

2011

2012

2011

Policyholders with settlement agreements . . . . . . . . . .
Home office and field office . . . . . . . . . . . . . . . . . . . .
Assumed reinsurance and other . . . . . . . . . . . . . . . . .

15
1,678
—

15
1,616
—

$ 13
199
24

$ 54
199
31

$

91
2,089
198

$ 588
1,660
191

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,693

1,631

$236

$284

$2,378

$2,439

The ‘‘policyholders with settlement agreements’’  category  includes structured settlements,  coverage

in place arrangements and, with respect  to  TPC,  Wellington accounts.  Reserves are  based on the
expected payout for each policyholder under the applicable agreement. Structured settlements  are
arrangements under which policyholders and/or  plaintiffs  agree to fixed financial  amounts to be paid at
scheduled times. Coverage in place arrangements represent  agreements with  policyholders on specified
amounts of coverage to be provided. Payment obligations may be subject to annual maximums and are

95

only made when valid claims are presented. Wellington  accounts refer to the 35 defendants  that  are
parties to a 1985 agreement settling certain disputes concerning insurance coverage for their  asbestos
claims. Many of the aspects of the Wellington  agreement are similar to those of coverage in place
arrangements in which the parties have  agreed on specific amounts of coverage and the terms under
which  the coverage can be accessed.

The ‘‘home office and field office’’ category  relates to all other policyholders and also  includes
unallocated IBNR reserves and reserves for the costs of defending asbestos-related coverage litigation.
Policyholders are identified for the annual home office review  based upon,  among  other factors:  a
combination of past payments and current case reserves in excess of a specified  threshold (currently
$100,000), perceived level of exposure, number  of reported claims,  products/completed  operations and
potential ‘‘non-product’’ exposures, size of policyholder and geographic  distribution of products or
services sold by the policyholder. In addition to IBNR amounts  contained in the reserves for ‘‘home
office and field office’’ policyholders and the  costs of litigating asbestos  coverage  matters, the  Company
has established a reserve for further adverse  development related to existing  policyholders, new claims
from policyholders reporting claims for the  first time and policyholders for which  there is, or  may be,
litigation and direct actions against the Company.  During 2012,  $502 million of reserves included  in
‘‘Policyholders with settlement agreements’’ were reclassified to the unallocated  IBNR  component in
the ‘‘home office and field office’’ category as a  result of the U.S. District Court ruling on March 1,
2012 that the conditions of the Direct Action  Settlements  had not been satisfied.  For a  full discussion
of these  settlement agreements see the ‘‘Asbestos Direct  Action Litigation’’ section of note 16 of notes
to the consolidated financial statements.  The  ‘‘assumed reinsurance and other’’ category primarily
consists of reinsurance of excess coverage, including various pool participations.

On January 29, 2009, the Company and PPG Industries,  Inc (‘‘PPG’’), along with  approximately  30
other insurers of PPG, agreed in principle to an agreement to settle asbestos-related coverage litigation
under insurance policies issued to PPG. The tentative settlement agreement  has been incorporated  into
the Modified Third Amended Plan of Reorganization (‘‘Amended Plan’’)  proposed as  part of the
Pittsburgh Corning Corp. (‘‘PCC’’, which  is  50% owned by  PPG) bankruptcy  proceeding. Pursuant  to
the proposed Amended Plan, which was filed on January 30, 2009, PCC,  along with enumerated other
companies (including PPG as well as  the Company  as a participating insurer), are  to  receive protections
afforded by Section 524(g) of the Bankruptcy Code from  certain asbestos-related bodily injury claims.
Under the agreement in principle, the  Company  has the option to make a  series of payments over the
next 20 years totaling approximately $620  million to the Trust  to  be  created under the Amended Plan,
or it may elect to make a one-time discounted  payment, which, as  of March 31,  2013, would total
approximately $481 million (approximately  $452 million after reinsurance). The agreement  in principle
with PPG is subject to numerous contingencies, including final court approval of the  Amended  Plan,
and the Company has no obligation to  make the settlement payment  until all contingencies  are
satisfied. The Company’s obligations under this agreement  in principle are included in the  ‘‘home office
and field office’’ category in the preceding table.

96

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

(at and for the year ended December 31, in millions)

2012

2011

2010

Beginning reserves:

Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,780
(341)

$2,941
(393)

$3,097
(339)

Net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,439

2,548

2,758

Incurred losses and loss expenses:

Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Losses paid:

Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Ending reserves:

171
4

175

262
(26)

236

195
(20)

175

356
(72)

284

262
(122)

140

418
(68)

350

Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,689
(311)

2,780
(341)

2,941
(393)

Net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,378

$2,439

$2,548

See ‘‘—Uncertainty Regarding Adequacy  of  Asbestos and Environmental Reserves.’’

ENVIRONMENTAL CLAIMS AND LITIGATION

The Company has received and continues  to  receive claims  from  policyholders  who allege that they
are liable for injury or damage arising  out of their alleged disposition of toxic substances.  Mostly, these
claims are due to various legislative as  well as regulatory efforts aimed at environmental  remediation.
For instance, the Comprehensive Environmental Response,  Compensation  and Liability Act
(CERCLA), enacted in 1980 and later modified, enables private parties as well  as federal  and state
governments to take action with respect  to releases  and  threatened releases of hazardous substances.
This federal statute permits the recovery of response costs from some liable  parties and  may require
liable parties to undertake their own  remedial action. Liability  under CERCLA  may be joint and
several with other responsible parties.

The Company has been, and continues to be, involved in litigation involving insurance coverage

issues pertaining to environmental claims. The Company  believes that some court decisions have
interpreted the insurance coverage to  be  broader than the original intent of  the insurers and
policyholders. These decisions often pertain to insurance policies that were issued by the  Company
prior to the mid-1980s. These decisions  continue  to  be  inconsistent and vary from jurisdiction  to
jurisdiction. Environmental claims when  submitted  rarely indicate  the monetary amount being sought by
the claimant from the policyholder, and the Company does not  keep track of  the monetary amount
being sought in those few claims which indicate a monetary amount.

The resolution of environmental exposures by  the Company generally occurs through settlements

with policyholders as opposed to claimants. Generally, the  Company strives to extinguish any
obligations it may have under any policy  issued to the policyholder for past, present and future
environmental liabilities and extinguish  any  pending coverage litigation dispute with  the policyholder.
This form of settlement is commonly referred to as a  ‘‘buy-back’’ of  policies  for future environmental
liability. In addition, many of the agreements have also extinguished any insurance obligation which the

97

Company may have for other claims, including but  not  limited to asbestos and  other  cumulative injury
claims. The Company and its policyholders may also  agree to settlements which extinguish any liability
arising from known specified sites or  claims. Where appropriate,  these agreements also include
indemnities and hold harmless provisions to protect  the Company. The Company’s general  purpose in
executing these agreements is to reduce the  Company’s potential environmental exposure and  eliminate
the risks presented by coverage litigation  with the policyholder and related costs.

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

In its review of environmental reserves, the Company considers:  past  settlement payments;
changing  judicial and legislative trends;  its reserves for  the costs of litigating environmental coverage
matters; the potential for policyholders  with smaller  exposures  to  be  named in new clean-up actions  for
both on- and off-site waste disposal activities; the  potential  for adverse development; the potential for
additional new claims beyond previous  expectations; and  the  potential higher costs for  new settlements.

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

The Company continues to receive notices from policyholders tendering claims for the first time,

frequently under policies issued prior  to  the mid-1980’s. These policyholders continue to present
smaller exposures, have fewer sites and  are lower  tier defendants. Further, in  many instances,  clean-up
costs have been reduced because regulatory  agencies  are willing to accept risk-based site analyses and
more efficient clean-up technologies.  Overall net environmental  claim  payments in 2012 were  essentially
unchanged from 2011. Over the past  several years, the Company  has experienced generally favorable
trends  in the number of new policyholders tendering  environmental claims for  the first time  and in  the
number of pending declaratory judgment actions relating  to environmental  matters. The  degree  to
which  those favorable trends have continued, however, has  been less than  anticipated. As a result, in
2012 and 2011, the Company increased  its net environmental  reserves by $90  million  and $76  million,
respectively. In 2010, the Company increased  its  net environmental  reserves by $35 million due to a
modest upward development in the expected  defense  and settlement costs for  certain  of its  pending
policyholders.

98

Net environmental losses paid in 2012, 2011  and  2010 were $84 million, $86 million  and

$77 million, respectively. At December 31, 2012, approximately  93% of the net  environmental reserve
(approximately $323 million) was carried in a bulk reserve and included unresolved environmental
claims, incurred but not reported environmental claims and the anticipated cost of coverage litigation
disputes relating to these claims. The bulk reserve  the Company carries  is established and adjusted
based upon the aggregate volume of in-process environmental claims and the Company’s experience in
resolving those claims. The balance, approximately 7%  of  the  net environmental reserve (approximately
$24 million), consists of case reserves.

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

(at and for the year ended December 31, in millions)

2012

2011

2010

Beginning reserves:

Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$346
(5)

$354
(3)

$389
4

Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

341

351

393

Incurred losses and loss expenses:

Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Losses paid:

Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

99
(9)

90

93
(9)

84

80
(4)

76

88
(2)

86

45
(10)

35

80
(3)

77

Ending reserves:

Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

352
(5)

346
(5)

354
(3)

Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$347

$341

$351

UNCERTAINTY REGARDING ADEQUACY OF ASBESTOS AND  ENVIRONMENTAL RESERVES

As a result of the processes and procedures discussed above, management believes that the
reserves carried for asbestos and environmental claims at  December 31, 2012 are appropriately
established based upon known facts, current law and management’s judgment.  However, the
uncertainties surrounding the final resolution of these claims continue, and it  is difficult to determine
the ultimate exposure for asbestos and environmental  claims and  related  litigation.  As a  result, these
reserves are subject to revision as new  information becomes  available  and  as claims develop. The
continuing uncertainties include, without  limitation,  the risks and lack  of  predictability  inherent in
complex litigation, any impact from the  bankruptcy protection sought by various  asbestos producers and
other asbestos defendants, a further increase or decrease  in the  cost to resolve, and/or the  number of,
asbestos and environmental claims beyond that  which is  anticipated, the role  of any  umbrella or excess
policies the Company has issued, the resolution  or adjudication of  disputes pertaining  to  the amount of
available coverage for asbestos and environmental claims in a manner inconsistent with  the Company’s
previous assessment of these claims, the  number and outcome of direct actions against the Company,
future developments pertaining to the Company’s ability  to recover reinsurance  for asbestos and
environmental claims and the unavailability of other insurance sources  potentially available  to
policyholders, whether through exhaustion  of policy limits  or  through the insolvency  of other
participating insurers. In addition, uncertainties  arise from the insolvency  or bankruptcy of
policyholders and other defendants. It  is  also not possible to  predict  changes in the  legal, regulatory

99

and legislative environment and their impact on the future  development of asbestos and  environmental
claims. This environment could be affected by changes  in applicable legislation  and future court  and
regulatory decisions and interpretations, including the outcome of legal  challenges to legislative and/or
judicial reforms establishing medical criteria for the  pursuit of asbestos claims. It  is also  difficult  to
predict the ultimate outcome of complex  coverage disputes  until settlement negotiations near
completion and significant legal questions  are  resolved or, failing  settlement, until the dispute is
adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations often
involve a large number of claimants  and  other parties and  require court  approval to be effective. As
part of its continuing analysis of asbestos  and  environmental reserves,  the Company continues to study
the implications of these and other developments. (Also  see note 16 of notes to the consolidated
financial statements in this report).

Because of the uncertainties set forth above, additional  liabilities  may  arise for amounts in excess

of the Company’s current reserves. In  addition,  the Company’s estimate  of  claims  and claim adjustment
expenses may change. These additional  liabilities  or increases in estimates, or a  range of either, cannot
now be reasonably estimated and could result in income statement  charges  that  could  be  material  to
the Company’s operating results in future  periods.

INVESTMENT PORTFOLIO

The Company’s invested assets at December  31, 2012 were  $73.84 billion,  of  which 93%  was
invested in fixed maturity and short-term  investments, 1% in  equity securities, 1% in real estate  and
5% in other investments. Because the  primary purpose of the investment  portfolio  is to fund future
claims payments, the Company employs a  conservative  investment philosophy.  A significant majority of
funds  available for investment are deployed in a  widely diversified portfolio of high quality, liquid
taxable U.S. government, tax-exempt  U.S.  municipal and taxable  corporate and  U.S. agency mortgage-
backed bonds.

The carrying value of the Company’s  fixed  maturity portfolio  at December 31, 2012  was
$65.39 billion. The Company closely monitors the duration of its fixed maturity  investments, and
investment purchases and sales are executed with the objective  of  having adequate funds  available to
satisfy the Company’s insurance and debt  obligations. The weighted average credit quality of the
Company’s fixed maturity portfolio, both  including and excluding U.S. Treasury securities,  was  ‘‘Aa2’’ at
both December 31, 2012 and 2011. In 2011, Standard & Poor’s downgraded the credit rating of
securities issued by the U.S. government,  which had minimal  impact on the overall credit quality  of the
Company’s fixed maturity portfolio at December 31, 2011.  Below  investment  grade  securities
represented 3.1% of the total fixed maturity  investment portfolio  at both December 31, 2012  and 2011.
The average effective duration of fixed maturities and short-term securities  was 3.2 (3.4 excluding
short-term securities) at both December  31, 2012 and 2011.  See  the ‘‘Outlook’’ section in ‘‘Item 7—
Management’s Discussion and Analysis of Financial Condition and Results  of  Operations.’’

100

The carrying values of investments in  fixed  maturities classified as available for sale  at

December 31, 2012 and 2011 were as follows:

(at December 31, in millions)

U.S. Treasury securities and obligations  of U.S.
government and government agencies and
authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Obligations of states, municipalities and political

subdivisions::

2012

2011

Carrying
Value

Average Credit
Quality(1)

Carrying
Value

Average Credit
Quality(1)

$ 2,222

Aaa/Aa1

$ 2,497

Aaa/Aa1

Pre-refunded . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9,025
29,656

Aa1
Aa1

Total obligations of states, municipalities and

political subdivisions . . . . . . . . . . . . . . . . . .

38,681

Debt securities issued by foreign governments . . . . . .

2,257

Aaa

7,332
31,690

39,022

2,318

Mortgage-backed securities, collateralized  mortgage

obligations, and pass-through securities . . . . . . . . . .

2,997

A1

3,515

All other corporate bonds and redeemable preferred

stock:
Financial:

Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance/leasing . . . . . . . . . . . . . . . . . . . . . . . .
Brokerage and asset management . . . . . . . . . .

Total financial . . . . . . . . . . . . . . . . . . . . . . .

Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sovereign corporate securities(2) . . . . . . . . . . . . . .
Canadian municipal securities . . . . . . . . . . . . . . . .
Commercial mortgage-backed securities  and project
loans(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed and other . . . . . . . . . . . . . . . . . . . . .

Total all other corporate bonds and

1,808
433
39
34

2,314

12,076
2,151
1,011
643

453
588

A1
A1
Baa3
A2

A3
A3
Aaa
Aa1

Aaa
A2

1,452
386
42
39

1,919

9,961
2,116
1,407
639

446
392

Aa1
Aa1

Aaa

Aa3

A1
A2
Baa3
A3

Baa1
A3
Aaa
Aa1

Aaa
Baa1

redeemable preferred stock . . . . . . . . . . .

19,236

16,880

Total fixed maturities . . . . . . . . . . . . . . . . . .

$65,393

Aa2

$64,232

Aa2

(1) Rated using external rating agencies  or by the Company when a public rating does not exist.

(2) Sovereign corporate securities include corporate securities that are backed by a government and

include sovereign banks and securities  issued under the  Temporary Liquidity Guaranty  and the
Federal Ship Financing Programs.

(3) Included in commercial mortgage-backed securities  and project loans  at December 31, 2012  and

2011 are $50 million and $66 million  of securities guaranteed  by the U.S. government, respectively,
and $14 million and $15 million by government sponsored enterprises, respectively.

101

The following table sets forth the Company’s fixed maturity  investment portfolio rated using

external  ratings agencies or by the Company when a public rating does not exist:

(at December 31, 2012, in millions)

Quality Rating:

Carrying
Value

Percent of Total
Carrying Value

Aaa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Baa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total investment grade . . . . . . . . . . . . . . . . . . . . . . . . . .
Below investment  grade . . . . . . . . . . . . . . . . . . . . . . . . .

$28,108
20,768
8,354
6,111

63,341
2,052

43.0%
31.8
12.8
9.3

96.9
3.1

Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . .

$65,393

100.0%

Obligations of States, Municipalities and  Political Subdivisions

The Company’s fixed maturity investment portfolio at  December  31, 2012 and 2011 included
$38.68 billion and $39.02 billion, respectively, of securities  which are  obligations of states, municipalities
and political subdivisions (collectively referred  to  as the municipal bond portfolio). The municipal bond
portfolio is diversified across the United States, the District of Columbia and Puerto  Rico  and includes
general obligation and revenue bonds issued  by states, cities, counties,  school  districts and similar
issuers. Included in the municipal bond portfolio at December  31, 2012 and 2011  were $9.03  billion and
$7.33 billion, respectively, of advance  refunded  or escrowed-to-maturity bonds (collectively referred to
as pre-refunded bonds), which are bonds  for  which an  irrevocable trust has been established to fund
the remaining payments of principal and interest.  Such escrow accounts  are verified as to their
sufficiency by an independent verification  agent of  the underwriter, issuer or trustee  and are  almost
exclusively comprised of U.S. Treasury  securities. Moody’s Investors  Service has assigned negative
outlooks to municipal securities in both  the state  sector and local  government sector within  the United
States.

102

The following table shows the geographic distribution of  the $29.66  billion of municipal bonds at

December 31, 2012 that were not pre-refunded.

(at December 31, 2012, in millions)

State:

State
General

Local
General

Obligation Obligation

Revenue

Total
Carrying
Value

Average
Credit
Quality(1)

Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
California . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . .
Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minnesota . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Massachusetts . . . . . . . . . . . . . . . . . . . . . . . . .
Arizona . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
North Carolina . . . . . . . . . . . . . . . . . . . . . . . .
Colorado . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Georgia . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All Others(2) . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 426
46
273
183
161
306
345
188
—
239
—
201
299
1,976

$4,643

$ 2,572
1,775
793
673
866
746
42
28
495
606
679
376
380
3,498

$ 1,214
411
497
681
463
234
830
914
609
205
197
288
151
4,790

$ 4,212 Aaa/Aa1
2,232
Aa2
Aa1
1,563
1,537 Aaa/Aa1
1,490
Aa1
1,286 Aaa/Aa1
Aa1
1,217
1,130 Aaa/Aa1
Aa1
1,104
Aaa
1,050
Aa1
876
865 Aaa/Aa1
830 Aaa/Aa1
Aa1

10,264

$13,529

$11,484

$29,656

Aa1

(1) Rated using external rating agencies  or by the Company when a public rating does not exist.

Ratings shown are the higher of the  rating of the  underlying issuer or the insurer in the  case of
securities enhanced by third-party insurance for the payment of principal and interest in the  event
of issuer default.

(2) No other single state accounted for  2.5% or more  of  the  total pre-refunded municipal bonds.

103

The following table displays the funding sources for the  $11.48 billion of municipal bonds

identified as revenue bonds in the foregoing table at December  31, 2012.

(at December 31, 2012, in millions)

Source:

Carrying
Value

Average Credit
Quality(1)

Water and sewer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Higher education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Power and utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government funded/grant revenue . . . . . . . . . . . . . . . . . .
Healthcare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenue sources . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,886
1,824
1,169
1,071
883
536
139
98
97
61
51
33
1,636

Aaa/Aa1
Aaa/Aa1
Aa1
Aa2
Aa1
Aa2
Aaa
Aa2
Aaa/Aa1
Aa3
A1
Aa2
Aaa/Aa1

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$11,484

Aa1

(1) Rated using external rating agencies  or by the Company when a public rating does not

exist.

The Company bases its investment decision on  the underlying credit characteristics of the

municipal security. While its municipal bond portfolio includes  a number of securities  that  were
enhanced by third-party insurance for  the  payment of principal and interest  in the event  of  an issuer
default, the Company does not rely on enhanced credit  characteristics provided by such  third-party
insurance as part of its investing decisions. The downgrade during 2008  and 2009 of credit  ratings of
insurers of these securities resulted in  a  corresponding downgrade in  the ratings of many  such securities
to the underlying rating of the respective  security. Of the insured municipal  securities in  the Company’s
investment portfolio at December 31, 2012,  approximately 99% were rated  at A3  or above,  and
approximately 92% were rated at Aa3 or  above, without the benefit of  insurance. The Company
believes that a loss of the benefit of insurance  would not result in a material  adverse  impact  on the
Company’s results  of operations, financial  position or liquidity, due to the underlying credit strength  of
the issuers of the securities, as well as  the Company’s ability and intent to hold the securities. The
average credit rating of the underlying  issuers  of  these securities  was  ‘‘Aa2’’ at December  31, 2012. The
average credit rating of the entire municipal bond portfolio  was ‘‘Aa1’’ at December 31, 2012  with and
without the enhancement provided by  third-party  insurance.

104

Debt Securities Issued by Foreign Governments

The following table shows the geographic distribution of  the Company’s long-term fixed maturity

investments in debt securities issued by foreign governments at December  31, 2012.

(at December 31, 2012, in millions)

Foreign Government:

Carrying
Value

Average Credit
Quality(1)

Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Norway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All Others(2)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,025
945
74
70
143

Aaa
Aaa
Aaa
Aaa
Aa2

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,257

(1) Rated using external rating agencies  or by the Company when a public rating does not

exist.

(2) The Company does not have direct exposure to sovereign  debt issued  by  the Republic of

Ireland, Italy, Greece, Portugal or Spain.

(3) No other country accounted for 2.5%  or more of total debt securities  issued by foreign

governments.

The following table shows the Company’s Eurozone exposure at December  31, 2012 to all debt

securities issued by foreign governments,  financial companies, sovereign corporations  (including
sovereign banks) whose securities are  backed  by the  respective  country’s government and all other

105

corporate securities (comprised of industrial  corporations and utility  companies)  which could be
affected if economic conditions deteriorated due  to  a prolonged recession.

Debt Securities
Issued
by Foreign
Governments

Corporate Securities

Sovereign
Corporates

Financial

All Other

Carrying

Average
Credit

Carrying

Average
Credit

Carrying

Average
Credit

Carrying

Average
Credit

(at December 31, 2012, in millions)

Value Quality(1)

Value Quality(1)

Value Quality(1)

Value Quality(1)

Eurozone Periphery
Spain . . . . . . . . . . . . . . . . . . .
Ireland . . . . . . . . . . . . . . . . . .
Italy . . . . . . . . . . . . . . . . . . . .
Greece . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Portugal

$ —
—
—
—
—

Subtotal . . . . . . . . . . . . . . . .

—

Eurozone Non-Periphery
Germany . . . . . . . . . . . . . . . . .
France . . . . . . . . . . . . . . . . . .
Netherlands . . . . . . . . . . . . . .
Austria . . . . . . . . . . . . . . . . . .
Finland . . . . . . . . . . . . . . . . . .
Belgium . . . . . . . . . . . . . . . . .
Luxembourg . . . . . . . . . . . . . .

70
Aaa
36 Aaa/Aa1
—
—
—
—
Aaa
18
—
—
—
—

Subtotal . . . . . . . . . . . . . . . .

124

— $ 14
2
—
—
—
—
—
—
—

Baa3
A3
—
—
—

16

7
28
54
—
—
—
—

89

A2
A2
Aa3
—
—
—
—

$ —
—
—
—
—

—

490
—
126
43
—
—
—

659

Total

. . . . . . . . . . . . . . . .

$124

$105

$659

— $
—
—
—
—

Aaa
—
Aaa
Aa2
—
—
—

36
61
23
13
—

133

223
379
249
—
13
142
47

Baa1
A3
Baa2
Baa2
—

A3
A1
A2
—
Baa3
A3
Baa1

1,053

$1,186

(1) Rated using external rating agencies  or by the Company when a public rating does not exist. The
table includes $225 million of short-term  securities which  have  the highest ratings  issued by
external  rating agencies for short-term issuances. For purposes  of this table, the short-term
securities, which are rated ‘‘A-1+’’ and/or ‘‘P-1,’’ are  included as ‘‘Aaa’’ rated  securities.

In January 2012, Standard & Poor’s downgraded the sovereign ratings  of  nine Eurozone  countries,

including France (from ‘‘AAA’’ to ‘‘AA(cid:5)’’). In November 2012, Moody’s downgraded the sovereign
rating of France from ‘‘Aaa’’ to ‘‘Aa1.’’

In addition to fixed maturities noted in  the foregoing  table, the  Company has exposure totaling

$276 million to private equity limited  partnerships and real  estate partnerships  (both of  which are
included in other investments in the Company’s consolidated balance  sheet) whose primary investing
focus is across Europe. The Company has  unfunded commitments  totaling  $145 million to these
partnerships. The Company also has  $4 million of nonredeemable preferred  stock (included in  equity
securities on the Company’s consolidated  balance sheet) issued by  companies in the Eurozone.

Mortgage-Backed Securities, Collateralized  Mortgage Obligations and Pass-Through Securities

The Company’s fixed maturity investment portfolio at December  31, 2012 and 2011 included

$3.00 billion and $3.52 billion, respectively, of  residential mortgage-backed securities including
pass-through-securities and collateralized mortgage obligations (CMO), all  of  which are  subject to
prepayment risk (either shortening or lengthening  of  duration). While  prepayment risk  for securities
and its effect on income cannot be fully controlled, particularly when  interest  rates move  dramatically,
the Company’s investment strategy generally favors  securities that reduce this risk within expected

106

interest rate ranges. Included in the totals  at December 31, 2012 and 2011  were $1.44  billion and
$1.82 billion, respectively, of GNMA,  FNMA and FHLMC  (excluding FHA project  loans) guaranteed
residential mortgage-backed pass-through  securities classified as available for sale. Also  included in
those totals were residential CMOs classified as available for sale with a  fair value  of  $1.56 billion  and
$1.70 billion, at December 31, 2012 and 2011, respectively. Approximately 43% and  38% of the
Company’s CMO holdings at December  31, 2012 and 2011, respectively, were guaranteed by or fully
collateralized by securities issued by GNMA, FNMA  or FHLMC. The average credit rating of the
$893 million and $1.05 billion of non-guaranteed  CMO  holdings  at December 31, 2012  and 2011,
respectively, was ‘‘B2’’ and ‘‘Ba1,’’ respectively. The average credit  rating of all of the  above securities
was ‘‘A1’’ and ‘‘Aa3’’ at December 31,  2012  and 2011,  respectively.

The Company makes investments in residential CMOs that are either guaranteed by GNMA,
FNMA or FHLMC, or if not guaranteed,  are  senior or  super-senior positions within  their respective
securitizations. Both guaranteed and  non-guaranteed residential CMOs allocate  the distribution of
payments from the underlying mortgages  among different classes of bondholders. In addition,
non-guaranteed residential CMOs provide  structures that allocate  the  impact  of  credit losses to
different classes of bondholders. Senior and super-senior CMOs are  protected, to varying degrees, from
credit losses as those losses are initially allocated to subordinated bondholders. The Company’s
investment strategy is to purchase CMO  tranches that are expected to offer  the most favorable return
given the Company’s assessment of associated risks. The Company  does not purchase residual  interests
in CMOs.

Alternative Documentation Mortgages  and Sub-Prime  Mortgages

At December 31, 2012 and 2011, the  ‘‘mortgage-backed securities,  collateralized mortgage

obligations and pass-through securities’’ and ‘‘asset-backed and other’’ categories in the foregoing table
included collateralized mortgage obligations backed by alternative documentation mortgages  and asset-
backed securities collateralized by sub-prime  mortgages with a collective  fair value  of $347 million and
$351 million, respectively (comprising less  than 1% of  the Company’s total fixed maturity investments
at both dates). The continued disruption in secondary investment markets provided the Company  with
the opportunity to selectively acquire  additional mortgage-backed securities at  discounted prices  in
recent years. The Company purchased $11 million and $128  million  of  such securities in the  years
ended December 31, 2012 and 2011, respectively.  The Company  defines  sub-prime mortgage-backed
securities as investments in which the  underlying loans primarily exhibit one or  more of the following
characteristics: low FICO scores, above-prime interest rates, high loan-to-value ratios  or high
debt-to-income ratios. Alternative documentation  securitizations  are  those in which the  underlying  loans
primarily meet the government-sponsored  entities’ requirements for credit score but  do not meet the
government-sponsored entities’ guidelines  for documentation, property type, debt  and loan-to-value
ratios. The average credit rating on these securities  and  obligations held by the  Company was ‘‘Ba1’’
and ‘‘Baa2’’ at December 31, 2012 and 2011, respectively.

Commercial Mortgage-Backed Securities  and Project Loans

At December 31, 2012 and 2011, the  Company held commercial mortgage-backed securities
(including FHA project loans) of $453  million and  $446 million, respectively. The Company does  not
believe this portfolio exposes it to a  material adverse impact on its results  of operations,  financial
position or liquidity, due to the portfolio’s relatively small  size and  the  underlying  credit strength of
these securities.

Equity Securities Available for Sale, Real Estate and Short-Term Investments

See note 1 of notes to the Company’s consolidated  financial statements for further  information

about these invested asset classes.

107

Other Investments

At December 31, 2012 and 2011, the  carrying value  of the  Company’s other investments  was
$3.43 billion and $3.45 billion, respectively. The Company’s other investments are primarily comprised
of private equity limited partnerships,  hedge funds, real estate partnerships,  joint  ventures, mortgage
loans, venture capital (through direct ownership  and limited partnerships) and  trading securities, which
are subject to more volatility than the Company’s fixed maturity  investments. These  asset classes have
historically provided a higher return  than fixed maturities but are subject to more volatility. Net
investment income provided by these asset classes  was  $414  million, $292 million  and $304 million  in
2012, 2011 and 2010, respectively. The increase in 2012 was  primarily driven by improved results  from
the Company’s real estate partnerships and hedge  fund  investments.

Securities Lending

The Company has engaged in securities lending activities  from  which it generates net investment

income by lending certain of its investments to other institutions  for short periods of time.  At
December 31, 2012 and 2011, the Company had $403  million and $126 million of securities  on loan,
respectively, as part of a tri-party lending  agreement. The average monthly balance of securities on loan
during 2012 and 2011 was $197 million  and $170 million, respectively.  Borrowers of  these securities
provide collateral equal to at least 102% of the market value of the loaned securities plus  accrued
interest. The Company has not incurred any investment losses in its  securities lending  program for the
years ended December 31, 2012, 2011 and 2010.

Net Unrealized Investment Gains

The net unrealized investment gains  that were  included as a separate component  of  accumulated

other comprehensive income were as follows:

(at December 31, in millions)

Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Unrealized investment gains before tax . . . . . . . . . . . . .
Tax  expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2012

2011

2010

$4,564
183
14

4,761
1,658

$4,238
145
16

4,399
1,528

$2,650
147
30

2,827
968

Net unrealized investment gains at end  of year . . . . . . .

$3,103

$2,871

$1,859

Net pretax unrealized investment gains were $4.76 billion, $4.40  billion and $2.83 billion at

December 31, 2012, 2011 and 2010, respectively. The Company’s fixed maturities portfolio at
December 31, 2012 and 2011 experienced an increase in valuation compared with  the respective prior
year-end, primarily due to the continuing decline in market interest rates.

The following table summarizes, for  all fixed maturities  and equity securities  reported at  fair value

for which fair value is less than 80% of amortized cost  at December  31, 2012, the  gross unrealized

108

investment loss by  length of time those securities have continuously  been in an  unrealized loss position
of greater than 20% of amortized cost:

(in millions)

Fixed maturities:

Period For Which Fair Value Is Less Than 80% of Amortized  Cost

Greater Than Greater Than

3 Months,
6 Months
or Less

6 Months,
12 Months
or Less

3 Months
or Less

Greater Than
12 Months

Total

Mortgage-backed securities . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total fixed maturities . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$—
—

—
—

$—

$—
1

1
—

$ 1

$—
—

—
—

$—

$—
3

3
—

$ 3

$—
4

4
—

$ 4

These unrealized investment losses at December 31, 2012  represent less  than 1%  of the combined
fixed maturity and equity security portfolios  on a  pretax basis and less than 1% of shareholders’  equity
on an after-tax basis.

For fixed maturity investments where  fair value  is less than the carrying  value and the Company
did not reach a decision to impair, the  Company continues to have the intent and  ability  to  hold  such
investments to a projected recovery in  value, which  may  not be until maturity.

At both December 31, 2012 and 2011, below  investment grade securities comprised 3.1% of  the

Company’s fixed maturity investment portfolio.  Included in below investment grade securities at
December 31, 2012 were securities in an unrealized loss  position that,  in the aggregate, had an
amortized cost of $177 million and a fair value  of $168 million, resulting  in a net  pretax unrealized
investment loss of $9 million. These securities in an unrealized loss  position represented less than 1%
of both the total amortized cost and the  fair value of the  fixed  maturity portfolio at December 31,  2012
and accounted for 26% of the total gross  pretax unrealized investment loss in the  fixed  maturity
portfolio at December 31, 2012.

109

Impairment Charges

Impairment charges included in net realized investment gains  in the consolidated statement of

income were as follows:

(for the year ended December 31, in millions)

2012

2011

2010

Fixed maturities

U.S. Treasury securities and obligations of U.S. government and
government agencies and authorities . . . . . . . . . . . . . . . . . . .

$— $— $—
Obligations of states, municipalities and political subdivisions . . — — —
Debt securities issued by foreign governments . . . . . . . . . . . . . — — —
Mortgage-backed securities, collateralized mortgage obligations

and pass-through securities . . . . . . . . . . . . . . . . . . . . . . . . .
4
9
All other corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . — — —

13
5

4
4

Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8

18

13

Equity securities

Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . .

3
6
1 —

Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4

3

6

1

2
1

3

10

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$15

$25

$26

Following are the pretax realized losses  on investments  sold during the year ended  December 31,

2012:

(for the year ended December 31, 2012, in millions)

Loss

Fair Value

Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 9

$171
5
—

$176

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

CATASTROPHE MODELING

The Company uses various analyses and methods, including  proprietary  and third-party  computer
modeling processes, to analyze catastrophic events and the risks associated  with them. The Company
uses these analyses and methods to make underwriting and reinsurance decisions designed  to  manage
its  exposure to catastrophic events. There are no industry-standard methodologies or  assumptions  for
projecting catastrophe exposure. Accordingly, catastrophe  estimates provided by different insurers may
not be comparable.

The Company actively monitors and evaluates  changes in third-party models and,  when necessary,

calibrates the catastrophe risk model estimates  delivered via its own proprietary  modeling  processes.
The Company considers historical loss  experience, recent  events, underwriting  practices, market  share

110

analyses and various other factors to  account for  non-modeled losses to refine  its  proprietary view of
catastrophe risk. These proprietary models  are continually updated as new information emerges.

The tables below set forth the probabilities that estimated losses from a single event  occurring in a

one-year timeframe will equal or exceed  the indicated loss amounts (expressed in dollars and  as a
percentage of the Company’s common  equity), based on the current version of the proprietary and
third-party computer models utilized  by the  Company at December 31, 2012. For example, on the basis
described below the tables, the Company  estimates that  there is a one percent  chance that the
Company’s loss from a single U.S. hurricane  in a one-year timeframe would  equal or exceed
$1.4 billion, or 6% of the Company’s  common equity at  December 31, 2012.

Likelihood of Exceedance(1)

Dollars (in billions)

Single U.S.
Hurricane

Single U.S.
and Canadian
Earthquake

2.0% (1-in-50) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.0% (1-in-100) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.4% (1-in-250) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.1% (1-in-1,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1.1
$1.4
$2.4
$5.2

$0.5
$0.7
$0.9
$2.0

Likelihood of Exceedance

Percentage of
Common Equity(2)

Single U.S.
Hurricane

Single U.S.
and Canadian
Earthquake

2.0% (1-in-50) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.0% (1-in-100) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.4% (1-in-250) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.1% (1-in-1,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5%
6%
11%
23%

2%
3%
4%
9%

(1) An event that has, for example, a  2% likelihood of  exceedance  is sometimes described as
a ‘‘1-in-50 year event.’’ As noted above,  however,  the probabilities in the  table represent
the likelihood of losses from a single  event equaling or exceeding the indicated  threshold
loss amount in a one-year timeframe, not over a  multi-year timeframe. Also,  because the
probabilities relate to a single event,  the probabilities  do not address  the likelihood of
more than one event occurring in a particular period,  and, therefore, the amounts do not
address potential aggregate catastrophe losses  occurring in a one-year timeframe.

(2) The percentage of common equity  is calculated by  dividing (a) indicated loss amounts in
dollars by (b) total common equity excluding net  unrealized investment gains and losses,
net of taxes. Net unrealized investment gains and losses  can be significantly impacted by
both discretionary and other economic factors  and  are not necessarily  indicative of
operating trends. Accordingly, the Company’s management uses the percentage  of
common equity calculated on this basis as  a metric  to  evaluate the potential impact of a
single hurricane or single earthquake on the  Company’s financial  position  for purposes of
making underwriting and reinsurance decisions.

The threshold loss amounts in the tables  above,  which are  based on the Company’s in-force
portfolio at December 31, 2012 and catastrophic reinsurance program at January  1, 2013, are  net of
reinsurance, after-tax and exclude most loss adjustment expenses, which historically have been less than
10% of loss estimates. The amounts for  hurricanes reflect U.S. exposures  and include  property
exposures, property residual market exposures and an adjustment for  certain non-property exposures.
The hurricane loss amounts are based  on the Company’s  catastrophe risk model estimates and  include
losses from the hurricane hazards of  wind and storm surge. The amounts for earthquakes reflect U.S.

111

and Canadian exposures and include property exposures and workers’ compensation exposures.  The
Company does not believe that the inclusion  of hurricane or earthquake losses arising from other
geographical areas or other exposures  would materially change  the estimated threshold  loss amounts.

Catastrophe modeling relies upon inputs based  on experience, science, engineering  and history.

These inputs reflect a significant amount  of judgment and are  subject to changes  which may result in
volatility in the modeled output. Catastrophe modeling output may also fail to account for risks that
are outside the range of normal probability  or are otherwise  unforeseeable. Catastrophe modeling
assumptions include, among others, the  portion of purchased reinsurance that is  collectible after a
catastrophic event, which may prove  to be materially  incorrect. Consequently, catastrophe  modeling
estimates are subject to significant uncertainty. In the tables above, the uncertainty  associated with  the
estimated threshold loss amounts increases significantly as the likelihood of exceedance  decreases. In
other words, in the case of a relatively  more remote event (e.g.,  1-in-1,000), the estimated threshold
loss amount is relatively less reliable.  Actual losses from an event could materially  exceed the  indicated
threshold loss amount. In addition, more  than one such event could occur in  any period.

Moreover, the Company is exposed to the risk of material losses from other than property and

workers’ compensation coverages arising  out of hurricanes  and earthquakes,  and it is  exposed  to
catastrophe losses from perils other than  hurricanes and earthquakes, such as tornadoes and other
windstorms, hail, wildfires, severe winter weather, floods, volcanic eruptions, tsunamis and  acts  of
terrorism.

For more information about the Company’s exposure to catastrophe losses, see ‘‘Item 1A—Risk

Factors—Catastrophe losses could materially and adversely affect our  results of operations, our
financial position and/or liquidity, and could adversely  impact our ratings,  our ability  to  raise capital
and the availability and cost of reinsurance’’ and ‘‘Item 1A—Risk  Factors—We may be adversely
affected if our pricing and capital models provide  materially different  indications  than actual  results.’’

CHANGING CLIMATE CONDITIONS

Severe weather events over the last several years have underscored  the unpredictability of future

climate trends and created uncertainty  regarding  insurers’  exposures to financial loss  as a result  of
catastrophes and other weather-related  events. Some scientists  believe that, in  recent years, changing
climate conditions have added to the  unpredictability, frequency and  severity of natural disasters.  For
example, in recent years hurricane activity has  impacted areas further inland than  previously
experienced, thus expanding the Company’s  potential for  losses from hurricanes. Additionally, both the
frequency and severity of tornado and  hail storms in  the United States have been greater  in recent
years. Further, any reduction in arctic  sea ice may contribute to rising  sea  levels that could impact
flooding in coastal areas. Accordingly,  if  climate  conditions are changing,  the Company may  be  subject
to increased losses from catastrophes  and other weather-related events.  Additionally, the Company’s
catastrophe models may be less reliable due to the  increased unpredictability,  frequency  and severity of
severe weather events.

The Company discusses how potentially changing climate conditions may present other issues for

its  business under ‘‘Risk Factors’’ in Item 1A of this report  and under ‘‘—Outlook’’  herein.  For
example, among other things:

(cid:127) Increasingly unpredictable and severe weather conditions could result in increased  frequency  and
severity of claims under policies issued by  the Company. See  ‘‘Risk Factors—Catastrophe losses
could materially and adversely affect our results  of operations, our financial position and/or
liquidity, and could adversely impact our ratings, our  ability to raise capital and the availability
and cost of reinsurance’’ and ‘‘—Outlook—Underwriting Gain/Loss.’’

112

(cid:127) Changing climate conditions could  also  impact the  creditworthiness  of  issuers of  securities in

which  the Company invests. For example, water supply adequacy could impact the
creditworthiness of bond issuers in the Southwestern United States,  and  more  frequent and/or
severe hurricanes could impact the creditworthiness of  issuers  in the Southeastern United States,
among other areas. See ‘‘Risk Factors—Our investment portfolio may suffer reduced returns  or
material realized or unrealized losses.’’

(cid:127) Increased regulation adopted in response to potential changes in  climate conditions  may impact

the Company and its customers. For example, state  insurance regulation  could  impact  the
Company’s ability to manage property exposures  in areas  vulnerable to significant climate driven
losses. If the Company is unable to implement risk based  pricing, modify  policy terms or reduce
exposures to the extent necessary to address rising losses related to catastrophes and  smaller
scale weather events (should those increased  losses occur), its  business may  be  adversely
affected. See ‘‘Risk Factors—Catastrophe losses could materially and adversely affect  our  results
of operations, our financial position and/or liquidity, and could adversely impact our ratings,  our
ability to raise capital and the availability and cost  of reinsurance.’’

(cid:127) The full range of potential liability  exposures related  to  climate change continues to evolve.

Through the Company’s Emerging Issues Committee and its Committee on  Climate,  Energy  and
the Environment, the Company works with its  business  units and corporate groups,  as
appropriate, to identify and try to assess  climate change-related liability issues, which are
continually evolving and often hard to  fully  evaluate. See ‘‘Risk Factors—The effects  of
emerging claim and coverage issues on our business  are uncertain.’’

Climate change regulation also could increase  the Company’s customers’ costs of  doing  business.
For example, insureds faced with carbon  management regulatory requirements may have  less  available
capital for investment in loss prevention and safety  features which may,  over  time, increase loss
exposures. Also, increased regulation may result in reduced economic activity,  which would decrease
the amount of insurable assets and businesses.

The Company regularly reviews emerging  issues, such  as changing climate conditions, to consider
potential changes to its modeling and  the use of such  modeling, as well  as to help  determine the  need
for new  underwriting strategies, coverage  modifications or new  products.

REINSURANCE RECOVERABLES

Ceded reinsurance involves credit risk, except with  regard  to  mandatory  pools for  which liability is

mostly joint and several, 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 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. After reinsurance  is purchased, the Company has  limited  ability  to  manage the credit
risk to a reinsurer. In addition, in a number  of jurisdictions, particularly the  European Union and  the
United Kingdom, a reinsurer is permitted  to  transfer  a reinsurance arrangement to another reinsurer,
which  may be less creditworthy, without a  counterparty’s consent, provided  that  the transfer has been
approved by the applicable regulatory and/or court authority.

The Company holds collateral, including trust agreements,  escrow funds and letters  of  credit,
under certain reinsurance agreements. The Company  has also entered  into  Master Security Agreements
with certain reinsurers. These agreements  define  conditions  that require the reinsurer to provide
collateral. The specific conditions and  the amounts and form of collateral to be provided by these

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agreements vary based on a number of factors including, but not limited to, the reinsurers’  legal
structure and trading history with the  Company.

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

(at December 31, in millions)

2012

2011

Gross reinsurance recoverables on paid and unpaid claims and

claim adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for uncollectible reinsurance . . . . . . . . . . . . . . . . . . .

$ 5,256
(258)

$ 6,255
(345)

Net reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . . . . .
Mandatory pools and associations . . . . . . . . . . . . . . . . . . . . . . .
Structured settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,998
2,549
3,165

5,910
2,020
3,225

Total reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . . . .

$10,712

$11,155

The $912 million decline in net reinsurance  recoverables since December 31,  2011 primarily

reflected the impact of cash collections, including commutation  agreements, and the impact of net
favorable prior year reserve development.

The following table presents the Company’s  top five reinsurer groups  by reinsurance recoverable at

December 31, 2012 (in millions). Also included is  the A.M.  Best  rating of each reinsurer group  at
February  19,  2013:

Reinsurer Group

Reinsurance
Recoverable

A.M. Best Rating of Group’s Predominant  Reinsurer

Munich Re Group . . . . . . . . . . . . . . . . . . . .
Swiss Re Group . . . . . . . . . . . . . . . . . . . . . .
Alleghany Group(1) . . . . . . . . . . . . . . . . . . .
XL Capital Group . . . . . . . . . . . . . . . . . . . .
Berkshire Hathaway Group . . . . . . . . . . . . .

$550
517
302
266
258

A+
A+
A
A
A++ highest of 16 ratings

second highest of 16  ratings
second highest of 16 ratings
third  highest of 16 ratings
third  highest of 16 ratings

(1) In 2012, Alleghany Corporation  and  Transatlantic Holdings, Inc. completed their  merger. As a

result, Transatlantic became an operating subsidiary  of Alleghany.

At December 31, 2012, the Company  held  $1.5 billion  of collateral in the form of letters of credit,

funds  and trust agreements held to fully or partially collateralize certain reinsurance  recoverables.

For a  discussion of a pending reinsurance dispute pertaining  to  a portion of  the Company’s

reinsurance recoverable from the Munich  Re Group in the foregoing  table, see note 16 of notes to the
consolidated financial statements.

Also included in reinsurance recoverables are  amounts related to structured settlements,  which are

annuities purchased from various life insurance companies  to settle certain  personal  physical injury
claims, of which workers’ compensation  claims comprise a significant portion. In cases  where the
Company did not receive a release from the  claimant, the amount due from the life  insurance company
related to the structured settlement is  included  in the Company’s consolidated balance sheet as a
liability and as a reinsurance recoverable, as the Company  retains the  contingent liability to the
claimant. In the event that the life insurance company fails to make  the required annuity  payments, the
Company would be required to make  such payments  if and to the extent the  purchased annuities are
not covered by state guaranty associations. The following table presents the Company’s top five groups

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by structured settlements at December 31,  2012 (in millions). Also included  is the A.M. Best rating of
the Company’s predominant insurer from  each insurer group at February 19,  2013:

Group

Structured
Settlements

A.M. Best Rating of Group’s Predominant  Insurer

Fidelity & Guaranty Life Group . . . . . . . . . . .
MetLife Group . . . . . . . . . . . . . . . . . . . . . . .
Genworth Financial Group . . . . . . . . . . . . . .
Symetra Financial Group . . . . . . . . . . . . . . . .
John Hancock Group . . . . . . . . . . . . . . . . . .

$981
474
437
256
190

B++ fifth highest of 16 ratings
A+
A
A
A+

second highest of 16 ratings
third  highest of 16 ratings
third  highest of 16 ratings
second highest of 16 ratings

Reinsurance companies and life insurance companies  have been negatively  impacted  by  turbulent

economic conditions, significant catastrophe events and investment portfolio challenges in recent years.
A number of such companies have been subjected  to  downgrades and/or negative  outlook changes by
various ratings agencies, including those with  which the  Company conducts  business.  The  Company
considers these factors in assessing the adequacy of its allowance for uncollectible amounts.

OUTLOOK

The following discussion provides outlook  information  for  certain key drivers  of  the Company’s

results of operations and capital position.

Premiums. The Company’s earned premiums are a  function of  net written premium volume.  Net

written premiums comprise both renewal business  and  new business  and  are recognized  as earned
premium over the life of the underlying  policies. When business  renews,  the amount of net written
premiums associated with that business  may  increase or  decrease (renewal premium change) as  a result
of increases or decreases in rate and/or  insured exposures, which the Company  considers  as a measure
of units of exposure (such as the number and value of vehicles or properties  insured). Net written
premiums from both renewal and new business, and therefore earned premiums, are  impacted  by
competitive market conditions as well as  general  economic conditions, which,  particularly in the  case of
the Business Insurance segment, affect audit premium adjustments, policy endorsements and mid-term
cancellations. Net written premiums are also impacted by the  structure  of  reinsurance programs and
related costs.

Given the possibility that more active weather patterns such as  the Company experienced in a
number of recent periods may continue,  as well as  the possibility  that interest  rates may  remain  low for
some period of time, along with the current level of profitability in  certain of its product  lines, the
Company has undertaken efforts to improve its underwriting  margins. These efforts include  seeking
improved rates, as well as improved terms  and conditions on many of  its insurance products, and  also
include other initiatives, such as reducing  operating expenses and acquisition costs. These  efforts may
not be successful and/or may result in lower retention and  new business levels  and therefore  lower
business volumes.  In particular, in the  Agency Automobile  line of business, the Company  has
undertaken various actions to improve its  underwriting margins,  which have  been negatively  impacted
by various factors. If these actions are not effective,  the Company may need to explore other actions or
initiatives to improve its competitive position  and profitability in  this line of business. Refer to
‘‘Part I—Item 1A—Risk Factors—The intense  competition  that we face could harm  our ability  to
maintain or increase our business volumes and our profitability’’ in  this report.

Nonetheless, the Company currently  expects retention levels  (the  amount  of  expiring premium that

renews, before the impact of renewal  premium  changes)  will remain strong  relative to historical
experience. The Company also expects to continue to achieve price increases on renewal business
during 2013 that generally exceed loss  cost  trends. In the Business Insurance segment, the Company
expects that renewal premium changes during  2013 will be broadly consistent with the  higher levels

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attained in the fourth quarter of 2012 and will be driven  by both positive  renewal rate changes and,
subject to the economic uncertainties discussed below, growth in  insured exposures. In the Financial,
Professional & International Insurance segment, the Company  expects that renewal  premium changes
will modestly improve during 2013 compared to the fourth quarter of 2012.  With respect  to
construction surety, the Company expects  written  premium  volume to be broadly consistent with the
levels attained in 2012. In the Personal  Insurance  segment, the  Company  expects both Agency
Automobile and Agency Homeowners  and Other renewal premium changes during 2013 will  decline
slightly as compared to the fourth quarter of  2012, but are expected to remain positive  and exceed
underlying loss cost trends, assuming weather  patterns consistent with the Company’s  expectations.
Renewal premium changes for both Agency  Automobile  and Agency  Homeowners and Other  in 2013
are expected to be driven by both positive  renewal rate changes (based on the Company’s  actions to
file for rate increases) and, subject to  the economic uncertainties discussed  below,  growth in insured
exposures. The need for state regulatory  approval  for changes to personal property  and casualty
insurance prices, as well as competitive  market  conditions,  may impact  the  timing and  extent of renewal
premium changes.

The pricing environment for new business generally has less of an impact on  underwriting

profitability than renewal rate changes, given the  volume of new business  relative to renewal  business.
Property and casualty insurance market  conditions  are expected to remain competitive during 2013 for
new business, not only in Business Insurance and Financial, Professional &  International Insurance, but
especially in Personal Insurance, where price comparison technology used by agents and brokers,
sometimes referred to as ‘‘comparative raters,’’ has facilitated  the process  of generating multiple  quotes,
and thereby increasing price comparison  on new  business and, increasingly, on  renewal business. In
addition, the Company launched a new distribution channel in 2009  that markets  personal insurance
products directly to consumers, which is expected to continue to generate modest  growth in premium
volume for Personal Insurance during 2013.

Current economic conditions have been  somewhat  volatile, and there is increased uncertainty as to

whether the U.S. or the global economy  will grow modestly,  remain stagnant or  enter a recession.
Economic growth experienced in 2011  and 2012 may or  may not continue, or may continue at  a slower
rate for an extended period of time.  In addition, some economic conditions, such as  the commercial
and residential real estate environment and employment rates, may continue to be weak.  Future  actions
or inactions of the United States government, including  a failure to increase the  government debt limit
or a shutdown of the federal government, could  increase the actual  or  perceived risk that the U.S. may
not ultimately pay  its obligations when  due and  may disrupt financial markets.  Further,  general
uncertainty regarding the U.S. Federal  budget and taxes has  added  to  the uncertainty  regarding
economic conditions generally.

If weak economic conditions persist or deteriorate, the  resulting  low  levels  of economic activity
could impact exposure changes at renewal and the Company’s ability  to  write business at acceptable
rates. Additionally, low levels of economic activity could  adversely impact  audit premium adjustments,
policy endorsements and mid-term cancellations after policies are written. All  of the foregoing,  in turn,
could adversely impact net written premiums during 2013, and, since earned premiums  lag net written
premiums, earned premiums could be  adversely impacted following  2013.

Underwriting Gain/Loss. The Company’s underwriting gain/loss  can be significantly impacted by

catastrophe losses and net favorable  or  unfavorable prior  year reserve development, as  well as
underlying underwriting margins.

Catastrophe and other weather-related  losses  are inherently unpredictable from period to period.

The Company experienced significant catastrophe and other  weather-related losses  in a number of
recent periods which adversely impacted  its results of operations. The  Company’s results of operations

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would continue to be adversely impacted if significant catastrophe and other weather-related losses
were to occur during 2013.

For the last several years, the Company’s results have included significant amounts of net  favorable

prior year reserve development, although  at  lower levels in some  recent years, driven by better than
expected loss experience in all of the Company’s segments. The lower level of net favorable prior year
reserve  development in a number of recent periods  may  have  been in  part due to the  Company’s
reserve  estimation process incorporating  those factors  that led  to  the higher levels of net favorable
prior year reserve development in previous  years.  If that trend continues,  the better  than expected loss
experience may continue at these recent lower levels,  or even lower levels.  However, given  the inherent
uncertainty in estimating claims and claim  adjustment expense  reserves, loss experience could develop
such that the Company recognizes higher  or lower levels of favorable  prior year reserve  development,
no favorable prior year reserve development or unfavorable prior  year reserve development in future
periods. In addition, the ongoing review of prior year claims  and  claim  adjustment  expense reserves, or
other changes in current period circumstances, may result in the Company revising current  year loss
estimates upward or downward in future  periods of the current  year.

In Business Insurance, the Company  expects that the  anticipated  impact of increases in renewal
premium  changes,  partially  offset  by  an  expected  modest  increase  in  underlying  losses,  and  assuming
weather patterns consistent with the Company’s expectations, will  likely result in underlying
underwriting margins during 2013 that  are higher than  in 2012. In Financial, Professional &
International Insurance, the Company  expects that  the anticipated impact of lower  underlying  losses
due to recent underwriting actions in  the segment  and  increases  in renewal  premium changes in
Bond & Financial Products will likely  result in  underlying  underwriting  margins during 2013  that  are
modestly higher than in 2012. In Personal  Insurance, the Company anticipates  underlying  underwriting
margins during 2013 that are broadly  consistent with 2012.  In  Agency  Automobile, the Company
anticipates an improvement in underlying underwriting margins during  2013 due to the anticipated
impact of continued positive renewal  premium changes, partially offset by loss cost  trends. In Agency
Homeowners and Other, the Company  anticipates a decline in underlying underwriting margins during
2013, reflecting a return to non-catastrophe  weather-related loss levels consistent with the Company’s
expectations. Also  in Personal Insurance, the Company’s  direct to consumer initiative, as discussed
above, while intended to enhance the Company’s  long-term ability to compete successfully in a
consumer-driven marketplace, is expected  to  remain unprofitable  for  a  number  of years as this book  of
business grows and matures.

Investment Portfolio. The Company expects to continue to focus its investment strategy on
maintaining  a  high-quality  investment  portfolio  and  a  relatively  short  average  effective  duration.  The
average effective duration of fixed maturities and short-term securities  was 3.2 (3.4 excluding  short-term
securities) at December 31, 2012. In 2013, subject to market  conditions,  the Company  plans to increase
its  short position in U.S. Treasury futures, which  it uses to manage the duration of  its fixed maturity
portfolio. The Company continually evaluates  its  investment alternatives and mix. Currently, the
majority of the Company’s investments are comprised of a widely diversified  portfolio  of  high quality,
liquid taxable U.S. government, tax-exempt U.S.  municipal and taxable corporate and U.S.  agency
mortgage-backed bonds.

The Company also invests much smaller amounts in equity securities, real estate, private equity

limited partnerships, hedge funds, real estate partnerships, joint ventures, mortgage  loans, venture
capital (through direct ownership and limited partnerships)  and trading securities. These  investment
classes have the potential for higher returns but  also the potential for  higher degrees  of  risk, including
less  stable rates of return and less liquidity.

Net investment income is a material  contributor to the Company’s results  of operations.  Interest

rates remain at very low levels by historical standards.  Based on the current  interest  rate environment,

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the Company estimates that the impact of lower  reinvestment yields on the Company’s  fixed  maturity
portfolio could, in 2013, result in approximately  $30 million of lower after-tax  net investment income
from that portfolio on a quarterly basis  as compared to the corresponding quarter of 2012. Given
recent general economic and investment market conditions, the Company expects investment income
from the non-fixed maturity portfolio  for 2013 to be lower than in 2012. If general economic  conditions
and/or investment market conditions  deteriorate in 2013,  the Company could also experience a
reduction in net investment income and/or significant realized investment losses, including impairments.
For further discussion of the Company’s investment  portfolio, see  ‘‘Item 7—Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Investment  Portfolio’’ in this report.
For a  discussion of the risks to the Company’s business during  or  following a financial market
disruption and risks to the Company’s investment portfolio, see the risk factors entitled ‘‘During or
following a period of financial market disruption  or economic downturn, our  business  could  be
materially and adversely affected’’ and ‘‘Our  investment portfolio may  suffer reduced returns or
material realized or unrealized losses’’  included in ‘‘Risk Factors’’ in Part I, Item 1A  of  this  report.

Capital Position. The Company believes it has a strong  capital position  and, as  part of  its ongoing

efforts to create shareholder value, expects to continue  to return capital not needed  to  support its
business operations to its shareholders.  In recent years, the  Company has  returned  capital to its
shareholders, comprising dividends to  common shareholders and common share  repurchases, in
amounts that have exceeded its operating income. The Company now expects that, generally over  time,
the combination of dividends to common shareholders and common share repurchases  will  likely not
exceed operating income. In addition, actual amounts of common  share repurchases  will also depend
on a variety of additional factors, including  corporate and regulatory requirements, maintaining capital
levels commensurate with the Company’s  existing  ratings from independent rating agencies, share price,
funding of the Company’s qualified pension plan,  strategic initiatives and  other market conditions. For
information regarding the Company’s common share  repurchases in 2012, see ‘‘Liquidity  and Capital
Resources’’ in this report.

The Company had a net after-tax unrealized  investment gain of $2.98  billion in  its  fixed  maturity

investment portfolio at December 31, 2012.  While  the Company  does not  attempt to predict  future
interest rate movements, a rising interest rate environment would reduce the market value of fixed
maturity investments and, therefore, reduce shareholders’ equity, and  a  declining interest rate
environment would have the opposite  effects.

Many of the statements in this ‘‘Outlook’’ section are forward-looking statements, which  are
subject  to risks and uncertainties that are often  difficult to predict  and  beyond  the Company’s control.
Actual results could differ materially from those expressed or  implied by  such forward-looking
statements. Further, such forward-looking  statements speak only as of the  date of this report and the
Company undertakes no obligation to  update them. See ‘‘—Forward-Looking Statements.’’ For a
discussion of potential risks and uncertainties that  could impact  the Company’s  results of operations or
financial position, see ‘‘Item 1A—Risk Factors’’ and ‘‘Item 7—Management’s  Discussion and  Analysis
of Financial Condition and Results of Operations—Critical  Accounting Estimates’’ in this report.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measure of a company’s ability to generate  sufficient cash flows to meet the cash
requirements of its business operations and  to  satisfy general  corporate  purposes when needed.  The
liquidity requirements of the Company have  been  met primarily by  funds generated from premiums,
fees, income received on investments and investment  maturities. Cash provided  from these sources is
used primarily for claims and claim adjustment expense payments, operating expenses, debt  servicing,
taxes, shareholder  dividends and, in recent  years,  for common share repurchases. The timing and
amount of catastrophe claims are inherently unpredictable. Such claims  increase liquidity  requirements.
The timing and amount of reinsurance recoveries may be affected by reinsurer solvency  and

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reinsurance coverage disputes. Additionally, the variability of asbestos-related claim payments, as well
as the volatility of potential judgments  and  settlements arising out of litigation,  may also result in
increased liquidity requirements. It is  the opinion of the  Company’s  management that the Company’s
future liquidity needs will be adequately  met from  all of the  above sources.

At December 31, 2012, total cash and  short-term invested assets aggregating  $2.03 billion and
having a weighted average maturity of  76  days were  held in the United States  by  the holding company.
These assets are sufficient to meet the holding company’s current liquidity requirements and are in
excess of the Company’s minimum target level,  comprising  the Company’s estimated  annual pretax
interest expense and common shareholder dividends, and currently totaling approximately $1.1  billion.
These liquidity requirements primarily  include  shareholder  dividends, debt service and contributions to
its  qualified domestic pension plan from  time to time.

The holding company is not dependent on dividends or other  forms of repatriation from  its foreign

operations to support its liquidity needs.  U.S. income taxes have not been  recognized on $755 million
of the Company’s foreign operations’ undistributed earnings as of  December 31, 2012, as  such earnings
are intended to be permanently reinvested in those operations. Furthermore,  taxes paid to foreign
governments on these earnings may be used as  credits  against the U.S. tax  on dividend distributions  if
such earnings were to be distributed  to the holding company. The amount of undistributed earnings
from foreign operations and related taxes  on those  undistributed earnings  were not material to the
Company’s financial position or liquidity at December 31, 2012.

The Company has a shelf registration statement with  the Securities  and Exchange Commission

which  permits it to issue securities from time to time.  The Company also  has a  $1.0 billion  line of
credit facility with a syndicate of financial institutions that  expires  in June 2013. This line  of credit  also
supports the Company’s $800 million  commercial  paper program, of which $100  million was
outstanding at December 31, 2012. The  Company  is not reliant on its commercial paper program to
meet its operating cash flow needs.

The Company currently utilizes uncollateralized letters of credit  issued by  major banks with  an
aggregate limit of approximately $392 million  to  provide much of the capital needed to support its
obligations at Lloyd’s. If uncollateralized  letters of credit  are not available at  a reasonable price or  at
all in the future, the Company can collateralize these letters of credit or may  have to seek alternative
means of supporting its obligations at Lloyd’s, which could  include utilizing  holding  company funds on
hand.

Operating Activities

Net cash flows provided by operating activities were $3.23  billion, $2.17  billion and $3.05 billion in

2012, 2011 and 2010, respectively. Cash  flows  in 2012 primarily  reflected a decrease  in losses paid
related to catastrophes, a lower level of paid losses related  to  asbestos claims and operations in runoff
and a higher level of collected premiums, partially offset  by an  increase in paid  losses related  to
non-catastrophe ongoing business (including the impact of  increased  loss costs). Cash flows in  2011
reflected an increase in losses paid related  to  catastrophes and ongoing business (including  the impact
of increased loss costs), a higher level  of contributions  to  the Company’s qualified domestic pension
plan  and lower receipts related to net  investment  income  as  compared with 2010. These  factors were
partially offset by a higher level of collected premiums, a lower level of paid operating expenses  and a
lower level of paid losses related to asbestos claims and operations in runoff. In the years ended
December 31, 2012, 2011 and 2010, the Company contributed  $217 million, $185 million and
$35 million, respectively, to its qualified  domestic pension plan.

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Investing Activities

Net cash flows used by investing activities  in 2012 were $972 million, compared  with net cash flows

provided by investing activities of $1.15 billion and $2.11 billion  in 2011 and 2010,  respectively. The
Company’s consolidated total investments  at  December  31,  2012 increased  by  $1.14 billion  from
year-end 2011, driven by operating cash  flows of $3.23  billion  and  a  $362 million increase in  net pretax
unrealized appreciation of investments  in 2012, partially offset by  the  impact  of  the Company’s  common
share repurchases of $1.47 billion under  its  share repurchase authorization, common  shareholder
dividends of $694 million and debt repayments  of $258 million.

On December 5, 2012, the Company  increased  its  ownership in  J. Malucelli Participa¸c˜oes em
Seguros e Resseguros S.A, its Brazilian  joint venture  (JMalucelli), through the exercise of a  pre-existing
option. As a result, the Company increased its  ownership to  49.5%  of  the venture.  JMalucelli is
currently the market leader in surety  in Brazil based on market share. The Company’s investment was
funded with cash provided internally  from  an operating subsidiary  of  the Company.

The Company’s investment portfolio is managed to support its  insurance  operations; accordingly,

the portfolio is positioned to meet obligations to policyholders. As such,  the primary goals of the
Company’s asset-liability management  process  are to satisfy the  insurance liabilities and maintain
sufficient liquidity to cover fluctuations in projected liability  cash flows.  Generally,  the expected
principal and interest payments produced  by  the Company’s fixed maturity portfolio adequately fund
the estimated runoff of the Company’s  insurance reserves. Although this is  not  an exact  cash flow
match in each period, the substantial  amount by which  the market value of the  fixed  maturity portfolio
exceeds the value of the net insurance  liabilities, as well as the  positive cash flow  from newly sold
policies and the large amount of high  quality  liquid bonds, contributes  to  the Company’s ability  to  fund
claim payments without having to sell  illiquid assets  or access credit facilities.

Financing Activities

Net cash flows used in financing activities  were $2.15  billion, $3.31 billion  and $5.22 billion in  2012,

2011 and 2010, respectively. The totals  in  each year reflected common share  repurchases, dividends to
shareholders and the repayment of debt, partially offset by the  proceeds from  employee stock option
exercises and, in 2010, the issuance of debt.

Debt Transactions.

2012. On May 29, 2012, the Company purchased and retired  $8.5 million aggregate  principal

amount of its 6.25% fixed-to-floating rate  junior subordinated  debentures due March 15,  2067 in an
open market transaction. The Company’s $250 million, 5.375%  senior notes matured on June 15,  2012
and were paid from existing holding company liquidity.

2011. On June 1, 2011, the Company repaid the  remaining  $9 million principal balance on its

7.22% real estate non-recourse debt.

2010. On November 1, 2010, the Company  issued  $500 million aggregate principal amount 3.90%
senior notes that will mature on November 1, 2020, and $750 million aggregate principal amount 5.35%
senior notes that will mature on November 1, 2040. The net  proceeds of these issuances, after  original
issuance discount and the deduction  of underwriting expenses and  commissions and other expenses,
were approximately $496 million and  $738 million, respectively. Interest  on the senior notes is payable
semi-annually in arrears on November 1  and  May 1  of each  year. The  senior  notes are  redeemable in
whole at  any time or in part from time  to  time, at the Company’s option, at a redemption price  equal
to the greater of (a) 100% of the principal amount of  senior  notes to be redeemed or (b) the sum of
the present values of the remaining scheduled payments  of principal and  interest on  the senior  notes to
be redeemed (exclusive of interest accrued to the date  of  redemption) discounted  to  the date of
redemption on a semi-annual basis (assuming a  360-day  year consisting  of twelve  30-day  months) at  the

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then current Treasury rate (as defined) plus  15 basis points for  the  2020 senior notes  and 20  basis
points for the 2040 notes.

Prior to November 2010, the Company  was subject to a replacement capital covenant  that  it had

granted to the holders of its 6.75% senior notes due June 20,  2036 (the senior notes). The replacement
capital covenant restricted the Company’s ability to repurchase its $1.00 billion in outstanding 6.25%
fixed-to-floating rate junior subordinated  debentures due March 15, 2067  (the debentures). In
November 2010, the Company paid approximately  $4 million to holders of the senior notes  to
terminate the replacement capital covenant. Following the termination, the Company  purchased
approximately $885 million aggregate principal amount of the debentures.  A $60  million pretax loss  was
recognized in 2010 related to these transactions.

On September 16, 2010, the Company repaid  the remaining  $4 million principal balance on  its

7.81% private placement senior notes. On  August  23, 2010, the Company’s  $21 million, 7.415%
medium-term notes matured and were  fully paid. On  April  15, 2010, the  Company’s $250  million,
8.125% senior notes matured and were fully  paid. All of these debt payments were made  from
internally-generated funds.

The amount of debt obligations, other than  commercial paper, that  becomes  due  in 2013 is
$500 million. In 2014, no debt obligations become due. In 2015,  the amount of debt obligations, other
than commercial paper, that comes due  is $400 million. The Company may refinance maturing  debt
through funds generated internally or,  depending on  market conditions, through  funds  generated
externally, including as a result of the  issuance of debt or  other securities.

Dividends. Dividends paid to shareholders were $694  million, $665 million and $673 million in
2012, 2011 and 2010, respectively. The declaration  and  payment  of future dividends to holders  of the
Company’s common stock will be at  the discretion of the Company’s board of directors and will depend
upon many factors, including the Company’s financial position,  earnings, capital  requirements of the
Company’s operating subsidiaries, legal  requirements, regulatory constraints and other factors  as the
board of directors deems relevant. Dividends will  be  paid by  the  Company only if declared by its board
of directors out of funds legally available, subject to any other  restrictions  that  may be applicable to the
Company. On January 22, 2013, the Company  announced that  it declared a regular  quarterly dividend
of $0.46 per share, payable March 29,  2013 to shareholders  of record  on March 8,  2013.

Share Repurchases. The Company’s board of directors has approved common share repurchase

authorizations under which repurchases  may be made from  time  to  time in  the open  market, pursuant
to pre-set trading plans meeting the requirements of Rule  10b5-1 under the Securities Exchange Act  of
1934, in private transactions or otherwise.  The authorizations  do not have a stated expiration date. The
timing and actual number of shares to  be  repurchased in the future will depend  on a variety of factors,
including the Company’s financial position,  earnings, share price,  catastrophe losses, funding of the
Company’s qualified pension plan, capital requirements of the Company’s  operating subsidiaries, legal
requirements, regulatory constraints,  other investment  opportunities (including mergers and
acquisitions), market conditions and other factors.  The following table summarizes repurchase  activity
in 2012 and remaining repurchase capacity at December 31, 2012.

Quarterly Period Ending
(in millions,  except per share amounts)

Number of
shares
purchased

Cost of shares
repurchased

Average price paid
per share

Remaining capacity
under share  repurchase
authorization

March 31, 2012 . . . . . . . . . . . . . . . . .
June 30, 2012 . . . . . . . . . . . . . . . . . .
September 30, 2012 . . . . . . . . . . . . . .
December 31, 2012 . . . . . . . . . . . . . .

6.0
5.6
5.4
5.4

Total . . . . . . . . . . . . . . . . . . . . . . .

22.4

$ 350
350
350
400

$1,450

$58.73
$62.40
$65.00
$73.00

$64.64

$3,259
$2,909
$2,559
$2,159

$2,159

121

From the inception of the first authorization in May 2006 through December  31, 2012, the

Company repurchased a cumulative total of  362.4 million  shares  for a total cost  of $18.84 billion,  or an
average of $51.99 per share.

In 2012, 2011 and  2010, the Company acquired  0.9 million, 1.4  million and 1.3  million  shares,
respectively, of common stock from employees as  treasury stock  primarily to cover payroll withholding
taxes related to the vesting of restricted  stock awards and exercises of stock options.

Conversion of Preferred Stock to Common Stock.

In May 2011, the Company’s board of  directors

authorized the redemption of the Company’s preferred  stock held by The  Travelers 401(k) Savings Plan
(the Savings Plan) and gave notice of that redemption to the appropriate fiduciaries of the Savings
Plan. Following a fiduciary review, the  Savings Plan exercised its right to convert each preferred share
into eight shares of the Company’s common stock. As a result, all  preferred shares outstanding on
June 7, 2011 (190,083 shares) were converted into a  total  of  1.52 million  shares of the  Company’s
common stock. 

Capital Resources

Capital resources reflect the overall financial  strength  of the Company and its ability to borrow
funds  at competitive rates and raise new  capital to meet its needs. The following table summarizes the
components of the Company’s capital structure at December 31, 2012 and 2011.

(at December 31, in millions)

Debt:

Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unamortized fair value adjustments and debt issuance costs . . . . . .

Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shareholders’ equity:

Common stock and retained earnings, less treasury stock . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . .

Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2012

2011

$

600
5,761
(11)

6,350

$

350
6,269
(14)

6,605

23,169
2,236

25,405

22,472
2,005

24,477

Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$31,755

$31,082

Total capitalization at December 31,  2012  was $31.76 billion, $673 million higher  than at

December 31, 2011 primarily reflecting  the impact of  net income of $2.47 billion and  an increase in  net
unrealized appreciation of investments,  partially offset  by common share repurchases  under the
Company’s share repurchase authorization totaling  $1.45 billion, shareholder dividends of $700 million
and debt repayments of $258 million.

The following table provides a reconciliation  of total capitalization  excluding net unrealized  gains

on investments to total capitalization presented in  the foregoing  table.

(at December 31, dollars in millions)

2012

2011

Total capitalization excluding net unrealized gains on investments . . . . . . . . . . . . .
Net unrealized gain on investments, net  of taxes . . . . . . . . . . . . . . . . . . . . . . . . . .

$28,652
3,103

$28,211
2,871

Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$31,755

$31,082

Debt-to-total capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Debt-to-total capital ratio excluding net  unrealized gains on investments . . . . . . .

20.0%

22.2%

21.3%

23.4%

122

The debt-to-total capital ratio excluding net unrealized gains  on  investments is calculated by
dividing (a) debt by (b) total capitalization excluding net unrealized gains and  losses on  investments,
net of taxes. Net unrealized gains and  losses on investments can be significantly impacted by both
discretionary and other economic factors and are not necessarily indicative of operating trends.
Accordingly, in the opinion of the Company’s  management,  the debt-to-total  capital ratio calculated on
this  basis provides another useful metric  for investors to understand the  Company’s financial leverage
position. The Company’s debt-to-total capital ratio of 22.2% at December  31, 2012 calculated on  this
basis was  within the Company’s target  range of 15%  to  25%.

Line of Credit Agreement. The Company is party to a three-year,  $1.0 billion revolving credit

agreement with a syndicate of financial  institutions  that expires in June 2013.  Pursuant to the credit
agreement covenants, the Company must  maintain  a minimum consolidated net worth (generally
defined as shareholders’ equity plus certain  trust preferred and  mandatorily  convertible securities,
reduced for goodwill and other intangible  assets) of $14.35 billion.  The Company must also maintain a
ratio of total debt to the sum of total debt plus  consolidated net worth  of not greater  than 0.40  to  1.00.
In addition, the credit agreement contains  other customary restrictive  covenants as well  as certain
customary events of default, including  with respect to a change  in control, which  is defined to include
the acquisition of 35% or more of the Company’s  voting stock and certain changes in  the composition
of the Company’s board of directors. At  December  31, 2012, the Company  was  in compliance  with
these covenants. Generally, the cost of borrowing under this agreement will range from  LIBOR plus
100 basis points to LIBOR plus 175 basis points depending  on the  Company’s credit ratings. At
December 31, 2012, that cost would  have been LIBOR plus 125  basis points  had there been any
amounts outstanding under the credit agreement. This  line of credit also supports the Company’s
commercial paper program.

Shelf Registration. The Company has filed with the Securities and Exchange Commission a
universal shelf registration statement for  the  potential  offering and sale of securities  to  replace the
Company’s previous registration statement that had expired in the normal course of business. The
Company may offer these securities from time to time at  prices and on other terms  to  be  determined
at the time of offering.

Share Repurchase Authorization. At December 31, 2012, the Company  had $2.16  billion of
capacity  remaining under its share repurchase  authorization  approved by  the board of directors.

Contractual Obligations

The following table summarizes, as of December 31, 2012,  the Company’s  future payments under

contractual obligations and estimated claims and claim-related  payments. The table  excludes  short-term
obligations and includes only liabilities  at  December 31, 2012 that  are  expected  to  be  settled in  cash.

The table below includes the amount and  estimated  future timing of  claims  and claim-related
payments. The amounts do not represent the  exact liability, but instead represent estimates, generally
utilizing actuarial projections techniques, at a given  accounting date. These estimates  include
expectations of what the ultimate settlement and administration  of  claims will cost based on the
Company’s assessment of facts and circumstances then known, review of  historical  settlement patterns,
estimates of trends in claims severity,  frequency,  legal theories of liability  and other factors. Variables in
the reserve estimation process can be affected  by  both internal and  external events,  such as changes  in
claims handling procedures, economic inflation or deflation, legal trends and  legislative  changes. Many
of these  items are not directly quantifiable, particularly  on  a prospective  basis. Additionally, there may
be significant reporting lags between the occurrence  of  the  policyholder event and the time it is actually
reported to the insurer. The future cash flows related to the items  contained in the  table  below
required estimation of both amount  (including severity  considerations) and timing. Amount  and timing
are frequently estimated separately. An  estimation of both amount and timing of  future cash flows

123

related to claims and claim-related payments is  generally  reliable only in  the aggregate with some
unavoidable estimation uncertainty.

The contractual obligations related to debt, operating leases, purchase  obligations, long-term

unfunded investment commitments, estimated claims and claim-related payments (gross of the
estimated reinsurance recoveries) and liabilities related to unrecognized tax benefits, at  December 31,
2012 were as follows:

Payments Due by Period
(in millions)

Debt

Total

Less than
1 Year

1-3 Years

3-5 Years

After
5  Years

$ 850
—

$ 4,150
361

Senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debentures . . . . . . . . . . . . . .

$ 5,900
361

$

. . . . . . . . . . . . . . . . . . . . . .
Total  debt principal
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,261
5,243

Total  long-term debt obligations(1) . . . . . . . . . .

11,504

Operating leases(2) . . . . . . . . . . . . . . . . . . . . . . . .

666

Purchase obligations

Information systems administration and

maintenance commitments(3) . . . . . . . . . . . . . .
Other purchase commitments(4) . . . . . . . . . . . . .

Total  purchase obligations . . . . . . . . . . . . . . . . . .

146
99

245

Long-term unfunded investment commitments(5) . . .

1,270

500
—

500
355

855

164

59
76

135

268

$

400
—

400
685

850
601

1,085

1,451

259

154

50
18

68

37
3

40

370

428

Estimated claims and claim-related payments

Claims and claim adjustment expenses(6) . . . . . . .
Claims from large deductible policies(7) . . . . . . . .
Loss-based assessments(8) . . . . . . . . . . . . . . . . . .
Reinsurance contracts accounted for as

deposits(9) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payout from ceded funds withheld(10) . . . . . . . . .

Total  estimated claims and claim-related

48,845
—
196

11,505
—
38

11,894
—
45

1
221

1
28

—
59

6,727
—
19

—
30

4,511
3,602

8,113

89

—
2

2

204

18,719
—
94

—
104

payments . . . . . . . . . . . . . . . . . . . . . . . . . . . .

49,263

11,572

11,998

6,776

18,917

Liabilities related to unrecognized tax  benefits(11) . .

657

657

—

—

—

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$63,605

$13,651

$13,780

$8,849

$27,325

(1) The Company’s $107 million remaining aggregate principal amount of 6.25% fixed-to-floating rate

debentures bear interest at an annual  rate of 6.25% from the date  of  issuance  to,  but excluding,
March 15, 2017 and at a rate of three-month LIBOR plus  2.215%  thereafter. The table above
includes interest payments through the  scheduled maturity  date of March 15, 2037.  Interest
payments beginning March 15, 2017 through March 15, 2037 were calculated using the three-
month LIBOR rate as of December  31, 2012.

See note 8 of notes to the Company’s consolidated  financial statements for a further discussion of
outstanding indebtedness. Because the  amounts  reported in the foregoing table include principal
and interest, the total long-term debt obligations will  not  agree with  the amounts reported in
note 8.

(2) Represents agreements entered into  in  the ordinary course of business to lease office space,

equipment and furniture.

124

(3) Includes agreements with vendors  to  purchase system software administration and  maintenance

services.

(4) Includes commitments to vendors entered into in the ordinary course of business for  goods and

services including property, plant and  equipment, office  supplies,  archival services, etc.

(5) Represents estimated timing for  fulfilling unfunded commitments for private  equity limited

partnerships and real estate partnerships.

(6) The amounts in ‘‘Claims and claim  adjustment expenses’’ in the  table  above represent the

estimated timing of future payments  for both reported and unreported  claims  incurred and related
claim adjustment expenses, gross of reinsurance recoverables,  excluding  structured settlements
expected to be paid by annuity companies.

The Company has entered into reinsurance agreements to protect itself from potential losses in
excess of the amount it is prepared to accept as  described in note  5 of notes to the Company’s
consolidated financial statements.

In order to qualify for reinsurance accounting,  a reinsurance agreement  must  indemnify  the insurer
from insurance risk, i.e., the agreement must transfer amount and timing risk.  Since the  timing and
amount of cash inflows from such reinsurance agreements are directly related to the underlying
payment of claims and claim adjustment expenses by the  insurer, reinsurance recoverables are
recognized in a manner consistent with  the liabilities (the estimated  liability  for claims and claim
adjustment expenses) relating to the underlying  reinsured  contracts.  The presence  of  any feature
that can delay timely reimbursement  of claims by a reinsurer results  in the reinsurance contract
being accounted for as a deposit rather than reinsurance  (see below). The assumptions used in
estimating the amount and timing of the reinsurance recoverables  are  consistent with those used in
estimating the amount and timing of the related  liabilities.

Reinsurance agreements that do not transfer  both amount and timing risk are  accounted for  as
deposits and included in ‘‘Reinsurance contracts  accounted for  as deposits’’ in  the table above.

The estimated future cash inflows from the Company’s reinsurance contracts that qualify for
reinsurance accounting are as follows:

(in millions)

Total

Less than
1 Year

1-3 Years

3-5  Years

After
5 Years

Reinsurance recoverables . . . . . . . . . . . . . . . . . .

$7,247

$1,834

$1,468

$1,003

$2,942

The Company manages its business and evaluates  its  liabilities  for  claims  and claim adjustment
expense on a net of reinsurance basis. The estimated cash flows on a net of reinsurance basis are
as follows:

(in millions)

Total

Less than
1 Year

1-3 Years

3-5 Years

After
5  Years

Claims and claim adjustment expenses, net

. . .

$41,598

$9,671

$10,426

$5,724

$15,777

For business underwritten by non-U.S. operations, future  cash flows related to reported and
unreported claims incurred and related claim adjustment expenses were translated  at the  spot rate
on December 31, 2012.

The amounts reported in the table above and in the  table of  reinsurance recoverables  above are
presented on a nominal basis and have  not been adjusted to reflect the time value  of  money.
Accordingly, the amounts above will differ  from the Company’s balance sheet to the extent  that
the liability for claims and claim adjustment expenses  and the related reinsurance  recoverables
have been discounted in the balance  sheet. (See  note 1 of notes to the Company’s  consolidated
financial statements.)

125

(7) Workers’ compensation large deductible  policies  provide third party coverage in which the

Company typically is responsible for  paying the entire loss under  such policies and then seeks
reimbursement from the insured for  the deductible  amount. ‘‘Claims  from  large deductible
policies’’ represent the estimated future payment for  claims and claim related  expenses below the
deductible amount, net of the estimated  recovery of the deductible.  The  liability  and the  related
deductible receivable for unpaid claims  are presented in  the consolidated balance sheet as
‘‘contractholder payables’’ and ‘‘contractholder  receivables,’’  respectively. Most deductibles for such
policies are paid directly from the policyholder’s escrow which is periodically replenished by the
policyholder. The payment of the loss  amounts above the  deductible are reported  within ‘‘Claims
and claim adjustment expenses’’ in the above table. Because the timing  of  the collection of the
deductible (contractholder receivables) occurs shortly  after the payment of  the deductible  to  a
claimant (contractholder payables), these  cash  flows  offset  each other in  the table.

The estimated timing of the payment  of the contractholder payables  and  the collection of
contractholder receivables for workers’ compensation policies is presented  below:

(in millions)

Total

Less than
1 Year

1-3 Years

3-5  Years

After
5 Years

Contractholder payables/receivables . . . . . . . . . . .

$4,806

$1,168

$1,306

$710

$1,622

(8) The amounts in ‘‘Loss-based assessments’’ relate to estimated future payments of second-injury

fund assessments which would result  from payment  of  current claim liabilities.  Second injury funds
cover the cost of any additional benefits for aggravation of  a  pre-existing  condition.  For loss-based
assessments, the cost is shared by the  insurance industry and self-insureds,  funded  through
assessments to insurance companies and self-insureds  based on losses. Amounts relating to second-
injury fund assessments are included in ‘‘other liabilities’’ in  the consolidated  balance  sheet.

(9) The amounts in ‘‘Reinsurance contracts accounted for as deposits’’ represent estimated future

nominal payments for reinsurance agreements that are accounted for as  deposits. Amounts payable
under deposit agreements are included in  ‘‘other liabilities’’ in the  consolidated  balance  sheet. The
amounts reported in the table are presented on a nominal basis  and have not been adjusted to
reflect the time value of money. Accordingly, the amounts above will differ from the Company’s
balance sheet to the extent that deposit  values in the balance sheet have  been discounted using
deposit accounting.

(10) The amounts in ‘‘Payout from ceded  funds withheld’’ represent estimated payments for losses and
return  of funds held related to certain reinsurance arrangements whereby the Company holds a
portion of the premium due to the reinsurer and is allowed  to  pay claims from the  amounts held.

(11) The Company’s current liabilities related to unrecognized tax benefits  from uncertain  tax positions
are $657 million. Offsetting these liabilities are deferred tax assets of  $594 million associated with
the temporary differences that would  exist  if these positions become  realized.

The above table does not include an analysis  of liabilities reported for structured settlements for

which  the Company has purchased annuities  and  remains  contingently liable in the event  of default by
the company issuing the annuity. The  Company is  not  reasonably likely  to  incur  material  future
payment obligations under such agreements. In addition, the Company is not currently subject to any
minimum funding requirements for its  qualified pension  plan. Accordingly, future  contributions are  not
included in the foregoing table.

Dividend Availability

The Company’s principal insurance subsidiaries are  domiciled in  the state of  Connecticut. The

insurance holding company laws 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

126

dividend that, together with other distributions made within the preceding twelve  months, exceeds the
greater of 10% of the insurer’s capital  and 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 and  by  state regulation. This declaration or payment  is
further limited by adjusted unassigned surplus, as  determined in accordance with  statutory accounting
practices. The insurance holding company laws of other states in which the Company’s subsidiaries are
domiciled generally contain similar, although in  some instances  somewhat more restrictive, limitations
on the payment of dividends. A maximum of $2.05 billion is available by  the end of 2013 for  such
dividends without prior approval of the  Connecticut Insurance  Department.  The  Company may choose
to accelerate the timing within 2013 and/or  increase the amount of dividends from its insurance
subsidiaries in 2013, which could result in certain  dividends being subject to approval  by  the
Connecticut Insurance Department.

The holding company is not dependent on dividends or other  forms of repatriation from  its foreign

operations to support its liquidity needs.  The undistributed  earnings of the  Company’s foreign
operations are not material and are intended  to  be  permanently reinvested  in those  operations.

The holding company received $1.96 billion of dividends in 2012,  all of which was  received from its

U.S. insurance subsidiaries.

Pension and Other Postretirement Benefit Plans

The Company sponsors a qualified non-contributory defined benefit pension plan (the Qualified
Plan), which covers substantially all U.S. domestic  employees  and  provides  benefits primarily under  a
cash balance formula. In addition, the  Company sponsors: a nonqualified defined benefit pension plan
which  covers certain highly-compensated  employees, pension plans for  employees of  its foreign
subsidiaries, and a postretirement health and life insurance benefit plan for employees  satisfying certain
age and service requirements and for certain retirees.

The Qualified Plan is subject to regulations under the Employee Retirement  Income Act  of 1974
as amended (ERISA), which requires  plans to meet minimum standards of funding and  requires such
plans to subscribe to plan termination insurance through the Pension Benefit  Guaranty Corporation
(PBGC). The Company does not have a minimum funding requirement  for the  Qualified Plan  for 2013
and does not anticipate having a minimum  funding  requirement in 2014.  The  Company has  significant
discretion in making contributions above those necessary to satisfy the  minimum funding requirements.
The Company made discretionary contributions to the Qualified Plan of $217 million,  $185 million, and
$35 million in 2012, 2011 and 2010, respectively. In determining future contributions, the  Company will
consider the performance of the plan’s investment portfolio, the effects of interest  rates  on the
projected benefit obligation of the plan and the Company’s other capital requirements. The Company
has not determined whether or not additional discretionary  funding will  be made  in the current  year  or
beyond. However, the Company currently believes, subject  to actual plan performance and funded
status at the time,  that it may make discretionary pension  contributions of approximately  $75 million to
$100 million annually over the next few  years.

The Qualified Plan assets are managed to maximize long-term total  return.  The  Company’s overall

strategy is to achieve a mix of approximately 85% to 90% of investments  for long-term  growth and
10% to 15% for near-term benefit payments with a  wide diversification  of  asset types, fund strategies
and fund managers. The current target allocations for plan assets  are 55% to 65% equity securities and
20% to 40% fixed income securities,  with  the remainder allocated  to  short-term securities. For  2013,
the Company plans to apply an expected long-term rate of return on  plan assets of 7.50%, the  same
rate as  in 2012. The rates of return reflect the Company’s current expectations of long-term  returns on
the plan’s invested assets, taking into account the current low  level  of long-term interest rates as well as
the Federal Reserve’s commentary in  January 2013  regarding  its expectation to maintain interest  rates
at their current low levels until the national unemployment  rate  drops to 6.5%. The Company’s
expected long-term rate of return on  plan  assets also  contemplates  a  return to more normal levels  of
long-term interest rates in the future.

127

For further discussion of the pension and other postretirement  benefit plans, see note 14 of notes

to the consolidated financial statements.

Risk-Based Capital

The NAIC has Risk-Based Capital (RBC)  requirements for property casualty companies to be
used as minimum capital requirements by  the NAIC  and  states  to  identify companies that merit further
regulatory action. The formulas have  not  been designed to  differentiate among adequately capitalized
companies that operate with levels of  capital  above the  RBC requirements.  Therefore, it  is
inappropriate and ineffective to use the formulas to rate or to rank these companies. At December 31,
2012, all of the Company’s insurance  subsidiaries had  adjusted  capital in  excess  of amounts requiring
any company or regulatory action.

Off-Balance Sheet Arrangements

The  Company  has  entered  into  certain  contingent  obligations  for  guarantees  related  to  the  sale  of
business entities, certain investments, third-party loans related to certain investments, certain insurance
policy obligations of former insurance  subsidiaries and various other indemnifications. See  note 16  of
notes to the Company’s consolidated  financial  statements.  The Company  does  not  expect these
arrangements will have a material effect on the Company’s financial position, changes  in financial
position, revenues and expenses, results  of operations, liquidity, capital expenditures  or capital
resources.

CRITICAL ACCOUNTING ESTIMATES

The Company considers its most significant accounting estimates to be those applied to claims and

claim adjustment expense reserves and related reinsurance recoverables,  investment valuation and
impairments, and goodwill and other  intangible assets  impairments.

Claims and Claim Adjustment Expense Reserves

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

(at December 31, in millions)

General liability . . . . . . . . . . . . . . . . . . . .
Commercial property . . . . . . . . . . . . . . . .
Commercial multi-peril
. . . . . . . . . . . . . .
Commercial automobile . . . . . . . . . . . . . .
Workers’ compensation . . . . . . . . . . . . . .
Fidelity and surety . . . . . . . . . . . . . . . . . .
Personal automobile . . . . . . . . . . . . . . . .
Homeowners and personal—other . . . . . .
International and other . . . . . . . . . . . . . .

Property-casualty . . . . . . . . . . . . . . . . .
Accident and health . . . . . . . . . . . . . . . . .

Claims and claim adjustment expense

Case

$ 5,525
992
2,018
2,343
9,684
479
1,980
1,335
2,216

26,572
34

2012

IBNR

$ 9,109
638
1,723
1,241
7,589
934
722
809
1,551

24,316
—

Total

Case

$14,634
1,630
3,741
3,584
17,273
1,413
2,702
2,144
3,767

$ 5,571
1,025
2,153
2,388
9,649
500
2,038
778
2,370

2011

IBNR

$ 9,657
643
1,792
1,121
7,348
1,029
736
814
1,741

Total

$15,228
1,668
3,945
3,509
16,997
1,529
2,774
1,592
4,111

50,888

26,472

24,881

51,353

3439

—

39

reserves . . . . . . . . . . . . . . . . . . . . . .

$26,606

$24,316

$50,922

$26,511

$24,881

$51,392

The $470 million decrease in gross claims and  claim  adjustment expense reserves since

December 31, 2011 primarily reflected  the impact  of net favorable prior year reserve  development and
payments related to significant catastrophe  losses  incurred in 2011 as well  as operations in runoff

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(including asbestos and environmental  claims), partially offset  by the increase in  loss cost trends and
catastrophe losses incurred in 2012.

Asbestos and environmental reserves are included in the General  liability,  Commercial multi-peril
and International and other lines in the foregoing summary table. Asbestos  and environmental reserves
are discussed separately; see ‘‘Asbestos Claims and  Litigation’’,  ‘‘Environmental  Claims and  Litigation’’
and ‘‘Uncertainty Regarding Adequacy  of  Asbestos and Environmental Reserves.’’

Claims and claim adjustment expense  reserves represent management’s  estimate of  ultimate unpaid

costs of losses and loss adjustment expenses for claims that  have been reported and claims that have
been incurred but not yet reported (IBNR). Claims and claim adjustment  expense reserves do not
represent an exact calculation of liability, but instead  represent management  estimates, generally
utilizing actuarial expertise and projection techniques, at a  given accounting  date. These estimates  are
expectations of what the ultimate settlement and administration  of  claims will cost upon final  resolution
in the future, based on the Company’s assessment of facts and circumstances then  known,  review of
historical settlement patterns, estimates of trends  in claims severity and frequency, expected
interpretations of legal theories of liability  and other  factors. In  establishing gross claims  and claim
adjustment expense reserves, the Company also considers  salvage and subrogation. Estimated recoveries
from reinsurance are included in ‘‘Reinsurance Recoverables’’ as  an asset on the Company’s
consolidated balance sheet. The claims  and claim adjustment  expense reserves are reviewed  regularly by
qualified actuaries employed by the Company.

The process of estimating claims and claim adjustment expense reserves involves  a high degree of
judgment and is subject to a number  of  variables. These  variables can be affected by both internal and
external  events, such as changes in claims  handling procedures, changes in  individuals involved in the
reserve  estimation process, economic inflation, legal  trends  and legislative  changes, among others. The
impact of many of these items on ultimate  costs for claims and  claim  adjustment  expenses is difficult to
estimate. Estimation difficulties also differ significantly by product line due to differences in  claim
complexity, the volume of claims, the potential severity  of individual claims,  the determination  of
occurrence date for a claim and reporting  lags (the time between the  occurrence of the  policyholder
event and when it is actually reported  to  the insurer). Informed judgment is  applied  throughout the
process, including the application of various individual experiences and expertise to multiple  sets of
data and analyses. The Company continually refines its estimates  in a regular ongoing  process  as
historical loss experience develops and  additional claims are reported  and settled. The Company
rigorously attempts to consider all significant facts and circumstances known at the time claims and
claim adjustment expense reserves are established. Due to  the inherent uncertainty underlying these
estimates including, but not limited to, the future settlement environment, final resolution of  the
estimated liability for claims and claim adjustment expenses may be higher or lower than the related
claims and claim adjustment expense  reserves  at the reporting date. Therefore, actual paid  losses, as
claims are settled in the future, may be materially different than  the amount currently  recorded—
favorable or unfavorable.

Because establishment of claims and claim adjustment expense reserves is  an inherently  uncertain

process involving estimates, currently established claims and claim adjustment expense reserves may
change. The Company reflects adjustments to the  reserves in  the results  of  operations in the period the
estimates are changed.

There are also additional risks which  impact  the estimation  of  ultimate  costs for catastrophes. For
example, the estimation of reserves related to hurricanes, tornadoes and  other  catastrophic  events can
be affected by the inability of the Company and  its  insureds to access portions of the impacted areas,
the complexity of factors contributing  to  the losses, the legal and regulatory uncertainties and  the
nature of the information available to  establish the  reserves. Complex factors include,  but are not
limited to: determining whether damage was caused by flooding  versus wind;  evaluating  general liability

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and pollution exposures; estimating additional living  expenses; estimating the  impact  of  demand surge,
infrastructure disruption, fraud, the effect of  mold damage and  business  interruption costs; and
reinsurance collectibility. The timing of a  catastrophe, such as at or near the end  of  a reporting period,
can also affect the information available  to the  Company in estimating reserves for  that  reporting
period. The estimates related to catastrophes  are adjusted as actual claims emerge.

A portion of the Company’s gross claims and claim adjustment expense reserves (totaling
$3.04 billion at December 31, 2012) are for asbestos and  environmental  claims and related litigation.
While the ongoing review of asbestos and environmental claims and associated liabilities considers the
inconsistencies of court decisions as to coverage, plaintiffs’ expanded  theories of liability and the risks
inherent in complex litigation and other  uncertainties, in the opinion of  the  Company’s management, it
is possible that the outcome of the continued  uncertainties  regarding  these claims  could  result in
liability in future periods that differs from current reserves by  an amount that could be material to the
Company’s future operating results. See the  preceding discussion  of  ‘‘Asbestos Claims and Litigation’’
and ‘‘Environmental Claims and Litigation.’’

General Discussion

The process for estimating the liabilities for claims and claim adjustment  expenses begins  with the

collection and analysis of claim data. Data on  individual reported  claims, both current and historical,
including paid amounts and individual  claim adjuster estimates, are grouped by common characteristics
(components) and evaluated by actuaries  in  their analyses of ultimate claim liabilities by product line.
Such data is occasionally supplemented with external data as available and when appropriate. The
process of analyzing reserves for a component is undertaken  on a regular basis, generally quarterly, in
light  of continually updated information.

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

In most cases, multiple estimation methods will be valid for the particular facts and  circumstances

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

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

Property-casualty insurance policies are either  written on  a  claims-made or on an  occurrence basis.

Claims-made policies generally cover, subject  to  requirements in individual policies, claims  reported
during the policy period. Policies that  are  written on an occurrence basis require that the  insured

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demonstrate that a loss occurred in the policy period,  even if the insured  reports the  loss many  years
later.

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

A basic premise in most actuarial analyses  is that past patterns demonstrated in  the data will
repeat themselves  in the future, absent  a material  change in  the associated risk factors  discussed below.
To the extent a material change affecting the  ultimate claim  liability  is known, such  change  is quantified
to the extent possible through an analysis of internal company data  and, if available and when
appropriate, external data. Such a measurement is  specific  to  the facts and circumstances  of the
particular claim portfolio and the known  change being evaluated.  Significant  structural  changes to the
available data, product mix or organization  can materially  impact the reserve estimation  process.

Informed judgment is applied throughout  the reserving process.  This includes  the application of

various individual experiences and expertise to multiple  sets of data  and analyses. In addition  to
actuaries, experts involved with the reserving process  also include  underwriting and claims personnel
and lawyers, as well as other company management.  Therefore, management may have  to  consider
varying individual viewpoints as part of its estimation of  claims and  claim adjustment expense  reserves.
It  is also likely that during periods of significant change, such as  a merger, consistent  application  of
informed judgment becomes even more  complicated and difficult.

The variables discussed above in this general discussion have different impacts on reserve

estimation uncertainty for a given product  line, depending on the length  of  the claim tail, the  reporting
lag, the impact of individual claims and  the complexity of the claim process for a given product line.

Product lines are generally classifiable as  either long tail or short tail,  based on  the average length

of time between the event triggering  claims  under a  policy and the final resolution  of those claims.
Short tail claims are reported and settled quickly, resulting in  less estimation variability. The longer  the
time before final claim resolution, the greater the exposure  to  estimation  risks  and hence the greater
the estimation uncertainty.

A major component of the claim tail is the reporting  lag.  The reporting lag, which is the time

between the event triggering a claim and the reporting of  the claim to the  insurer, makes estimating
IBNR inherently more uncertain. In  addition, the greater the reporting lag, the  greater  the proportion
of IBNR to the total claim liability for the product  line. Writing new  products  with material reporting
lags can result in adding several years’  worth of IBNR claim exposure before the reporting  lag exposure
becomes clearly observable, thereby increasing  the risk  associated  with pricing and reserving such
products. The most extreme example of claim liabilities with  long reporting lags  are asbestos claims.

For some lines, the impact of large individual claims can  be material to the analysis. These lines
are generally referred to as being ‘‘low frequency/high severity,’’ while lines without  this ‘‘large  claim’’
sensitivity are referred to as ‘‘high frequency/low severity.’’  Estimates of claim liabilities  for low
frequency/high severity lines can be sensitive  to  the impact of a small number of potentially  large
claims. As a result, the role of judgment is much  greater  for these reserve estimates.  In contrast, for
high frequency/low severity lines the  impact of individual claims is relatively  minor and the range  of
reasonable reserve estimates is narrower  and more stable.

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

Actuaries have to exercise a considerable  degree  of  judgment in the  evaluation of all these factors

in their analysis of reserves. The human  element  in the application of actuarial judgment  is unavoidable
when faced with material uncertainty. Different actuaries may  choose different  assumptions  when faced
with such uncertainty, based on their  individual backgrounds, professional experiences  and areas  of
focus. Hence, the estimates selected by the  various actuaries may differ materially from each other.

Lastly, significant structural changes to  the available data, product mix or  organization can also

materially impact the reserve estimation process.  Events such  as mergers increase  the inherent
uncertainty of reserve estimates for a  period of time, until  stable trends re-establish themselves within
the new organization.

Risk factors

The major causes of material uncertainty (‘‘risk factors’’)  generally  will vary for each product line,
as well as for each separately analyzed component of the product line. In  a few cases, such risk  factors
are explicit assumptions of the estimation method,  but in  most  cases, they are implicit. For example,  a
method may explicitly assume that a  certain percentage  of claims will close  each year,  but will implicitly
assume that the legal interpretation of  existing contract language will  remain  unchanged. Actual results
will likely vary from expectations for  each of these  assumptions, causing actual paid  losses, as claims
are settled in the future, to be different  in amount than the  reserves being  estimated  currently.

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

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

The evaluation of data is also subject to distortion from  extreme events  or structural shifts,

sometimes in unanticipated ways. For example,  the timing of claims payments in one geographic region
will be impacted if claim adjusters are temporarily reassigned  from  that region  to  help settle
catastrophe claims in another region.

While some changes in the claim environment  are sudden  in nature (such as a  new court ruling

affecting the interpretation of all contracts  in that jurisdiction), others are more  evolutionary.
Evolutionary changes can occur when multiple factors affect final claim values, with the  uncertainty
surrounding each factor being resolved separately, in stepwise fashion. The final impact is  not  known
until all steps have occurred.

Sudden changes generally cause a one-time shift in  claim  liability estimates, although there  may be

some lag in reliable quantification of  their impact. Evolutionary changes  generally cause a  series of
shifts in claim liability estimates, as each component of  the evolutionary change becomes evident and
estimable.

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Actuarial methods  for analyzing and estimating claims  and claim adjustment  expense reserves

The principal estimation and analysis  methods  utilized  by the Company’s  actuaries to evaluate
management’s existing estimates for prior  accident  periods are the  paid  development method,  the case
incurred development method, the Bornhuetter-Ferguson (BF) method,  and  average value  analysis
combined with the reported claim development method.  The BF method  is usually utilized for more
recent accident periods, with a transition  to other methods as  the underlying claim data becomes  more
voluminous and therefore more credible.  These are  typically  referred to as  conventional actuarial
methods. (See Glossary for an explanation of these methods).

While these are the principal methods utilized throughout the  Company, actuaries evaluating a
particular component for a product line have available to them the full range  of methods developed
within the casualty actuarial profession.  The Company’s actuaries are  also continually monitoring
developments within the profession for advances in existing techniques or the  creation of new
techniques that might improve current  and future  estimates.

Some components of product line reserves are susceptible  to relatively  infrequent large claims that

can materially impact the total estimate  for that component.  In  such cases, the  Company’s actuarial
analysis generally isolates and analyzes separately such large claims.  The  reserves excluding such large
claims are generally analyzed using the conventional methods described above. The reserves associated
with large claims are then analyzed utilizing various methods, such as:

(cid:127) Estimating the number of large claims and their average values based on historical trends  from
prior accident periods, adjusted for the  current environment  and  supplemented with  actual data
for the accident year analyzed to the extent available.

(cid:127) Utilizing individual claim adjuster estimates of the  large claims, combined with  continual

monitoring of the aggregate accuracy of  such claim adjuster estimates. (This  monitoring may
lead to supplemental adjustments to the aggregate  of  such  claim  estimates.)

(cid:127) Utilizing historic longer-term average ratios of large  claims to small  claims, and  applying such

ratios to the estimated ultimate small claims from  conventional analysis.

(cid:127) Ground-up analysis of the underlying  exposure (typically used for asbestos and environmental).

The results of such methodologies are subjected  to  various reasonability and diagnostic tests,

including paid-to-incurred loss ratios, implied incurred-loss-to-earned-premium ratios and  non-zero
claim severity trends. An actual versus expected  analysis is also performed  comparing actual loss
development to expected development embedded within  management’s best estimate. Additional
analyses may be performed based on  the results of  these diagnostics, including  the investigation of
other actuarial methods.

The methods described above are generally utilized to evaluate management’s existing estimate for

prior accident periods. For the initial estimate of the current accident year,  the available claim data is
typically insufficient to produce a reliable indication. Hence, the initial  estimate for an accident year  is
generally based on a loss ratio projection method,  which uses the  earned  premium  for the  current year
multiplied by a projected loss ratio. The  projected  loss ratio is determined through an  analysis of prior
periods’ experience, using loss trend,  rate level differences, mix  of  business changes and other known or
observed  factors influencing the current  accident year relative to prior accident years. The exact
number of prior accident years utilized  varies by product line  component,  based on the volume  of
business for that component and the reliability of  an individual  accident year estimate.

Management’s estimates

At least once per quarter, certain members of Company management meet with  the Company’s
actuaries to review the latest claims and  claim adjustment expense reserve analyses. Based on these

133

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

Such an assessment requires considerable judgment. It is  frequently not possible to determine

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

The Audit Committee of the Board of Directors is responsible for  providing oversight of reserving

propriety, and annually reviews the process  by which the Company  establishes reserves.

Discussion of Product Lines

The following section details reserving considerations  and common risk factors by product line.
There are many additional risk factors  that may impact ultimate  claim  costs. Each  risk factor presented
will have a different impact on required  reserves. Also,  risk factors can have  offsetting  or compounding
effects on required reserves. For example,  in workers’ compensation,  the use of  expensive  medical
procedures that result in medical cost inflation may enable  workers to return to work faster, thereby
lowering indemnity costs. Thus, in almost  all cases, it is  impossible to discretely measure the effect of a
single risk factor and construct a meaningful sensitivity expectation.

In order to provide information on reasonably possible reserving changes by product line,  the
historical changes in year-end claims  and  claim adjustment expense  reserves over  a one-year period are
provided for the U.S. product lines. This information is provided for both the  Company and the
industry for the nine most recent years,  and  is based on the most recent publicly available data for the
reported line(s) that most closely match  the individual product line being discussed. These changes
were calculated, net of reinsurance, from  statutory  annual  statement data found in Schedule  P of those
statements, and represent the reported  reserve development on the beginning-of-the-year claim
liabilities divided by the beginning claim liabilities, all  accident years combined, excluding non-defense
related claim adjustment expense. Data  presented for the Company includes  history for  the entire
Travelers group (U.S. companies only), whether  or not the individual subsidiaries were  originally part of
SPC or TPC. This treatment is required by the statutory  reporting instructions  promulgated  by  state
regulatory authorities for Schedule P.  Comparable  data for non-U.S. companies is  not  available.

General Liability

General liability is generally considered a  long tail line, as it takes a relatively long period  of time

to finalize and settle claims from a given  accident year. The speed  of  claim  reporting and  claim
settlement is a function of the specific  coverage provided, the jurisdiction and  specific policy provisions
such as self-insured retentions. There  are  numerous components underlying the general liability product
line. Some of these have relatively moderate payment  patterns  (with most  of the claims for a given
accident year closed within five to seven  years),  while others can have extreme  lags in both reporting
and payment of claims (e.g., a reporting lag of a decade or more for ‘‘construction defect’’ claims).

134

While the majority of general liability coverages are  written on an ‘‘occurrence’’ basis, certain

general liability coverages (such as those  covering directors and officers or professional liability) are
typically insured on a ‘‘claims-made’’  basis.

General liability reserves are generally  analyzed as two components: primary and  excess/umbrella,

with the primary component generally  analyzed separately for  bodily  injury  and property  damage.
Bodily injury liability payments reimburse  the claimant  for  damages pertaining to physical  injury  as a
result of the policyholder’s legal obligation arising  from non-intentional acts such as negligence, subject
to the insurance policy provisions. In  some cases  the damages can  include future wage loss  (which is a
function of future earnings power and wage  inflation) and future  medical treatment costs. Property
damage  liability payments result from damages to the claimant’s private  property arising from the
policyholder’s legal obligation for non-intentional acts. In most cases, property damage losses are a
function of costs as of the loss date, or soon thereafter.

In addition, sizable or unique exposures are reviewed separately. These exposures include  asbestos,

environmental, other mass torts, construction defect and  large unique accounts that would  otherwise
distort the analysis. These unique categories  often require a very high degree of judgment  and require
reserve  analyses that do not rely on conventional actuarial  methods.

Defense costs are also a part of the insured costs covered by liability policies and can be
significant, sometimes greater than the  cost of the actual paid claims. For some products this  risk is
mitigated by policy language such that the insured portion  of defense costs erodes  the amount of policy
limit available to pay the claim. Such  ‘‘defense  within the limits’’ policies are most common for
‘‘claims-made’’ products. When defense  costs  are outside of the  limits,  amounts paid for defense costs
do not erode the policy limits.

This line is typically the largest source of  reserve estimate uncertainty in  the United States
(excluding assumed reinsurance contracts  covering the same risk). Major contributors to this reserve
estimate uncertainty include the reporting  lag (i.e., the length of time  between the event triggering
coverage and the actual reporting of the  claim), the  number of parties  involved in the  underlying  tort
action, whether the ‘‘event’’ triggering coverage is  confined to only one time  period or  is spread  over
multiple time periods, the potential dollars involved  (in the  individual claim actions), whether such
claims were reasonably foreseeable and  intended to be covered at the  time the  contracts were written
(i.e., coverage dispute potential), and  the  potential  for mass claim actions. Claims  with longer reporting
lags result in greater inherent risk. This is especially true  for alleged claims with a  latency feature,
particularly where courts have ruled that  coverage is spread over multiple  policy  years,  hence involving
multiple defendants (and their insurers and reinsurers) and multiple policies  (thereby increasing the
potential dollars involved and the underlying settlement complexity). Claims  with long  latencies  also
increase the potential recognition lag  (i.e.,  the lag between  writing a type of policy in  a certain market
and the recognition that such policies  have potential mass tort  and/or latent  claim  exposure).

The amount of reserve estimate uncertainty  also varies significantly  by component for  the general

liability product line. The components in  this product  line with the  longest latency, longest  reporting
lags, largest potential dollars involved and greatest claim settlement complexity are asbestos and
environmental. Components that include  latency, reporting lag and/or  complexity issues, but to a
materially lesser extent than asbestos and environmental,  include construction defect and other mass
tort actions. Many components of general liability are not subject to material latency or claim
complexity risks and hence have materially  less  uncertainty than  the previously mentioned components.
In general, policies providing coverage  with shorter reporting lags, fewer parties involved in settlement
negotiations, only one policy potentially triggered per claim,  fewer potential settlement dollars,
reasonably foreseeable (and stable) potential  hazards/claims  and no mass tort potential result  in much
less  reserve estimate uncertainty than policies  without  those characteristics.

135

In addition to the conventional actuarial methods mentioned  in the  general discussion section, the

company utilizes various report year  development and S-curve methods for the construction defect
components of this product line. The  Construction Defect report year  development analysis is
supplemented with projected claim counts  and average  values for IBNR claim counts. For components
with greater lags in claim reporting, such  as  excess  and umbrella components of  this product line, the
company relies more heavily on the BF  method than on  the paid and case  incurred development
methods.

Examples of common risk factors, or  perceptions thereof,  that could change and, thus,  affect the

required general liability reserves (beyond those included  in  the general  discussion section) include:

General liability risk factors

(cid:127) Changes in claim handling philosophies

(cid:127) Changes in policy provisions or court  interpretation of such provisions

(cid:127) New theories of liability

(cid:127) Trends in jury awards

(cid:127) Changes in the propensity to sue, in general with specificity to particular  issues

(cid:127) Changes in the propensity to litigate rather than settle a  claim

(cid:127) Changes in statutes of limitations

(cid:127) Changes in the underlying court system

(cid:127) Distortions from losses resulting from large single  accounts or single issues

(cid:127) Changes in tort law

(cid:127) Shifts in lawsuit mix between federal and state  courts

(cid:127) Changes in claim adjuster office structure (causing distortions in the data)

(cid:127) The potential impact of inflation on  loss costs

(cid:127) Changes in settlement patterns

General liability book of business risk factors

(cid:127) Changes in policy provisions (e.g.,  deductibles, policy limits, endorsements)

(cid:127) Changes in underwriting standards

(cid:127) Product mix (e.g., size of account,  industries insured, jurisdiction  mix)

Unanticipated changes in risk factors  can  affect reserves. As  an  indicator  of the causal  effect  that a

change in one or more risk factors could  have on reserves for  general liability (excluding asbestos and
environmental), a 1% increase (decrease) in  incremental paid loss development for each future
calendar year could result in a 1.5%  increase (decrease)  in  claims and claim  adjustment  expense
reserves.

Historically, the one-year change in the reserve estimate  for this product  line, excluding  estimated
asbestos and environmental amounts, over  the last  nine years has varied from (cid:4)8% to 10%  (averaging
(cid:4)1%) for the Company and from (cid:4)5% to 6% (averaging (cid:4)1%) for the industry overall. The
Company’s year-to-year changes are driven by, and are based  on, observed  events during the year.
Because the high end of the Company’s range of historical adverse  development comes from certain
businesses that the Company has since  exited,  the Company believes that the  industry’s range of
historical outcomes is illustrative of reasonably  possible one-year changes  in reserve estimates  for this
product  line. General liability reserves  (excluding asbestos and environmental) represent approximately
24% of the Company’s total claims and  claim  adjustment  expense reserves.

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The Company’s change in reserve estimate for this product  line, excluding estimated asbestos and
environmental amounts, was (cid:4)3% for  2012, (cid:4)8%  for 2011 and (cid:4)5% for 2010. The 2012 change was
primarily concentrated in excess coverages for accident years  2009 and  prior and reflected what the
Company believes are more favorable legal and  judicial environments than what  the Company
previously expected. Also contributing  to  the 2012 change was better than expected  results for
management liability business, primarily for the  errors & omissions and  fiduciary products for accident
years 2007 and prior. The 2011 change  was  concentrated in excess coverages for accident years
2005-2008 and reflected what the Company believes  are more favorable legal and judicial  environments
than what the Company previously expected.  The  2010 change was primarily concentrated in excess
coverages for accident years 2006 and prior and reflected what the  Company believes are more
favorable legal and judicial environments than what  the Company previously expected.

Commercial Property

Commercial property is generally considered a short tail  line with a simpler and faster claim
reporting and adjustment process than liability coverages, and  less uncertainty in the  reserve setting
process (except for more complex business  interruption claims). It  is generally viewed as  a moderate
frequency, low to moderate severity line, except for catastrophes and coverage  related to large
properties. The claim reporting and settlement process for property coverage  claim  reserves is generally
restricted to the insured and the insurer. Overall,  the claim liabilities for this line create  a low
estimation risk, except possibly for catastrophes and  business interruption claims.

Commercial property reserves are typically analyzed in two components, one for catastrophic or

other large single events, and another for  all  other events.  Examples  of  common risk factors, or
perceptions thereof, that could change  and,  thus, affect  the required property reserves (beyond those
included in the general discussion section) include:

Commercial property risk factors

(cid:127) Physical concentration of policyholders

(cid:127) Availability and cost of local contractors

(cid:127) For the more severe catastrophic events,  ‘‘demand surge’’  inflation, which refers  to  significant

short-term increases in building material and labor costs  due to a sharp increase in demand for
those materials and services

(cid:127) Local building codes

(cid:127) Amount of time to return property  to  full usage  (for business interruption claims)

(cid:127) Frequency of claim re-openings on claims previously  closed

(cid:127) Court interpretation of policy provisions (such as occurrence definition,  or wind versus flooding)

(cid:127) Lags in reporting claims (e.g., winter damage to summer homes, hidden damage  after an

earthquake, hail damage to roofs and/or equipment on roofs)

(cid:127) Court or legislative changes to the statute of limitations

Commercial property book of business risk factors

(cid:127) Policy provisions mix (e.g., deductibles, policy limits,  endorsements)

(cid:127) Changes in underwriting standards

Unanticipated changes in risk factors  can  affect reserves. As  an  indicator  of the causal  effect  that a

change in one or more risk factors could  have on reserves for  property,  a 1% increase  (decrease) in

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incremental paid loss development for  each future calendar  year could result in  a 1.1% increase
(decrease) in claims and claim adjustment  expense reserves.

Historically, the one-year change in the reserve estimate  for this product  line over  the last nine
years has varied from (cid:4)34% to (cid:4)5%  (averaging (cid:4)18%) for the Company, and from (cid:4)14%  to  2%
(averaging (cid:4)9%) for the industry overall. The Company’s year-to-year changes are driven by, and are
based on, observed events during the  year.  The  Company believes that its range of  historical outcomes
is illustrative of reasonably possible one-year changes  in reserve  estimates for this product line.
Commercial property reserves represent approximately 3% of the Company’s total  claims  and claim
adjustment expense reserves.

Since commercial property is considered  a short tail coverage,  the one year change for commercial
property can be more volatile than that for  the longer  tail product  lines. This is  due  to  the fact that the
majority of the reserve for commercial  property relates  to the most recent accident year, which  is
subject to the most uncertainty for all product  lines.  This recent  accident year uncertainty is relevant to
commercial property because of weather-related events which, notwithstanding 2010 and 2011
experience, tend to be concentrated in  the second half  of the  year, and  generally are not completely
resolved  until the following year. Reserve estimates associated with major catastrophes may  take even
longer to resolve. The reserve estimates for this product  line are also potentially subject  to  material
changes due to uncertainty in measuring  ultimate  losses for significant catastrophes such as the events
of September 11, 2001, Hurricane Katrina and Storm  Sandy.

The Company’s change in reserve estimate for this product  line was (cid:4)22% for  2012, (cid:4)5% for

2011 and (cid:4)25% for 2010. The 2012  change primarily reflected better than  expected development  for
accident years 2009 through 2011, driven by favorable loss development related to catastrophe losses
incurred in 2011, and by higher subrogation  and salvage recoveries for accident years 2009 through
2011. The 2011 change primarily reflected  better than expected development in  the 2008 and 2009
accident years for certain large national  property and  ocean  marine  exposures. The 2010 change
primarily occurred in the 2008 and 2009  accident years as a result of better  than expected loss
development in Industry-Focused Underwriting  and Target Risk Underwriting.

Commercial Multi-Peril

Commercial multi-peril provides a combination of property and  liability  coverage typically for small

businesses and, therefore, includes both  short and  long tail  coverages. For property coverage, it
generally takes a relatively short period  of time to close claims,  while for the  other  coverages, generally
for the liability coverages, it takes a longer period of time to close claims.

The reserving risk for this line is dominated by the  liability coverage  portion of this product, except

occasionally in the event of catastrophic or  large single losses. The reserving risk for  this  line differs
from that of the general liability product line and the property product  line due to the  nature of the
customer. Commercial multi-peril is generally  sold  to  smaller-sized  accounts, while the  customer profile
for general liability and commercial property includes larger  customers.

See ‘‘Commercial property risk factors’’ and  ‘‘General  liability risk factors,’’  discussed above,  with

regard to reserving risk for commercial multi-peril.

Unanticipated changes in risk factors  can  affect reserves. As  an  indicator  of the causal  effect  that a

change in one or more risk factors could  have on reserves for  commercial  multi-peril  (excluding
asbestos and environmental), a 1% increase (decrease)  in incremental paid loss development for each
future calendar year could result in a  1.2% increase  (decrease) in claims and claim adjustment expense
reserves.

Historically, the one-year change in the reserve estimate  for this product  line over  the last nine

years has varied from (cid:4)19% to 5% (averaging  (cid:4)6%) for the Company, and from  (cid:4)6% to 3%

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(averaging (cid:4)2%) for the industry overall. The Company’s year-to-year changes are driven by, and are
based on, observed events during the  year.  The  Company believes that its range of  historical outcomes
is illustrative of reasonably possible one-year changes  in reserve  estimates for this product line.
Commercial multi-peril reserves (excluding asbestos and environmental reserves)  represent
approximately 7% of the Company’s  total claims  and claim adjustment expense reserves.

As discussed above, this line combines general liability and commercial property coverages and it

has been impacted in the past by many  of  the same  events as those two lines.

The Company’s change in reserve estimate for this product  line was (cid:4)1% for  2012, 5% for 2011
and 1% for 2010. The 2011 change reflected unfavorable loss development driven by late reporting of
hail claims incurred in 2010.

Commercial Automobile

The commercial automobile product  line  is a mix of property and  liability coverages and, therefore,

includes both short and long tail coverages.  The  payments that  are  made quickly typically  pertain to
auto physical damage (property) claims and property damage (liability) claims. The payments that take
longer to finalize and are more difficult to estimate relate to bodily injury claims.  In general, claim
reporting lags are minor, claim complexity is  not  a major issue, and the line  is viewed as  high
frequency, low to moderate severity.  Overall, the  claim  liabilities for this line  create a  moderate
estimation risk.

Commercial automobile reserves are  typically  analyzed in four components: bodily injury liability;
property damage liability; collision claims; and  comprehensive claims. These last two components have
minimum reserve risk and fast payouts and, accordingly, separate  risk factors are  not  presented.

The Company utilizes the conventional actuarial methods  mentioned in  the general  discussion

above in estimating claim liabilities for this line. This  is supplemented with detailed custom analyses
where  needed.

Examples of common risk factors, or  perceptions thereof,  that could change and, thus,  affect the

required commercial automobile reserves  (beyond those included in the general discussion section)
include:

Bodily injury and property damage liability risk factors

(cid:127) Trends in jury awards

(cid:127) Changes in the underlying court system

(cid:127) Changes in case  law

(cid:127) Litigation trends

(cid:127) Frequency of claims with payment  capped by policy limits

(cid:127) Change in average severity of accidents,  or proportion  of severe accidents

(cid:127) Changes in auto safety technology

(cid:127) Subrogation opportunities

(cid:127) Changes in claim handling philosophies

(cid:127) Frequency of visits to health providers

(cid:127) Number of medical procedures given during  visits to health  providers

(cid:127) Types of health providers used

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(cid:127) Types of medical treatments received

(cid:127) Changes in cost of medical treatments

(cid:127) Degree of patient responsiveness to treatment

Commercial automobile book of business risk  factors

(cid:127) Changes in policy provisions (e.g.,  deductibles, policy limits, endorsements,  etc.)

(cid:127) Changes in mix of insured vehicles  (e.g.,  long haul trucks versus  local  and smaller vehicles, fleet

risks versus non-fleets)

(cid:127) Changes in underwriting standards

Unanticipated changes in risk factors  can  affect reserves. As  an  indicator  of the causal  effect  that a

change in one or more risk factors could  have on reserves for  commercial  automobile, a  1% increase
(decrease) in incremental paid loss development for each  future calendar year could result in  a 1.2%
increase (decrease) in claims and claim adjustment  expense reserves.

Historically, the one-year change in the reserve estimate  for this product  line over  the last nine

years has varied from (cid:4)10% to 7% (averaging  (cid:4)3%) for the Company, and from  (cid:4)3% to 2%
(averaging (cid:4)1%) for the industry overall. The Company’s year-to-year changes are driven by, and are
based on, observed events during the  year.  The  Company believes that its range of  historical outcomes
is illustrative of reasonably possible one-year changes  in reserve  estimates for this product line.
Commercial automobile reserves represent approximately 7% of the Company’s total claims and claim
adjustment expense reserves.

The Company’s change in reserve estimate for this product  line was 7% for  2012, 5% for 2011  and

(cid:4)1% for 2010. The 2012 change reflected  higher than expected severity  in the bodily injury coverage
primarily for accident years 2010 and 2011. The 2011 change reflected worse than  expected severity for
the 2009 and 2010 accident years.

Workers’ Compensation

Workers’ compensation is generally considered a  long tail coverage, as  it takes a  relatively  long
period of time to finalize claims from  a  given accident year. While certain payments such as  initial
medical treatment or temporary wage replacement  for  the injured  worker are made quickly, some other
payments are made over the course of  several years, such  as  awards for  permanent partial injuries.  In
addition, some payments can run as long  as the injured worker’s life, such as  permanent disability
benefits and on-going medical care. Despite the  possibility of  long payment tails, the reporting  lags are
generally short, settlements are generally  not complex,  and most of  the liability can  be  considered high
frequency with moderate severity. The largest  reserve risk generally comes from the  low frequency, high
severity claims providing lifetime coverage for medical expense arising from  a worker’s  injury,  as such
claims are subject to greater inflation risk. Overall, the claim liabilities for this line  create a somewhat
greater than moderate estimation risk.

Workers’ compensation reserves are  typically analyzed  in three  components: indemnity losses,

medical losses and claim adjustment expenses.

Examples of common risk factors, or  perceptions thereof,  that could change and, thus,  affect the

required workers’ compensation reserves (beyond  those included  in the general discussion section)
include:

Indemnity risk factors

(cid:127) Time required to recover from the injury

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(cid:127) Degree of available transitional jobs

(cid:127) Degree of legal involvement

(cid:127) Changes in the interpretations and processes of the workers’ compensation commissions’

oversight of claims(1)

(cid:127) Future wage inflation for states that  index benefits

(cid:127) Changes in the administrative policies of second injury funds

Medical risk factors

(cid:127) Changes in the cost of medical treatments  (including prescription  drugs)  and underlying fee

schedules (‘‘inflation’’)

(cid:127) Frequency of visits to health providers

(cid:127) Number of medical procedures given during  visits to health  providers

(cid:127) Types of health providers used

(cid:127) Type of medical treatments received

(cid:127) Use of preferred provider networks and other medical cost containment practices

(cid:127) Availability of new medical processes and equipment

(cid:127) Changes in the use of pharmaceutical drugs

(cid:127) Degree of patient responsiveness to treatment

General workers’ compensation risk factors

(cid:127) Frequency of claim reopenings on  claims previously closed

(cid:127) Mortality trends of injured workers with lifetime benefits and  medical treatment

(cid:127) Degree of cost shifting between workers’ compensation and health insurance, including Medicare

Workers’ compensation book of business  risk  factors

(cid:127) Product mix

(cid:127) Injury type mix

(cid:127) Changes in underwriting standards

Unanticipated changes in risk factors  can  affect reserves. As  an  indicator  of the causal  effect  that a

change in one or more risk factors could  have on reserves for  workers’ compensation,  a 1% increase
(decrease) in incremental paid loss development for each  future calendar year could result in  a 1.3%
increase (decrease) in claims and claim adjustment  expense reserves.

Historically, the one-year change in the reserve estimate  for this product  line over  the last nine
years has varied from (cid:4)2% to 1% (averaging  0%)  for the Company, and from  (cid:4)1% to 2% (averaging
0%) for the industry overall. The Company’s year-to-year  changes  are  driven by, and are  based on,
observed  events during the year. The  Company believes  that its range of  historical outcomes is
illustrative of reasonably possible one-year changes in  reserve estimates  for this product line.  Workers’

(1) These are administrative bodies  that evaluate  whether  or  not  a given claim for workers’

compensation benefits is valid. Their duties  include the determination  of  whether a given  injury
arose out of the scope of employment or  the determination of the degree of injury where  disputes
exist.

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compensation reserves represent approximately 34% of the Company’s total claims and claim
adjustment expense reserves.

The Company’s change in reserve estimate for this product  line was (cid:4)2% in 2012,  0% in 2011  and

(cid:4)1% for 2010. The 2012 change was primarily driven by better than expected  frequency  and severity
related to lifetime medical claims for accident  years  2008 and  prior.

Fidelity and Surety

Fidelity is generally considered a short  tail coverage. It  takes a relatively  short period of time to
finalize and settle fidelity claims. The volatility  of fidelity reserves  is generally related to the type  of
business of the insured, the size and  complexity of the insured’s  business  operations, amount of  policy
limit and attachment point of coverage. The uncertainty  surrounding reserves  for small, commercial
insureds is typically less than the uncertainty for large  commercial or  financial  institutions. The high
frequency, low severity nature of small  commercial  fidelity losses provides for stability in loss  estimates,
whereas the low frequency, high severity  nature of losses for large insureds results  in a wider range of
ultimate loss outcomes. Actuarial techniques  that rely  on a stable pattern of loss development are
generally not applicable to low frequency, high severity policies.

Surety has certain components that are generally considered short tail coverages with short
reporting lags, although large individual  construction  and commercial surety contracts can  result in a
long settlement tail, based on the length  and complexity of  the construction project or commercial
transaction being insured. (Large construction projects can  take  many years  to  complete.)  The
frequency of losses in surety generally  correlates with economic cycles as  the primary cause of surety
loss is the inability of an insured contractor  to  fulfill  its contractual obligations. The Company actively
seeks to mitigate this exposure to loss through disciplined risk selection and adherence to underwriting
standards. The volatility of surety losses  is generally related to the type of  business  performed by the
insured, the type of bonded obligation, the amount of limit exposed to loss and the amount of  assets
available to the insurer to mitigate losses, such as unbilled contract  funds,  collateral,  first  and third
party indemnity, and other security positions of  an insured’s assets.  Certain classes of surety  claims  are
very high severity, low frequency in nature. These can include large  construction contractors involved
with one or multiple large, complex projects as well as certain large commercial surety exposures.
Other claim factors affecting reserve  variability  of  surety include litigation  related to amounts owed by
and due the insured (e.g., salvage and subrogation efforts) and  the  results of financial restructuring  of
an insured.

Examples of common risk factors, or  perceptions thereof,  that could change and, thus,  affect the
required fidelity and surety reserves (beyond those  included in the  general discussion section)  include:

Fidelity risk factors

(cid:127) Type of business of insured

(cid:127) Policy limit and attachment points

(cid:127) Third-party claims

(cid:127) Coverage litigation

(cid:127) Complexity of claims

(cid:127) Growth in insureds’ operations

Surety risk factors

(cid:127) Economic trends, including the general  level of  construction activity

(cid:127) Concentration of reserves in a relatively  few large claims

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(cid:127) Type of business insured

(cid:127) Type of obligation insured

(cid:127) Cumulative limits of liability for insured

(cid:127) Assets available to mitigate loss

(cid:127) Defective workmanship/latent defects

(cid:127) Financial strategy of insured

(cid:127) Changes in statutory obligations

(cid:127) Geographic spread of business

Fidelity and Surety book of business risk factors

(cid:127) Changes in policy provisions (e.g.,  deductibles, limits, endorsements)

(cid:127) Changes in underwriting standards

Unanticipated changes in risk factors  can  affect reserves. As  an  indicator  of the causal  effect  that a

change in one or more risk factors could  have on reserves for  fidelity and surety, a 1%  increase
(decrease) in incremental paid loss development for each  future calendar year could result in  a 1.3%
increase (decrease) in claims and claim adjustment  expense reserves.

Historically, the one-year change in the reserve estimate  for this product  line over  the last nine
years has varied from (cid:4)11% to 138% (averaging  10%)  for the Company,  and from  (cid:4)13% to 24%
(averaging 2%) for the industry overall.  The Company’s  year-to-year changes are  driven by, and are
based on, observed events during the  year.  Because  the high end of the  Company’s range  was due to
acquired business in 2004, the Company believes that the industry’s  range of  historical outcomes is
illustrative of reasonably possible one-year changes in  reserve estimates  for this product line.  Fidelity
and surety reserves represent approximately 3% of the  Company’s  total  claims and claim adjustment
expense reserves.

In general, developments on single large claims (both adverse and  favorable) are a primary source

of changes in reserve estimates for this product line.

The Company’s change in reserve estimate for this product  line was (cid:4)8% for  2012, (cid:4)11% for

2011 and (cid:4)6% for 2010. The 2012 change  reflected  better than expected  results primarily for the
contract surety line of business for accident years 2008  and  prior. The 2011 change primarily reflected
better than expected development for  accident years 2008 and prior for the contract surety business.
The 2010 change was driven by better than expected loss development due to lower than expected
claim activity and loss severity, primarily for the  contract surety  business  in this product  line for the
2008 and prior accident years.

Personal Automobile

Personal automobile includes both short and long  tail coverages.  The payments that are made
quickly typically pertain to auto physical  damage  (property) claims and property damage (liability)
claims. The payments that take longer to finalize  and are  more difficult  to  estimate relate to bodily
injury claims. Reporting lags are relatively short and the claim  settlement process for  personal
automobile liability generally is the least complex of the  liability products. It is  generally  viewed as a
high frequency, low to moderate severity product line. Overall,  the claim liabilities for  this  line create a
moderate estimation risk.

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Personal automobile reserves are typically  analyzed in five components: bodily  injury  liability,

property damage liability, no-fault losses,  collision claims and comprehensive claims. These  last two
components have minimum reserve risk and fast payouts and, accordingly,  separate factors are not
presented.

Examples of common risk factors, or  perceptions thereof,  that could change and, thus,  affect the
required personal automobile reserves (beyond  those included in  the general  reserve discussion section)
include:

Bodily injury and property damage liability risk factors

(cid:127) Trends in jury awards

(cid:127) Changes in the underlying court system and its philosophy

(cid:127) Changes in case  law

(cid:127) Litigation trends

(cid:127) Frequency of claims with payment  capped by policy limits

(cid:127) Change in average severity of accidents,  or proportion  of severe accidents

(cid:127) Subrogation opportunities

(cid:127) Degree of patient responsiveness to treatment

(cid:127) Changes in claim handling philosophies

No-fault risk factors (for selected states  and time periods)

(cid:127) Effectiveness of no-fault laws

(cid:127) Frequency of visits to health providers

(cid:127) Number of medical procedures given during  visits to health  providers

(cid:127) Types of health providers used

(cid:127) Types of medical treatments received

(cid:127) Changes in cost of medical treatments

(cid:127) Degree of patient responsiveness to treatment

Personal automobile book of business  risk  factors

(cid:127) Changes in policy provisions (e.g.,  deductibles, policy limits, endorsements,  etc.)

(cid:127) Changes in underwriting standards

(cid:127) Changes in the use of credit data for  rating and underwriting

Unanticipated changes in risk factors  can  affect reserves. As  an  indicator  of the causal  effect  that a

change in one or more risk factors could  have on reserves for  personal automobile, a  1% increase
(decrease) in incremental paid loss development for each  future calendar year could result in  a 1.1%
increase (decrease) in claims and claim adjustment  expense reserves.

Historically, the one-year change in the reserve estimate  for this product  line over  the last nine

years has varied from (cid:4)9% to 3% (averaging  (cid:4)3%) for the Company, and from  (cid:4)4% to (cid:4)1%
(averaging (cid:4)2%) for the industry overall. The Company’s year-to-year changes are driven by, and are
based on, observed events during the  year.  The  Company believes that its range of  historical outcomes
is illustrative of reasonably possible one-year changes  in reserve  estimates for this product line.

144

Personal automobile reserves represent  approximately 5%  of  the Company’s total claims and claim
adjustment expense reserves.

The Company’s change in reserve estimate for this product  line was 2% for  2012, 3% for 2011  and

0% for  2010. The 2012 change was primarily  driven by higher than expected bodily injury severity for
accident year 2011. The 2011 change  reflected  worse than  expected severity for  the 2007-2010 accident
years.

Homeowners  and Personal Lines Other

Homeowners is generally considered a short  tail coverage. Most payments are related to the
property portion of the policy, where  the claim reporting  and settlement process is generally restricted
to the insured and the insurer. Claims on property coverage are typically reported  soon  after the actual
damage  occurs, although delays of several months are not unusual. The resulting  settlement process is
typically fairly short term, although exceptions  do exist.

The liability portion of the homeowners policy generates claims  which take longer  to  pay due to

the involvement of litigation and negotiation, but  with generally small  reporting lags.

Overall, the line is generally high frequency, low to moderate severity (except for catastrophes),

with simple to moderate claim complexity.

Homeowners reserves are typically analyzed in two components: non-catastrophe  related losses  and

catastrophe loss payments.

Examples of common risk factors, or  perceptions thereof,  that could change and, thus,  affect the

required homeowners reserves (beyond those included in the general discussion section) include:

Non-catastrophe risk factors

(cid:127) Salvage opportunities

(cid:127) Amount of time to return property  to  residential  use

(cid:127) Changes in weather patterns

(cid:127) Local building codes

(cid:127) Litigation trends

(cid:127) Trends in jury awards

(cid:127) Court interpretation of policy provisions (such as occurrence definition,  or wind versus flooding)

(cid:127) Lags in reporting claims (e.g., winter damage to summer homes, hidden damage  after an

earthquake, hail damage to roofs and/or equipment on roofs)

(cid:127) Court or legislative changes to the statute of limitations

Catastrophe risk factors

(cid:127) Physical concentration of policyholders

(cid:127) Availability and cost of local contractors

(cid:127) Local building codes

(cid:127) Quality of construction of damaged homes

(cid:127) Amount of time to return property  to  residential  use

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(cid:127) For the more severe catastrophic events,  ‘‘demand surge’’  inflation, which refers  to  significant

short-term increases in building material and labor costs  due to a sharp increase in demand for
those materials and services

Homeowners book of business risk factors

(cid:127) Policy provisions mix (e.g., deductibles, policy limits,  endorsements, etc.)

(cid:127) Degree of concentration of policyholders

(cid:127) Changes in underwriting standards

(cid:127) Changes in the use of credit data for  rating and underwriting

Unanticipated changes in risk factors  can  affect reserves. As  an  indicator  of the causal  effect  that a

change in one or more risk factors could  have on reserves for  homeowners and personal lines other,  a
1% increase (decrease) in incremental paid loss development  for  each future  calendar  year could result
in a 1.1% increase (decrease) in claims and claim adjustment expense reserves.

Historically, the one-year change in the reserve estimate  for this product  line (excluding the
umbrella line of business, which for statutory reporting  purposes is included with the  general liability
line of business) over the last nine years has varied from (cid:4)31% to 3% (averaging  (cid:4)11%) for the
Company, and from (cid:4)8% to (cid:4)2% (averaging  (cid:4)5%)  for the industry overall. The Company’s
year-to-year changes are driven by, and are based  on, observed events during  the year. The Company
believes that its range of historical outcomes  is illustrative  of  reasonably possible one-year changes  in
reserve  estimates for this product line. Homeowners and personal lines  other  reserves represent
approximately 4% of the Company’s  total claims  and claim adjustment expense reserves.

This line combines both liability and  property coverages; however,  the majority  of  the reserves
relate to property. While property is considered a short tail coverage, the  one  year  change  for property
can be more volatile than that for the  longer  tail product lines. This is due to the fact that the majority
of the reserve for property relates to the  most  recent accident year, which is subject  to  the most
uncertainty for all product lines. This recent accident year uncertainty  is relevant to property  because of
weather related events which, notwithstanding 2010 and 2011 experience, tend to be concentrated in
the second half of the year, and generally  are not completely resolved until  the following  year.  Reserve
estimates associated with major catastrophes  may take even longer to resolve.

The Company’s change in reserve estimate for this product  line (excluding the  umbrella line of
business) was (cid:4)11% for 2012, (cid:4)7% for  2011 and 2%  for  2010. The  2012 change reflected better than
expected loss development related to catastrophe  losses incurred in  2011 and  non-catastrophe losses
incurred in accident years 2010 and 2011. The 2011  change reflected better  than expected loss
development related to catastrophe losses  incurred in  the first half of 2010. The 2010 change reflected
unfavorable loss development in the 2009  accident year for the  homeowners’ line of business that was
driven by higher than anticipated late-reported claims related  to  storms in 2009.

International and other

International and other includes products written by the Company’s international operations, as

well as all other products not explicitly  discussed above. The  principal  component of ‘‘other’’ claim
reserves is assumed reinsurance written on  an excess-of-loss basis,  which may include  reinsurance of
non-U.S.  exposures, and is runoff business.

International and other claim liabilities result  from a mix of coverages, currencies and jurisdictions/

countries. The common characteristic is the  need to customize the analysis  to  the individual
component, and the inability to rely on  data characterizations and reporting requirements in the  U.S.
statutory reporting framework.

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Due to changes in the business mix for  this line over time, the recently incurred claim liabilities

are relatively short term (due to both  the products  and the jurisdictions  involved, e.g., the Republic of
Ireland and the United Kingdom), while  the older liabilities include some from runoff operations that
are extremely long tail (e.g., U.S. excess  liabilities reinsured through  the London market, and  several
underwriting pools in runoff). The speed  of claim reporting and claim settlement is  a function of the
specific  coverage provided, the jurisdiction, the distribution system  (e.g., underwriting pool  versus
direct) and the proximity of the insurance  sale to the insured hazard (e.g., insured  and insurer located
in different countries). In particular, liabilities  arising from the underwriting pools in runoff may result
in significant reporting lags, settlement lags  and claim complexity, due to the need to coordinate with
other pool members or co-insurers through a broker  or lead-insurer  for claim settlement purposes.

International and other reserves are generally  analyzed by  program/pool,  country  and general

coverage category  (e.g., U.S. Liability—excess of loss reinsurance, or General Liability—
Municipalities—by country). The business  is also generally  split by direct  versus  assumed reinsurance
for a given coverage/jurisdiction. Where the underlying insured  hazard is  outside  the United States,  the
underlying coverages are generally similar to those described  under  the General  Liability  and
Commercial Property discussion above, provided that reserves  relating to insured hazards outside the
United States are analyzed taking into account differences  in  the legal environment and differences in
terms and conditions, including, for example and where applicable, that in some jurisdictions there are
no aggregate policy limits on certain  liability coverages. Where the underlying hazard is  within the U.S.,
the coverage involved is typically that of  General Liability and Commercial  Property,  but on  an excess
or excess-of-loss reinsurance basis. Excess exposure  requires  the  insured  to ‘‘prove’’ not only claims
under the policy, but also the prior payment of claims reaching up to the  excess  policy’s  attachment
point.

Examples of common risk factors, or  perceptions thereof,  that could change and, thus,  affect the

required International and other reserves  (beyond those included in  the general  discussion section)
include:

International and other risk factors

(cid:127) Changes in claim handling procedures,  including those of  the primary carriers

(cid:127) Changes in policy provisions or court  interpretation of such provision

(cid:127) New theories of liability

(cid:127) Trends in jury awards

(cid:127) Changes in the propensity to sue

(cid:127) Changes in statutes of limitations

(cid:127) Changes in the underlying court system

(cid:127) Distortions from losses resulting from large single  accounts or single issues

(cid:127) Changes in tort law

(cid:127) Changes in claim adjuster office structure (causing distortions in the data)

International and other book of business risk factors

(cid:127) Changes in policy provisions (e.g.,  deductibles, policy limits, endorsements,  ‘‘claims-made’’

language)

(cid:127) Changes in underwriting standards

(cid:127) Product mix (e.g., size of account,  industries insured, jurisdiction  mix)

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Unanticipated changes in risk factors  can  affect reserves. As  an  indicator  of the causal  effect  that a

change in one or more risk factors could  have on reserves for  International and other (excluding
asbestos and environmental), a 1% increase (decrease)  in incremental paid loss development for each
future calendar year could result in a  1.2% increase  (decrease) in claims and claim adjustment expense
reserves. International and other reserves  (excluding asbestos and  environmental) represent
approximately 7% of the Company’s  total claims  and claim adjustment expense reserves.

International and other represents a  combination  of different product lines, some  of which are  in

runoff. Comparative historical information is  not  available for international product lines as insurers
domiciled outside  of the U.S. do not file  U.S. statutory reports. Comparative historical information on
runoff business is not indicative of reasonably  possible one-year  changes in the reserve estimate for  this
mix of runoff business. Accordingly, the Company has  not included comparative analyses  for
International and other.

Reinsurance Recoverables

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

(at December 31, in millions)

2012

2011

Gross reinsurance recoverables on paid and unpaid claims and

claim adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for uncollectible reinsurance . . . . . . . . . . . . . . . . . . .

$ 5,256
(258)

$ 6,255
(345)

Net reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . . . . .
Mandatory pools and associations . . . . . . . . . . . . . . . . . . . . . . .
Structured settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,998
2,549
3,165

5,910
2,020
3,225

Total reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . . . .

$10,712

$11,155

The $912 million decline in net reinsurance  recoverables since December 31,  2011 primarily

reflected the impact of cash collections, including commutation  agreements, and the impact of net
favorable prior year reserve development.

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

Some of  the reinsurance agreements  that the  Company entered  into  as part  of its  catastrophe bond

programs are dual trigger contracts. All of these contracts  meet the requirements to be accounted for
as reinsurance in accordance with guidance for accounting for reinsurance contracts. The Company’s
catastrophe bond programs are described  in more  detail in  ‘‘Item 1—Business—Catastrophe
Reinsurance.’’

The Company reports its reinsurance  recoverables  net of an allowance for estimated uncollectible

reinsurance recoverables. The allowance  is based  upon the  Company’s ongoing review of amounts
outstanding, length of collection periods,  changes in reinsurer credit standing,  disputes,  applicable
coverage defenses and other relevant  factors. Accordingly, the establishment of reinsurance
recoverables and the related allowance for uncollectible reinsurance recoverables  is also  an inherently
uncertain process involving estimates.  From  time to time, as a result of the long-tailed nature  of  the
underlying liabilities, coverage complexities and potential for disputes,  the Company  considers  the

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commutation of reinsurance contracts. Changes in estimated reinsurance  recoverables and  commutation
activity could result in additional income  statement charges.

Recoverables attributable to structured settlements relate  primarily  to  personal injury claims, of

which  workers’ compensation claims comprise a significant  portion, for which the  Company has
purchased annuities and remains contingently liable  in the  event of a  default by the companies issuing
the annuities. Recoverables attributable to mandatory pools  and  associations relate primarily to
workers’ compensation service business.  These recoverables are supported  by  the participating
insurance companies’ obligation to pay  a  pro  rata share  based on each  company’s voluntary market
share of written premium in each state in which it  is a pool participant. In the event a  member of a
mandatory pool or association defaults  on  its  share of the  pool’s or association’s obligations,  the other
members’ share of such obligation increases proportionally.

On August 17, 2010, in a reinsurance dispute in New York state court captioned United States
Fidelity & Guaranty Company v. American  Re-Insurance  Company, et al., the trial court granted summary
judgment for United States Fidelity and  Guaranty  Company (USF&G),  a subsidiary of the Company,
and denied summary judgment for American Re-Insurance  Company, a subsidiary of Munich  Re
(American Re), and three other reinsurers. By  order  dated October 22,  2010, the trial court corrected
certain clerical errors and made certain  clarifications to the August 17, 2010 order. On October 25,
2010, judgment was entered against American Re and the other three insurers,  awarding  USF&G
$420 million, comprising $251 million ceded under  the terms of the disputed reinsurance contract  plus
interest of 9% amounting to $169 million as of  that date. The judgment,  including the  award  of
interest, was appealed by the reinsurers  to the New York Supreme Court, Appellate Division, First
Department. On January 24, 2012, the Appellate Division affirmed the judgment. On January  30, 2012,
the reinsurers filed a motion with the Appellate  Division seeking permission to appeal its decision to
the New York Court of Appeals, and  on  March 12,  2012, the  Appellate Division  granted the reinsurers’
motion. On February 7, 2013, the Court  of Appeals issued an opinion that largely affirmed the
summary judgment in USF&G’s favor, while modifying  in part the  summary  judgment with respect to
two  discrete  issues  and  remanding  the  case  to  the  trial  court  for  determination  of  those  issues.  The
Company believes it has a meritorious  position  on each of these issues  and  intends to pursue its  claim
vigorously. At December 31, 2012, the  claim totaled $470  million, comprising $251 million of
reinsurance  recoverable  plus  interest  which  had  grown  to  $219  million  as  of  that  date.  Interest  will
continue  to  accrue  at  9%  until  the  claim  is  paid.  The  $251  million  of  reinsurance  recoverable  owed  to
USF&G under the terms of the disputed  reinsurance contract has  been reported as  part of  reinsurance
recoverables in the Company’s consolidated  balance sheet. The interest that would  be  owed as part of
any judgment ultimately entered in favor of USF&G  is treated for accounting purposes as a gain
contingency in accordance with FASB Topic  450, Contingencies, and accordingly has not been
recognized in the Company’s consolidated financial statements.

Investment Valuation and Impairments

Fair Value Measurements

The Company’s estimates of fair value for financial assets  and financial  liabilities are based on  the

framework established in the fair value accounting  guidance. The  framework is based on the inputs
used in valuation, gives the highest priority to quoted  prices in active markets and  requires that
observable inputs be used in the valuations  when available. The disclosure of  fair value  estimates in the
fair value accounting guidance hierarchy  is based on  whether  the  significant inputs into the  valuation
are observable. In determining the level  of the hierarchy in which the estimate  is disclosed, the highest
priority is given to unadjusted quoted  prices  in active markets and the lowest priority to unobservable
inputs that reflect the Company’s significant market assumptions. The level in the  fair value  hierarchy

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within which the fair value measurement is reported is  based on the lowest  level input that is  significant
to the measurement in its entirety. The  three levels of the hierarchy  are  as follows:

(cid:127) Level 1—Unadjusted quoted market  prices for identical  assets or liabilities in  active  markets  that

the Company has the ability to access.

(cid:127) Level 2—Quoted prices for similar assets or  liabilities in  active  markets; quoted prices for

identical or similar assets or liabilities  in inactive markets;  or  valuations  based on models  where
the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default
rates, loss severities, etc.) or can be corroborated  by observable market data.

(cid:127) Level 3—Valuations based on models where significant inputs are not observable. The

unobservable inputs reflect the Company’s  own assumptions about the inputs that market
participants would use.

Valuation of Investments Reported at Fair  Value  in Financial Statements

The fair value of a financial instrument  is the estimated amount at which the instrument could be

exchanged in an orderly transaction between knowledgeable,  unrelated, willing  parties, i.e., not in a
forced transaction. The estimated fair  value of  a financial instrument may differ from  the amount that
could be realized if the security was sold in an  immediate  sale, e.g.,  a forced transaction. Additionally,
the valuation of investments is more  subjective when markets are less  liquid due to the lack  of  market
based inputs, which may increase the  potential that the  estimated fair value  of  an investment is  not
reflective of the price at which an actual transaction would  occur.

For investments that have quoted market  prices in active  markets, the Company uses  the
unadjusted quoted market prices as fair value and includes these prices in the  amounts disclosed in
Level 1 of the hierarchy. The Company  receives  the quoted market prices from  a third  party, nationally
recognized pricing service (pricing service). When quoted market prices are unavailable,  the Company
utilizes a pricing service to determine  an  estimate of fair value, which is mainly used for  its  fixed
maturity investments. The fair value estimates provided from this pricing service are  included in  the
amount disclosed in Level 2 of the hierarchy.  If quoted market prices  and an estimate from a  pricing
service are unavailable, the Company produces an estimate of fair value based on  internally  developed
valuation techniques, which, depending  on the level  of observable market inputs, will render the  fair
value estimate as Level 2 or Level 3. The Company bases all of its estimates  of fair value for  assets on
the bid price as it represents what a third-party market participant would be willing to pay in an arm’s
length transaction.

Fixed Maturities

The Company utilizes a pricing service to estimate fair  value measurements  for approximately 98%

of its fixed maturities. The pricing service  utilizes market quotations  for fixed maturity securities  that
have quoted prices in active markets.  Since fixed maturities  other  than  U.S. Treasury securities
generally do not trade on a daily basis, the  pricing service prepares estimates of fair value
measurements for  these securities using  its proprietary  pricing applications, which  include available
relevant market information, benchmark curves, benchmarking of like securities, sector  groupings and
matrix pricing. Additionally, the pricing  service uses an  Option  Adjusted Spread model to develop
prepayment and interest rate scenarios.

The pricing service evaluates each asset class based  on relevant  market  information, relevant credit

information, perceived market movements and  sector news.  The market inputs utilized  in the pricing
evaluation, listed in the approximate order of  priority,  include: benchmark yields, reported trades,
broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids,  offers, reference
data, and industry and economic events. The extent of  the use  of each market input depends on  the

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asset class and the market conditions. Depending on  the security,  the priority of  the use of  inputs  may
change or some market inputs may not  be  relevant. For some securities, additional inputs may  be
necessary.

The pricing service utilized by the Company  has indicated that they will only produce  an estimate
of fair value if there is objectively verifiable information to produce a valuation. If  the pricing service
discontinues pricing an investment, the  Company would be required to produce an estimate of fair
value using some of the same methodologies as the  pricing service but would have to make
assumptions for market-based inputs that  are unavailable due to market conditions.

The fair value estimates of most fixed maturity investments are based on observable  market

information rather than market quotes. Accordingly, the  estimates  of  fair value for such fixed
maturities, other than U.S. Treasury securities, provided  by the pricing service are  included in  the
amount disclosed in Level 2 of the hierarchy.  The  estimated fair value of U.S.  Treasury  securities is
included in the amount disclosed in Level 1 as the estimates  are based on unadjusted  market prices.

The Company reviews the estimates of fair value provided by the pricing service and compares the

estimates to the Company’s knowledge  of  the  market  to  determine if  the estimates obtained are
representative of the prices in the market.  In addition, the Company has  periodic discussions with the
pricing service to discuss any changes in  their process and reactions to overall markets. The Company
produces a report monthly that lists all price  changes from the previous  month in excess  of  10%. The
Company reviews the report and will  challenge any prices deemed not to be representative of fair
value. In addition, the Company has  implemented  various other processes including randomly  selecting
purchased or sold securities and comparing execution prices  to  the estimates from the pricing service as
well as reviewing reports that contain  securities whose valuation did not change from  their  previous
valuation (stale price review). The Company also uses an additional independent pricing service to
further test the primary pricing service’s  valuation of the Company’s fixed maturity  portfolio.  These
processes have not highlighted any significant issues with the fair value estimates received from the
pricing service.

The Company also holds certain fixed  maturity investments which are  not  priced  by  the pricing
service and, accordingly, estimates the  fair value of such fixed maturities  using an internal  matrix  that  is
based on market information regarding  interest  rates,  credit spreads and liquidity. The underlying
source data for calculating the matrix of  credit  spreads relative  to  the U.S.  Treasury curve are  the BofA
Merrill Lynch U.S. Corporate Index and  the BofA  Merrill  Lynch BB U.S. High  Yield Index. The
Company includes the fair value estimates of these corporate bonds in Level  2, since all significant
inputs are market observable.

While the vast majority of the Company’s municipal bonds and  corporate  bonds are included in
Level 2, the Company holds a number  of municipal bonds  and corporate  bonds  which are  not  valued
by the pricing service and, accordingly, estimates the  fair value of these bonds using an internal pricing
matrix with some unobservable inputs that are significant to  the valuation. Due  to  the limited amount
of observable market information, the Company includes the fair value  estimates for these  particular
bonds in Level 3. The fair value of the  fixed  maturities for which the Company used an internal pricing
matrix was $102 million and $88 million at December 31, 2012 and 2011,  respectively. Additionally, the
Company holds a small amount of other  fixed maturity investments that have  characteristics  that  make
them unsuitable for matrix pricing. For these  fixed  maturities,  the  Company obtains a quote  from a
broker (primarily the market maker). The  fair value of the fixed maturities for which  the Company
received a broker quote was $128 million  and $162 million  at  December 31,  2012 and  2011,
respectively. Due to the disclaimers on the  quotes  that  indicate that  the  price is  indicative only, the
Company includes these fair value estimates  in Level 3.

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Non-Fixed Maturities and Other Investments Not  Reported at Fair Value

See note 4 of notes to the Company’s consolidated  financial statements for a discussion of the
determination of fair value of non-fixed maturities and valuation  of investments not reported at fair
value in the financial statements.

Investment Impairments

The Company conducts a periodic review  to  identify and evaluate invested assets  having

other-than-temporary impairments. Some  of the  factors considered in identifying other-than-temporary
impairments include: (1) for fixed maturity investments, whether the Company intends to sell  the
investment or whether it is more likely than not that the Company  will be required to sell the
investment prior to an anticipated recovery in  value; (2)  for non-fixed maturity investments, the
Company’s ability and intent to retain  the investment  for a reasonable period of time sufficient to allow
for an anticipated recovery in value; (3) the likelihood  of  the recoverability of principal and interest for
fixed maturity securities (i.e., whether there is  a credit  loss)  or  cost for equity  securities;  (4) the length
of time and extent to which the fair value  has been less than  amortized cost  for fixed maturity
securities or cost for equity securities;  and  (5) the  financial condition, near-term  and long-term
prospects for the issuer, including the  relevant industry conditions and trends, and implications of
rating agency actions and offering prices.

Other-Than-Temporary Impairments of Fixed Maturities  and Equity Securities

For fixed maturity investments that the Company  does not intend to sell or  for which it  is more
likely than not that the Company would not be required  to sell before an anticipated recovery in value,
the Company separates the credit loss component of the impairment  from the amount related to all
other factors and reports the credit loss component in net realized  investment gains  (losses). The
impairment related to all other factors is  reported  in other comprehensive income.

For equity securities (including public common and non-redeemable  preferred stock)  and for fixed

maturity investments the Company intends to sell or for which it is more likely  than not that the
Company will be required to sell before an anticipated recovery  in value, the full  amount  of the
impairment is included in net realized  investment gains  (losses).

Upon recognizing an other-than-temporary impairment, the new cost basis of the investment is the

previous amortized cost basis less the  other-than-temporary impairment recognized in net  realized
investment gains (losses). The new cost basis is not adjusted for  any subsequent recoveries in  fair value;
however, for fixed  maturity investments  the  difference between the new cost basis and  the expected
cash flows is accreted on a quarterly  basis  to  net investment income over  the remaining expected life of
the investment.

Due to the subjective nature of the Company’s analysis and estimates of future  cash flows, along
with the judgment that must be applied  in the analysis, it is possible that the Company could reach a
different conclusion whether or not to  impair a security  if it  had  access  to additional information about
the issuer. Additionally, it is possible  that  the  issuer’s actual ability to meet contractual obligations may
be different than what the Company determined during  its  analysis,  which may lead  to  a different
impairment conclusion in future periods.

See note 1 of notes to the Company’s consolidated  financial statements for a further discussion of

investment impairments.

Goodwill and Other Intangible Assets Impairments

See note 1 of notes to the Company’s consolidated  financial statements for a discussion of

impairments of goodwill and other intangible assets.

152

OTHER UNCERTAINTIES

For a  discussion of other risks and uncertainties that could impact  the  Company’s results of

operations or financial position, see note 16  of notes  to  the Company’s consolidated financial
statements and ‘‘Item 1A—Risk Factors.’’

FUTURE APPLICATION OF ACCOUNTING STANDARDS

See note 1 of notes to the Company’s consolidated  financial statements for a discussion of recently

issued accounting standards updates.

The Company is currently required to prepare  its financial statements in accordance  with U.S.

Generally Accepted Accounting Principles (GAAP), as promulgated by  the Financial Accounting
Standards Board (FASB). During the last  several years, the Securities and  Exchange Commission (SEC)
has been evaluating whether, when and how International  Financial Reporting Standards (IFRS)  should
be incorporated into the U.S. financial  reporting system. Before  making a decision, the  SEC set forth a
work plan to evaluate the remaining differences between GAAP and IFRS,  determine  whether  IFRS
represented high quality standards, consider how  the International Accounting Standards Board  is
funded and its governance structure,  and examine the  variations in  the way  IFRS was applied by
various foreign companies that file financial statements with the SEC.  In  July 2012,  the SEC staff
issued a final report on the SEC work  plan which concluded  that IFRS provide high quality accounting
standards, but also indicated concerns with funding, consistency of application and  enforcement of
IFRS globally. The report did not give  a recommendation to the SEC  on whether, when and  how IFRS
should be incorporated into the U.S.  financial reporting  system. Additionally, the  SEC has not
indicated a timeline for further consideration of incorporating IFRS.

The International Accounting Standards Board (IASB)  and the FASB are  in the process of
developing a global insurance standard that  may involve methodologies for valuing insurance  contract
liabilities that may be significantly different  from the methodologies required by current GAAP. In June
2012, the FASB issued a statement that  indicated  that based on the  nature and totality of differences
between the FASB’s and IASB’s views, it is  not  likely that  the two boards will achieve convergence on
this  project. The FASB further noted that  the FASB and IASB have very different  perspectives  on the
project, given that the U.S. has existing  guidance on insurance  contracts  whereas there  is currently no
comprehensive IFRS insurance standard  for insurance contracts. As  a result  of  this,  it is currently
unclear what changes, if any, may be  made to the accounting for insurance  contracts under GAAP as a
result of this project.

The FASB and the IASB also continue to complete three  remaining projects intended  to  bring
convergence between GAAP and IFRS for  revenue recognition,  accounting for financial  instruments
and leasing. These projects are expected  to  be  completed by  the end of 2013.  The Company is not able
to predict whether it will choose to, or  be  required to, adopt IFRS or how the adoption of IFRS (or
the convergence of GAAP and IFRS,  including the joint project for  valuing insurance contract
liabilities) may impact the Company’s financial statements in the future.

FORWARD-LOOKING STATEMENTS

This report contains, and management may make, certain ‘‘forward-looking statements’’  within the
meaning of the Private Securities Litigation  Reform  Act of 1995.  All statements,  other than statements
of historical facts, may be forward-looking  statements.  Words such as ‘‘may,’’ ‘‘will,’’ ‘‘should,’’  ‘‘likely,’’
‘‘anticipates,’’ ‘‘expects,’’ ‘‘intends,’’ ‘‘plans,’’ ‘‘projects,’’ ‘‘believes,’’  ‘‘estimates’’  and similar  expressions
are used to identify these forward-looking statements. Specifically,  statements  about the  Company’s
share repurchase plans, expected margin  improvement, future pension plan contributions and the
potential impact of investment markets and other economic conditions on the Company’s investment

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portfolio and underwriting results, among  others, are forward looking,  and the  Company may also
make forward-looking statements about,  among other things:

(cid:127) its  results of operations and financial condition (including, among other things, premium volume,
premium rates, net and operating income, investment  income and performance, loss costs, return
on equity, and expected current returns  and combined  ratios);

(cid:127) the sufficiency of the Company’s asbestos and other reserves;

(cid:127) the impact of emerging claims issues as well  as other insurance  and  non-insurance litigation;

(cid:127) the cost and availability of reinsurance coverage;

(cid:127) catastrophe losses;

(cid:127) the impact of investment, economic  and underwriting market conditions; and

(cid:127) strategic initiatives.

The Company cautions investors that such statements are subject to risks  and uncertainties, many

of which are difficult to predict and generally  beyond the Company’s control, that could cause actual
results to differ materially from those  expressed in, or implied or projected by, the  forward-looking
information and statements.

For a  discussion of some of the factors that could cause actual results  to  differ, see ‘‘Item 1A—
Risk Factors’’ and ‘‘Item 7—Management’s  Discussion and Analysis of  Financial Condition and Results
of Operations—Critical Accounting Estimates.’’

The Company’s forward-looking statements speak only as of the  date of  this report  or as of the

date  they are made, and the Company  undertakes no obligation  to  update its forward-looking
statements.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

Market risk is the risk of loss arising  from  adverse  changes  in market rates and  prices, such  as

interest rates (inclusive of credit spreads),  foreign  currency exchange rates and other relevant  market
rate or price changes. Market risk is directly influenced by  the volatility and liquidity in the  markets  in
which  the related underlying assets are  traded. The following is  a  discussion of the Company’s primary
market risk exposures and how those  exposures are managed as of  December 31,  2012. The Company’s
market risk sensitive instruments, including derivatives, are primarily entered into for purposes  other
than trading.

The carrying value of the Company’s  investment portfolio at December  31, 2012  and 2011 was
$73.84 billion and $72.70 billion, respectively, of  which 89%  and 88% was invested in fixed maturity
securities, respectively. At both December 31,  2012 and 2011, approximately 6.2% of the Company’s
invested assets were denominated in foreign currencies. The Company’s exposure to equity price risk is
not significant. The Company has no direct commodity  risk and  is not a party to any  credit default
swaps.

The primary market risks to the investment portfolio are interest rate  risk and credit risk

associated with investments in fixed maturity securities.  The portfolio duration relative  to  the liabilities’
duration is primarily managed through  cash market transactions  and treasury futures transactions. For
additional information regarding the Company’s investments,  see notes  3 and 4 of  notes to the
Company’s consolidated financial statements as well as the  ‘‘Investment Portfolio’’ and ‘‘Outlook’’
sections of ‘‘Item 7—Management’s Discussion and  Analysis of  Financial Condition and Results of
Operations.’’

154

The primary market risk for all of the  Company’s debt  is interest  rate risk at the time of

refinancing. The Company monitors the  interest rate environment and  evaluates  refinancing
opportunities as maturity dates approach. For additional information regarding  the Company’s  debt see
note 8 of notes to the Company’s consolidated  financial statements  as well as  the ‘‘Liquidity and
Capital Resources’’ section of ‘‘Item 7—Management’s Discussion and  Analysis of Financial  Condition
and Results of Operations.’’

The Company’s foreign exchange market risk exposure is concentrated in the Company’s invested
assets, insurance reserves and shareholders’ equity  denominated in  foreign currencies. Cash flows from
the Company’s foreign operations are  the primary source of funds  for the  purchase  of investments
denominated in foreign currencies. The  Company purchases these investments primarily to fund
insurance reserves and other liabilities denominated in the same  currency,  effectively reducing its
foreign currency exchange rate exposure. Invested assets denominated in the British Pound  Sterling
comprised approximately 2.4% of the total  invested assets  at both December 31, 2012  and 2011.
Invested assets denominated in the Canadian dollar comprised  approximately  2.3% and  2.4% of the
total invested assets at December 31, 2012 and 2011, respectively. Invested  assets denominated in other
currencies at December 31, 2012 and  2011 were  not  material.

There were no other significant changes in  the Company’s primary market risk  exposures or  in
how those exposures were managed for  the  year  ended December 31, 2012 compared to the  year ended
December 31, 2011. The Company does not currently anticipate  significant changes  in its primary
market risk exposures or in how those  exposures are managed in future reporting periods based  upon
what is known or expected to be in effect in future reporting periods.

SENSITIVITY ANALYSIS

Sensitivity analysis is defined as the measurement  of  potential  loss in future earnings,  fair values or
cash flows of market sensitive instruments resulting  from one  or more selected hypothetical changes  in
interest rates and other market rates or prices  over a selected period of time. In the  Company’s
sensitivity analysis model, a hypothetical  change in  market rates is  selected  that  is expected to reflect
reasonably possible near-term changes in those rates. ‘‘Near-term’’ means  a period  of  time going
forward up to one year from the date of the consolidated financial statements.  Actual results may  differ
from the hypothetical change in market rates assumed in this disclosure, especially since  this  sensitivity
analysis does not reflect the results of any actions that would be taken by the Company  to  mitigate
such hypothetical losses in fair value.

Interest Rate Risk

In this sensitivity analysis model, the  Company uses  fair values to measure its  potential loss.  The
sensitivity analysis model includes the  following financial instruments entered into for  purposes other
than trading: fixed maturities, non-redeemable preferred  stocks, mortgage loans, short-term securities,
debt and derivative financial instruments.  The primary market risk to the Company’s  market  sensitive
instruments is interest rate risk (inclusive of credit spreads).  The  sensitivity  analysis model uses various
basis point changes in interest rates to measure the hypothetical change in fair  value of  financial
instruments included in the model.

For invested assets with primary exposure  to  interest  rate risk, estimates  of  portfolio  duration and

convexity are used to model the loss  of  fair value that would be expected to result from  a parallel
increase in interest rates. Durations on  invested assets are adjusted for call, put and interest rate  reset
features. Durations on tax-exempt securities are adjusted for the fact that the yields on such securities
do not normally move in lockstep with changes in the U.S. Treasury curve. Fixed maturity  portfolio
durations are calculated on a market value  weighted  basis, including  accrued interest, using holdings  as
of December 31, 2012 and 2011.

155

For debt, the change in fair value is determined by calculating hypothetical December 31, 2012  and

2011 ending prices based on yields adjusted to reflect a 100 basis point change, comparing such
hypothetical ending prices to actual ending prices, and multiplying the difference  by  the par or
securities outstanding.

The sensitivity analysis model used by the Company  produces a loss  in fair  value of market
sensitive instruments of approximately  $1.64 billion and $1.79  billion based on  a 100 basis point
increase in interest rates at December 31,  2012 and 2011, respectively.

The loss estimates do not take into account the impact of possible interventions that the  Company

might reasonably undertake in order to mitigate or avoid losses that would result  from emerging
interest rate trends. In addition, the loss  value only reflects  the impact  of an interest rate increase on
the fair value of the Company’s financial instruments.

Foreign Currency Exchange Rate Risk

The Company uses fair values of investment securities to measure its potential loss from foreign
denominated investments. A hypothetical 10% reduction in value of foreign  denominated investments is
used to estimate the impact on the market value of the foreign denominated  holdings. The Company’s
analysis indicates that a hypothetical 10% reduction in  the value of foreign denominated investments
would be expected to produce a loss in  fair  value of approximately $459 million and $452 million at
December 31, 2012 and 2011, respectively.

156

ITEM 8. FINANCIAL STATEMENTS  AND  SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

158

Consolidated Statement of Income for  the years ended  December 31,  2012, 2011 and 2010 . . . . .

159

Consolidated Statement of Comprehensive  Income for the  years  ended December  31, 2012, 2011
and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Balance Sheet at December 31, 2012 and 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statement of Changes in  Shareholders’ Equity  for  the years ended December 31,

2012, 2011 and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statement of Cash Flows  for the years ended December 31, 2012, 2011 and  2010 . .

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

160

161

162

163

164

157

Report Of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
The Travelers Companies, Inc.:

We have audited the accompanying consolidated balance  sheet of The Travelers Companies,  Inc.

and  subsidiaries (the Company) as of December  31, 2012 and 2011, and  the  related consolidated
statements of income, comprehensive  income,  changes in  shareholders’ equity, and cash flows  for each
of the years in the three-year period ended December  31, 2012. These consolidated financial  statements
are the responsibility of the Company’s management. Our responsibility is  to  express  an opinion on
these consolidated financial statements based on  our audits.

We conducted our audits in accordance  with the  standards  of  the Public Company Accounting
Oversight Board (United States). Those  standards require that we  plan and perform the audit to obtain
reasonable assurance about whether  the  financial  statements are free  of material misstatement.  An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures  in the
financial statements. An audit also includes assessing the accounting  principles used  and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable  basis for our opinion.

In our opinion, the consolidated financial  statements  referred to above present fairly,  in all
material respects, the financial position of The Travelers Companies,  Inc.  and subsidiaries as of
December 31, 2012 and 2011, and the results of  their operations  and their  cash flows for each of the
years in the three-year period ended December 31,  2012, in conformity with U.S. generally accepted
accounting principles.

We also have audited, in accordance with the  standards of  the Public Company Accounting
Oversight Board (United States), The Travelers  Companies, Inc. and subsidiaries’  internal control over
financial reporting as of December 31, 2012, based on criteria established  in Internal  Control—
Integrated Framework issued by the Committee  of Sponsoring Organizations of  the Treadway
Commission (COSO), and our report dated February  19, 2013 expressed an unqualified opinion  on the
effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

KPMG LLP

New York, New York
February  19,  2013

158

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

(in millions, except per share amounts)

For the year  ended December 31,

2012

2011

2010

Revenues
Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fee  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$22,357
2,889
323
51
120

$22,090
2,879
296
55
126

$21,432
3,059
287
264
70

Total  revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25,740

25,446

25,112

Claims and expenses
Claims and claim adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred acquisition  costs . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total  claims and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,676
3,910
3,610
378

22,574

3,166
693

16,276
3,876
3,556
386

24,094

1,352
(74)

13,210
3,802
3,406
388

20,806

4,306
1,090

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,473

$ 1,426

$ 3,216

Net income per share

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

6.35

6.30

$

$

3.40

$ 6.69

3.36

$ 6.62

Weighted average number of common shares  outstanding

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

386.2

389.8

415.8

420.5

476.5

482.5

(1) Total other-than-temporary impairment  (OTTI) gains  were $27 million, $30  million  and $7  million
for the years ended December 31, 2012, 2011  and 2010, respectively. Of total OTTI, credit losses
of $(15) million, $(25) million and $(26) million for  the years ended  December 31, 2012, 2011  and
2010, respectively, were recognized in net realized investment gains. In  addition, unrealized gains
from other changes in total OTTI of  $42 million, $55 million and $33  million for the years ended
December 31, 2012, 2011 and 2010, respectively, were  recognized in other  comprehensive income
as part of changes in net unrealized  gains on investment securities  having credit losses recognized
in the consolidated statement of income.

The accompanying notes are an integral part of the consolidated financial statements.

159

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(in millions)

For the year  ended December 31,

2012

2011

2010

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,473

$1,426

$3,216

Other comprehensive income:
Changes in net unrealized gains on investment securities:

Having no credit losses recognized in  the consolidated statement of

income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Having credit losses recognized in the consolidated  statement of  income . .
Net changes in benefit plan assets and obligations . . . . . . . . . . . . . . . . . . . .
Net changes in unrealized foreign currency translation and other changes . . .

Other comprehensive income before  income taxes . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other comprehensive income, net of taxes . . . . . . . . . . . . . . . . . . . . . .

281
81
(69)
43

336
105

231

1,570
4
(307)
(90)

1,177
427

750

(118)
123
39
12

56
20

36

Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,704

$2,176

$3,252

The accompanying notes are an integral part of the consolidated financial statements.

160

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in millions)

At December 31,

2012

2011

Assets
Fixed maturities, available for sale, at fair value  (amortized  cost $60,829  and

$59,994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities, available for sale, at fair value (cost $462 and $414) . . . . . . . . .
Real estate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 65,393
645
883
3,483
3,434

$ 64,232
559
865
3,594
3,451

Total  investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premiums receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contractholder receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

73,838

330
752
5,872
10,712
856
1,792
—
4,806
3,365
381
2,234

72,701

214
768
5,730
11,155
828
1,786
7
5,186
3,365
433
2,402

Total  assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$104,938

$104,575

Liabilities
Claims and claim adjustment expense  reserves . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned premium reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contractholder payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payables for reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 50,922
11,241
4,806
346
338
6,350
5,530

$ 51,392
11,102
5,186
389
—
6,605
5,424

Total  liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

79,533

80,098

Shareholders’ equity
Common stock (1,750.0 shares authorized; 377.4  and 392.8 shares issued and

outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost (372.3 and 349.0 shares) . . . . . . . . . . . . . . . . . . . . . . . . .

21,161
21,352
2,236
(19,344)

20,732
19,579
2,005
(17,839)

Total  shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25,405

24,477

Total  liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . .

$104,938

$104,575

The accompanying notes are an integral part of the consolidated financial statements.

161

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES  IN SHAREHOLDERS’ EQUITY

(in millions)

For the year  ended December 31,

2012

2011

2010

Convertible preferred stock—savings plan
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conversion to common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Common stock
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . .
Common shares issued—conversion of  preferred stock . . . . . . . . . . . .
Compensation amortization under share-based  plans  and other

— $
—
—

—

$

68
(5)
(63)

—

79
(11)
—

68

20,732
261
—

20,162
328
93

19,593
420
—

changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

168

149

149

Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21,161

20,732

20,162

Retained earnings
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium on preferred stock converted  to  common  stock . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19,579
2,473
(700)
—
—

18,847
1,426
(669)
(30)
5

16,315
3,216
(677)
—
(7)

Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21,352

19,579

18,847

Accumulated other comprehensive income, net of  tax
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Treasury stock (at cost)
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock acquired—share repurchase authorization . . . . . . . . . .
Net shares acquired related to employee share-based compensation

2,005
231

2,236

1,255
750

2,005

1,219
36

1,255

(17,839)
(1,450)

(14,857)
(2,900)

(9,791)
(5,000)

plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(55)

(82)

(66)

Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(19,344)

(17,839)

(14,857)

Total  common shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . .

25,405

24,477

25,407

Total  shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 25,405

$ 24,477

$ 25,475

Common shares outstanding
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock acquired—share repurchase authorization . . . . . . . . . .
Net shares issued under employee share-based  compensation plans . . .
Common shares issued—conversion of  preferred stock . . . . . . . . . . . .

Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

392.8
(22.4)
7.0
—

377.4

434.6
(51.0)
7.7
1.5

392.8

520.3
(95.7)
10.0
—

434.6

The accompanying notes are an integral part of the consolidated financial statements.

162

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)

For the year  ended December 31,

Cash flows  from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Adjustments to reconcile net income to net cash provided by operating activities:

2012

2011

2010

$ 2,473

$ 1,426

$ 3,216

Net realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred federal income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in income from other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premiums receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs
Claims  and claim adjustment expense reserves
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned premium reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(51)
827
223
3,910
(342)
(138)
453
(3,914)
(540)
123
206

(55)
802
63
3,876
(281)
(237)
809
(3,881)
(154)
188
(387)

(264)
812
178
3,802
(283)
(29)
1,303
(3,826)
(1,971)
63
53

Net  cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,230

2,169

3,054

Cash flows  from investing activities
Proceeds from maturities of fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of investments:

Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate investments
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Purchases of investments:

Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate investments
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales (purchases) of short-term securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities  transactions in course of settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,369

7,404

5,896

1,087
37
53
835

(10,447)
(48)
(95)
(534)
117
(23)
(323)

1,161
135
1
594

(8,704)
(131)
(66)
(889)
2,018
—
(371)

3,713
201
10
717

(6,785)
(61)
(21)
(514)
(699)
(30)
(318)

Net  cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . .

(972)

1,152

2,109

Cash flows  from financing activities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of  debt
Issuance  of debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid  to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance  of common stock—employee share options . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock acquired—share repurchase authorization . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock acquired—net employee share-based compensation . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from share-based payment arrangements . . . . . . . . . . . . . . . . . . . . . . . .

(258)
—
(694)
295
(1,474)
(53)
38

(8)
—
(665)
314
(2,919)
(46)
18

(1,160)
1,234
(673)
408
(4,998)
(40)
8

Net  cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2,146)

(3,306)

(5,221)

Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of year

Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Supplemental  disclosure of cash flow information
Income taxes  paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest  paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4

116
214

330

188
375

(1)

14
200

214

218
382

$

$
$

3

(55)
255

200

784
397

$

$
$

$

$
$

The accompanying notes are an integral part of the consolidated financial statements.

163

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts  of The Travelers Companies, Inc.
(together with its subsidiaries, the Company).  The  preparation of the consolidated financial statements
in conformity with U.S. generally accepted accounting principles  (GAAP) requires  management to
make estimates and assumptions that affect the reported  amounts of assets  and liabilities  and disclosure
of contingent assets and liabilities at the date  of  the consolidated financial  statements  and the  reported
amounts of revenues and claims and  expenses during  the reporting  period. Actual  results could differ
from those estimates. Certain reclassifications have been  made to the 2011 and 2010  financial
statements to conform to the 2012 presentation.  All material intercompany transactions  and balances
have been eliminated.

Adoption of Accounting Standards Updates

Testing Indefinite-Lived Intangible Assets  for Impairment

In July 2012, the Financial Accounting Standards Board  (FASB) issued updated guidance  regarding

the impairment test applicable to indefinite-lived intangible assets that is  similar to the impairment
guidance applicable to goodwill. Under the updated guidance, an entity may  assess qualitative factors
(such as changes in management, key personnel,  strategy, key technology or  customers) that may
impact the fair value of the indefinite-lived intangible asset and lead to the determination that it is
more likely than not that the fair value  of the asset  is less than its  carrying value. If  an entity
determines that it is more likely than  not  that the  fair value of  the intangible asset  is less than  its
carrying  value, an impairment test must  be  performed. The impairment test requires an  entity to
calculate the estimated fair value of the indefinite-lived intangible asset.  If the carrying value of the
indefinite-lived intangible asset exceeds its estimated fair  value, an impairment  loss is recognized  in an
amount equal to the excess.

The updated guidance is effective for the  quarter ending March 31,  2013, but early adoption was

permitted. The Company adopted the updated guidance effective December 31, 2012,  and such
adoption did  not have any effect on the  Company’s  results of operations, financial  position  or liquidity.

Testing of Goodwill

In September 2011, the FASB issued  updated guidance that modifies  the  manner  in which the
two-step impairment test of goodwill  is  applied.  Under the updated guidance,  an entity may assess
qualitative factors (such as changes in management, key personnel, strategy, key technology or
customers) that may impact a reporting unit’s fair value and lead to the determination that it  is more
likely than not that the reporting unit’s fair value is  less than its carrying value, including goodwill.  If
an entity determines that it is more likely  than not that a reporting unit’s  fair value  is less than its
carrying  value, an impairment test must  be  performed. The impairment test requires an  entity to
calculate the implied fair value of the  reporting unit’s goodwill in the same  manner  that  goodwill is
measured in a business combination.  If the carrying  value  of the  reporting unit’s goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an amount equal  to  the excess.

The updated guidance was effective for the quarter ending March 31, 2012.  The  adoption of this

guidance did  not have any effect on the  Company’s  results of operations, financial  position  or liquidity.

164

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Presentation of Comprehensive Income

In June 2011, the FASB issued updated guidance  to  increase the prominence of items reported in

other comprehensive income by eliminating  the option  of presenting components  of comprehensive
income as part of the statement of changes in shareholders’ equity. The updated guidance requires that
all nonowner changes in shareholders’ equity be presented  either as a single continuous statement of
comprehensive income or in two separate but consecutive statements.

The updated guidance was effective for the quarter ended March 31, 2012 and was applied
retrospectively. The Company’s adoption of this guidance resulted in a change in  the presentation of
the Company’s consolidated financial statements but did not have  any  effect  on the Company’s results
of operations, financial position or liquidity.

Reconsideration of Effective Control for  Repurchase Agreements

In April 2011, the FASB issued updated guidance related  to the accounting for repurchase

agreements and other agreements that  entitle  and obligate a transferor to repurchase or redeem
financial assets before their maturity. The updated  guidance eliminates the criteria to assess whether a
transferor is required to have the ability  to  repurchase or redeem the financial assets in order to
demonstrate effective control over the transferred asset. Transferors that maintain effective control over
a transferred asset are required to account  for the transaction as a secured borrowing rather than a
sale.

The updated guidance was effective for the quarter ended March 31, 2012. The  updated guidance

applies to transactions or modifications  of existing transactions  that occur on or after the  effective date.
The adoption of this guidance did not have any effect on the Company’s  results of operations, financial
position or liquidity.

Accounting for Costs Associated with Acquiring  or Renewing Insurance Contracts

In October 2010, the FASB issued updated guidance to address diversity in practice for  accounting

for costs associated with acquiring or renewing insurance contracts. This guidance modifies the
definition of acquisition costs to specify that  a cost  must be directly related to the successful acquisition
of a new or renewal insurance contract in  order to be deferred. If application  of this  guidance would
result in the capitalization of acquisition  costs that had not previously been capitalized by a reporting
entity, the entity may elect not to capitalize those costs.

The updated guidance was effective for the quarter ended March 31, 2012. The  adoption of this
guidance did not have any effect on the  Company’s  results of operations, financial position  or liquidity.

Accounting Standard Not Yet Adopted

Reporting of Amounts Reclassified Out  of  Accumulated Other Comprehensive Income

In February 2013, the FASB issued updated guidance to improve the reporting of  reclassifications
out of accumulated other comprehensive  income. The guidance requires an entity to present, either on
the face of the statement of income or  in  the notes,  separately for each component of comprehensive
income, the current period reclassifications out of accumulated other comprehensive income by the
respective line items of net income affected by  the reclassification.

165

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The updated guidance is effective prospectively for reporting periods beginning after December 15,

2012. The updated guidance will not  have any effect on  the Company’s results of operations, financial
position or liquidity.

Accounting Policies

Investments

Fixed Maturity and Equity Securities

Fixed maturities include bonds, notes  and redeemable preferred stocks. Fixed  maturities, including

instruments subject to securities lending agreements, are classified  as available for sale  and are
reported at fair value, with unrealized investment  gains and  losses,  net of income taxes, charged  or
credited directly to other comprehensive income. Equity  securities, which include  public common and
non-redeemable preferred stocks, are  classified as available for sale with changes in fair value, net of
income taxes, charged or credited directly to other comprehensive income.

Real Estate Investments

The Company’s real estate investments include warehouses, office buildings and other commercial

land  and properties that are directly  owned. Real estate  is recorded on the purchase date at the
purchase price, which generally represents fair value, and is  supported by internal analysis or external
appraisals that use discounted cash flow  analyses and other acceptable valuation techniques. Real  estate
held for investment purposes is subsequently carried at  cost less accumulated depreciation. Buildings
are depreciated on a straight-line basis  over the shorter of the expected useful life of the building  or
39 years. Real estate held for sale is  carried at lower  of  cost or fair value, less estimated costs to sell.

Short-term Securities

Short-term securities have an original  maturity  of less than one year and are carried at amortized

cost, which approximates fair value.

Other Investments

Investments in Private Equity Limited Partnerships, Hedge Funds and Real Estate Partnerships

The Company uses the equity method of accounting for private equity limited  partnerships, hedge
funds  and real estate partnerships. The  partnerships and the hedge funds generally report investments
on their balance sheet at fair value. The financial statements prepared by  the investee are received by
the Company on a lag basis, with the lag  period  generally dependent upon the type of underlying
investments. The private equity and real estate partnerships provide financial information quarterly
which  is generally  available to investors,  including  the Company, within three to six months following
the date of the reporting period. The  hedge funds  provide financial information  monthly, which is
generally available to investors within one month following the date of the reporting  period. The
Company regularly requests financial information from the partnerships prior to the receipt of the
partnerships’ financial statements and records any material  information obtained from  these requests in
its  consolidated financial statements.

166

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Other

Also included in other investments are non-public common  and  preferred equities, mortgage loans,
trading securities and derivatives. Non-public  common and preferred equities  are reported at fair value
with changes in fair value, net of income taxes,  charged or credited directly to other comprehensive
income. Mortgage loans are carried at amortized  cost. Trading securities  are marked to market with the
change in fair value recognized in net  investment income during the current period. The Company’s
derivative financial instruments are carried at fair value, with the changes in fair value  reflected in the
consolidated statement of income in net  realized investment gains (losses). For a further discussion of
the derivatives used by the Company,  see  note  3.

Net Investment Income

Investment income from fixed maturities and mortgage loans is recognized based on the constant

effective yield method which  includes an  adjustment for  estimated principal repayments, if any. The
effective yield used to determine amortization for fixed maturities subject to prepayment risk
(e.g., asset-backed, loan-backed and structured  securities) is recalculated and  adjusted periodically
based upon actual historical and/or projected  future cash flows, which  are obtained from a  widely-
accepted securities data provider. The  adjustments to the  yield for highly  rated  prepayable fixed
maturities are accounted for using the  retrospective  method. The adjustments  to  the yield  for
non-highly rated prepayable fixed maturities are  accounted for using the prospective method. Dividends
on equity securities (including those with transfer  restrictions) and venture capital investments are
recognized in income when declared. Rental income on real estate is recognized  on a straight-line basis
over the lease term. See note 3 for further discussion. Investments in private equity limited
partnerships, hedge funds, real estate  partnerships  and  joint ventures are accounted for using the  equity
method of accounting, whereby the Company’s share of the investee’s earnings or losses in the fund is
reported in net investment income. Trading securities are marked to market with the change in fair
value recognized in net investment income during the current period.

Accrual  of income is suspended on non-securitized  fixed  maturities or mortgage loans that are in

default, or on which it is likely that future  payments will not be made as scheduled. Interest income on
investments in default is recognized only when payments are received. Investments included in the
consolidated balance sheet that were not income-producing for the preceding 12 months were not
material.

For fixed maturities where the Company records  an other-than-temporary impairment, a

determination is made as to the cause of  the impairment and whether the Company expects a recovery
in the value. For fixed maturities where the Company expects a recovery  in value, not necessarily  to
par, the constant effective yield method  is  utilized and the investment is amortized to the  expected
recovery amount.

Investment Gains and Losses

Net realized investment gains and losses are  included as a  component of  pretax revenues based

upon specific identification of the investments sold on the trade date. Included in net realized
investment gains (losses) are other-than-temporary  impairment losses on invested assets other than
those investments accounted for using the  equity method of accounting as described in the ‘‘Investment
Impairments’’ section that follows.

167

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Investment Impairments

The Company conducts a periodic review  to  identify and evaluate invested assets  having

other-than-temporary impairments. Some  of the  factors considered in identifying other-than-temporary
impairments include: (1) for fixed maturity  investments, whether the Company intends to sell  the
investment or whether it is more likely than  not  that the Company  will be required to sell the
investment prior to an anticipated recovery in  value; (2) for non-fixed maturity investments, the
Company’s ability and intent to retain  the investment for a reasonable period of time sufficient to allow
for an anticipated recovery in value; (3) the likelihood  of  the recoverability of principal and interest for
fixed maturity securities (i.e., whether there  is  a credit loss)  or cost for equity  securities;  (4) the length
of time and extent to which the fair value  has been less than  amortized cost for fixed maturity
securities or cost for equity securities;  and  (5)  the financial condition, near-term  and long-term
prospects for the issuer, including the  relevant  industry  conditions and trends, and implications of
rating agency actions and offering prices.

Other-Than-Temporary Impairments of Fixed Maturities and Equity Securities

For fixed maturity investments that the Company does not intend to sell or  for which it  is more
likely than not that the Company would not be required to sell before an anticipated recovery in value,
the Company separates the credit loss component of the impairment from the amount related to all
other factors and reports the credit loss component in net realized investment gains  (losses). The
impairment related to all other factors is  reported  in other comprehensive income.

For equity securities (including public common and non-redeemable  preferred stock)  and for fixed

maturity investments the Company intends to sell or for which it is more likely  than not that the
Company will be required to sell before an anticipated recovery in value, the full amount of the
impairment is included in net realized  investment gains (losses).

Upon recognizing an other-than-temporary  impairment, the new cost basis of the investment is the

previous amortized cost basis less the  other-than-temporary impairment recognized in net  realized
investment gains (losses). The new cost basis is not adjusted for any subsequent recoveries in  fair value;
however, for fixed maturity investments  the difference  between the new cost basis and the expected
cash flows is accreted on a quarterly  basis  to net  investment income over the remaining expected life of
the investment.

Determination of Credit Loss—Fixed Maturities

The Company determines the credit  loss component of  fixed maturity investments by utilizing

discounted cash flow modeling to determine  the present value of the security  and comparing the
present  value with the amortized cost of  the security. If the amortized  cost is  greater than the present
value of the expected cash flows, the  difference is considered a credit loss and recognized in net
realized investment gains (losses).

For non-structured fixed maturities (U.S.  Treasury securities,  obligations of U.S.  government and
government agencies and authorities,  obligations of  states, municipalities and political  subdivisions, debt
securities issued by foreign governments,  and certain  corporate debt), the estimate of expected cash
flows is determined by projecting a recovery value and a recovery time frame and assessing whether
further principal and interest will be  received.  The  determination of  recovery value incorporates an
issuer valuation assumption utilizing one  or a  combination of valuation  methods as  deemed appropriate

168

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

by the Company. The Company determines  the undiscounted recovery value by allocating the estimated
value of the issuer to the Company’s assessment  of  the priority of claims.  The present value of  the cash
flows is determined by applying the effective yield  of  the security at  the date of  acquisition  (or the most
recent implied rate used to accrete the security if  the implied rate  has changed as a result  of a previous
impairment) and an estimated recovery  time frame.  Generally, that time frame for securities for which
the issuer is in bankruptcy is 12 months.  For securities for which the issuer is financially troubled but
not in bankruptcy, that time frame is generally 24 months. Included in  the present value  calculation are
expected principal and interest payments;  however,  for securities for which the issuer is classified as
bankrupt or in default, the present value calculation assumes  no interest payments and a single
recovery amount.

In estimating the recovery value, significant judgment is involved in the development of

assumptions relating to a myriad of factors related to the  issuer including, but not limited to, revenue,
margin and earnings projections, the  likely market or liquidation values of assets,  potential additional
debt to be incurred pre- or post-bankruptcy/restructuring, the ability to shift existing or new debt to
different priority layers, the amount of restructuring/bankruptcy expenses, the size and  priority of
unfunded pension obligations, litigation or  other  contingent claims,  the treatment of intercompany
claims and the likely outcome with respect to inter-creditor conflicts.

For structured fixed maturity securities  (primarily residential and commercial mortgage-backed
securities and asset-backed securities),  the  Company  estimates the present value of the security  by
projecting future cash flows of the assets underlying the  securitization, allocating the  flows to the
various tranches based on the structure  of  the securitization, and determining the present value of  the
cash flows using the effective yield of the  security at the  date of  acquisition (or the most recent implied
rate used to accrete the security if the implied rate  has changed as a result of a previous impairment or
changes in expected cash flows). The  Company incorporates levels of delinquencies, defaults and
severities as well as credit attributes  of  the remaining assets in the securitization, along with other
economic data, to arrive at its best estimate of the parameters applied to the assets underlying the
securitization. In order to project cash flows, the following assumptions  are applied to the assets
underlying the securitization: (1) voluntary prepayment  rates, (2) default rates and  (3) loss severity. The
key assumptions made for the Prime, Alt-A  and  first-lien  Sub-Prime mortgage-backed securities at
December 31, 2012 were as follows:

(at December 31, 2012)

Prime

Alt-A

Sub-Prime

Voluntary prepayment rates . . . . . . . . . . . . . . . . . . . . . . . . .
Percentage of remaining pool liquidated due  to  defaults
. . . .
Loss severity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2% - 35% 0% -  16% 1% - 10%
2% - 63% 13% - 70% 24% - 80%
25% -  65% 40%  -  73% 65% - 92%

Real Estate Investments

On at least an annual basis, the Company obtains  independent appraisals  for substantially  all  of  its

real estate investments. In addition, the  carrying  value of all real  estate  investments is  reviewed for
impairment on a quarterly basis or when events  or changes  in circumstances  indicate  that  the carrying
amount may not be recoverable. The review for impairment considers  the valuation  from the
independent appraisal, when applicable, and incorporates an estimate of the undiscounted  cash flows
expected to result from the use and eventual disposition of the real estate property. An  impairment loss
is recognized if the expected future undiscounted cash flows  are  less than  the carrying value of the real
estate property. The impairment loss  is  the amount by which the  carrying amount exceeds fair value.

169

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Other Investments

Investments in Private Equity Limited  Partnerships,  Hedge Funds and Real Estate Partnerships

Included in other investments are private equity limited partnerships, hedge funds and real estate

partnerships that generally report investments  on their balance sheet at  fair value  and are accounted
for by the Company using the equity method of accounting. The Company reviews these investments
for impairment no less frequently than quarterly and monitors  the performance  throughout the year
through discussions with the managers/general partners. If the  Company becomes aware of an
impairment of a partnership’s investments at the  balance sheet date prior to receiving the partnership’s
financial statements, it will recognize  an  impairment by recording  a reduction  in the carrying  value of
the partnership with a corresponding  charge to net investment income.

Mortgage Loans

A mortgage loan is considered impaired when it  is  probable that  the Company will be unable to
collect principal and interest amounts  due. For mortgage loans that are determined to be impaired, a
reserve  is established for the difference between  the amortized cost and the  fair value of the underlying
collateral. In estimating fair value, the Company  uses interest rates reflecting  the current real  estate
financing market returns.

Changes in Intent to Sell Temporarily  Impaired Assets

The Company may, from time to time, sell  invested assets subsequent to the balance sheet  date

that it did not intend to sell at the balance sheet date. Conversely, the Company may not sell invested
assets that it asserted that it intended to sell at the balance sheet date. Such changes in intent are
generally due to events occurring subsequent to the balance sheet date. The types of events that may
result in a change in intent include, but are not limited to, significant changes in the economic  facts
and circumstances related to the invested asset (e.g., a  downgrade or upgrade from a rating agency),
significant unforeseen changes in liquidity needs,  or changes in tax laws or the regulatory environment.

Securities Lending

The Company has engaged in securities lending activities from  which it generates net investment
income by lending certain of its investments to other  institutions  for short periods of time. Borrowers
of these  securities provide collateral equal to at least 102% of the market value of the loaned securities
plus accrued interest. This collateral is held by a  third-party custodian, and the Company has the right
to access the collateral only in the event  that  the institution  borrowing the Company’s securities is in
default under the lending agreement.  Therefore,  the Company does  not recognize the receipt of the
collateral held by the third-party custodian or the obligation to return the collateral. The loaned
securities remain a recorded asset of  the  Company.  The  Company accepts only cash as collateral for
securities on loan and restricts the manner in which that  cash is invested.

Reinsurance Recoverables

Amounts recoverable from reinsurers  are  estimated  in  a manner consistent with the associated
claim liability. The Company reports its reinsurance  recoverables net of an allowance for estimated
uncollectible reinsurance recoverables.  The allowance is based upon the Company’s ongoing review of
amounts outstanding, length of collection periods, changes in reinsurer credit standing, disputes,

170

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

applicable coverage defenses  and other relevant factors. Amounts  deemed  to  be  uncollectible, including
amounts due from known insolvent reinsurers,  are written off against the allowance for estimated
uncollectible reinsurance recoverables.  Any subsequent collections of amounts previously written off are
reported as part of claims and claim  adjustment  expenses. The Company  evaluates and monitors the
financial condition of its reinsurers under voluntary reinsurance arrangements  to  minimize its exposure
to significant losses from reinsurer insolvencies.

Deferred Acquisition Costs

Incremental direct costs of acquired  new and  renewal insurance contracts, consisting of
commissions and premium-related taxes,  are capitalized and charged to expense pro  rata over the
contract periods in which the  related  premiums  are earned. Deferred acquisition costs are reviewed  to
determine if they are recoverable from  future income and, if  not,  are charged to expense. Future
investment income attributable to related  premiums is  taken into account in measuring the
recoverability of the carrying value of this  asset.  All other acquisition expenses are charged to
operations as incurred.

Contractholder Receivables and Payables

Under certain workers’ compensation  insurance  contracts with deductible  features, the Company is

obligated to pay the claimant for the  full amount of  the claim. The Company is subsequently
reimbursed by the  policyholder for the  deductible amount. These  amounts  are included on a  gross basis
in the consolidated balance sheet in contractholder  payables and contractholder receivables,
respectively.

Goodwill and Other Intangible Assets

The Company performs a review, on at least an annual basis, of  goodwill held by the reporting
units which are the Company’s three operating and reportable segments: Business Insurance;  Financial,
Professional & International Insurance; and Personal Insurance.  The Company estimates the fair  value
of its reporting units and compares it to their carrying value,  including goodwill. If  the carrying values
of the reporting units were to exceed their fair  value, the amount of the impairment would be
calculated and goodwill adjusted accordingly.

The Company uses a discounted cash flow model  to  estimate the fair value of  its reporting units.
The discounted cash flow model is an  income approach to valuation that is  based on a detailed cash
flow analysis for deriving a current fair  value of reporting  units and is representative  of the Company’s
reporting units’ current and expected  future financial performance. The discount rate assumptions
reflected the Company’s assessment of  the  risks inherent in the  projected future cash flows and the
Company’s weighted-average cost of  capital, and were compared against available  market data for
reasonableness.

Other indefinite-lived intangible assets held by  the Company are  also reviewed for impairment on

at least an annual basis. The classification of the asset as indefinite-lived  is reassessed and an
impairment is recognized if the carrying amount of the asset exceeds its fair value.

Intangible assets that are deemed to  have a finite useful life are amortized over their useful lives.
The carrying amount of intangible assets with a  finite useful life is regularly reviewed for indicators of

171

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

impairment in value. Impairment is recognized only if the carrying amount of the intangible asset is not
recoverable from its undiscounted cash  flows  and  is  measured as the difference between the carrying
amount and the fair value of the asset.

As a result of the reviews performed for the years ended  December 31,  2012, 2011 and 2010, the
Company determined that the estimated  fair value  significantly exceeded the respective carrying value
of its reporting units for those years  and that  goodwill was not impaired. The Company also
determined during its reviews for each  year that its other indefinite-lived  intangible assets and finite-
lived intangible assets were not impaired.

Claims and Claim Adjustment Expense Reserves

Claims and claim adjustment expense  reserves represent estimates for the ultimate  cost of unpaid

reported and unreported claims incurred and related expenses. The  reserves are adjusted  regularly
based upon experience. Included in the  claims and claim adjustment expense reserves in the
consolidated balance sheet are certain  reserves discounted to the present value of estimated future
payments. The liabilities for losses for  most long-term disability and annuity  claim  payments, primarily
arising from workers’ compensation insurance and  workers’ compensation excess insurance policies,
were discounted using a rate of 5% at  both December 31, 2012 and 2011. These discounted reserves
totaled $2.01 billion and $2.20 billion  at December 31, 2012 and 2011, respectively.

The Company performs a continuing  review of its claims  and claim adjustment expense reserves,

including its reserving techniques and  its  reinsurance. The reserves are  also reviewed regularly by
qualified actuaries employed by the Company. Since the  reserves are based on estimates, the ultimate
liability may be more or less than such  reserves. The effects of changes in such estimated  reserves are
included in the results of operations  in  the period  in which the estimates are changed. Such changes in
estimates could occur in a future period  and may be material to the Company’s results of operations
and financial position in such period.

Other Liabilities

Included in other liabilities in the consolidated balance  sheet is the Company’s estimate of its
liability for guaranty fund and other insurance-related assessments. The liability for expected state
guaranty fund and other premium-based  assessments is recognized as the  Company writes or becomes
obligated to write or renew the premiums  on which  the assessments are expected to be based. The
liability for loss-based assessments is  recognized  as the related losses are incurred. At December  31,
2012 and 2011, the Company had a liability of $297 million and $293 million, respectively, for guaranty
fund and other insurance-related assessments and related recoverables of $15 million and $19 million,
respectively. The liability for such assessments and  the related recoverables are not discounted for the
time value of money. The loss-based  assessments are  expected to be paid over a period ranging from
one year to the life expectancy of certain workers’ compensation claimants and the recoveries are
expected to occur over the same period  of time.

Also included in other liabilities is an accrual for policyholder dividends. Certain insurance

contracts, primarily workers’ compensation, are participating whereby dividends are paid to
policyholders in accordance with contract provisions.  Net written  premiums for participating dividend
policies were approximately 2% of total  net written premiums for the year ended December 31,  2012,
and approximately 1% of total net written premiums for  each of the years ended December  31, 2011

172

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

and 2010, respectively. Policyholder dividends are accrued against earnings using best available
estimates of amounts to be paid. The  liability  accrued for  policyholder dividends totaled $59 million
and $54 million at  December 31, 2012 and 2011,  respectively.

Treasury Stock

The cost of common stock repurchased  by the Company is reported as treasury stock and

represents authorized and unissued shares of the Company under the Minnesota Business Corporation
Act.

Statutory Accounting Practices

The Company’s U.S. insurance subsidiaries, domiciled  principally in the state of Connecticut,

prepare statutory financial statements  in  accordance with the accounting practices prescribed or
permitted by the insurance departments  of the  states of domicile. Prescribed statutory accounting
practices are those practices that are  incorporated directly or by reference in state laws, regulations,
and general administrative rules applicable to all insurance  enterprises domiciled  in a particular state.
Permitted statutory accounting practices  include  practices not prescribed by the domiciliary  state, but
allowed by the domiciliary state regulatory authority.  The impact of any permitted accounting practices
on policyholders’ surplus of the Company is not material.

The Company’s non-U.S. insurance subsidiaries  file financial statements prepared in accordance

with the regulatory reporting requirements of their respective local jurisdiction.

Premiums and Unearned Premium Reserves

Premiums are recognized as revenues pro  rata over the policy period.  Unearned premium reserves

represent the unexpired portion of policy  premiums. Accrued retrospective premiums  are included in
premium balances receivable. Premium balances receivable are reported net of an allowance for
estimated uncollectible premium amounts.

Ceded premiums are charged to income  over the applicable term of the various  reinsurance
contracts with third party reinsurers.  Prepaid reinsurance premiums represent the unexpired portion of
premiums ceded to reinsurers and are reported as part of other assets.

Fee Income

Fee  income includes servicing fees from carriers and  revenues from large  deductible policies and

service contracts and is recognized pro rata over  the contract or  policy periods.

Other Revenues

Other revenues include revenues from premium installment charges, which are recognized as

collected, revenues of noninsurance subsidiaries other than fee  income  and gains  and losses on
dispositions of assets and redemption of debt, and other miscellaneous revenues.

173

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes

The Company recognizes deferred income tax  assets  and liabilities for  the expected future tax

effects attributable to temporary differences between the financial statement and tax return bases of
assets and liabilities, based on enacted  tax  rates and  other provisions of the tax law. The effect of a
change in tax laws or rates on deferred  tax assets and liabilities is recognized in income in the period in
which  such change is enacted. Deferred tax assets are reduced by a valuation allowance if it  is more
likely than not that all or some portion  of the  deferred tax assets will not be realized.

Foreign Currency Translation

The Company assigns functional currencies to its  foreign  operations, which are generally  the

currencies of the local operating environment. Foreign  currency amounts are remeasured to the
functional currency, and the resulting  foreign exchange gains or  losses are reflected in earnings.
Functional currency amounts are then  translated  into U.S. dollars. The foreign  currency  remeasurement
and translation are calculated using current exchange rates for items reported in the balance sheets and
average exchange rates for items recorded in earnings. The change in unrealized foreign currency
translation gain or loss during the year,  net  of  tax,  is  a component of other comprehensive income.

Share-Based Compensation

The Company has an employee stock  incentive compensation plan that permits grants of

nonqualified stock options, incentive stock options, stock  appreciation rights, restricted stock, deferred
stock, stock units, performance awards and other stock-based or stock-denominated awards  with respect
to the Company’s common stock.

Compensation cost is measured based on the grant-date fair value of an award, utilizing the
assumptions discussed in note 13. Compensation cost is recognized for financial reporting purposes
over the period in which the employee  is required to provide service in  exchange for the award
(generally the vesting period). In connection with certain share-based awards, participants are entitled
to receive dividends during the vesting period, either in cash or dividend equivalent shares,
commensurate with the dividends paid to common shareholders. Dividends  and dividend equivalent
shares on awards that are expected to vest  are recorded in retained earnings. Dividends  paid on awards
that are not expected to vest as part  of  the Company’s forfeiture estimate  are recorded as
compensation expense.

Nature of Operations

The Company is organized into three reportable business segments: Business Insurance;  Financial,
Professional & International Insurance; and Personal Insurance.  These segments reflect the manner in
which  the Company’s businesses are  currently  managed and represent an aggregation of products and
services based on type of customer, how  the business is marketed and the manner in which risks are
underwritten.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The specific business segments are as follows:

Business  Insurance

The Business Insurance segment offers a  broad  array of property and casualty insurance and
insurance-related services to its clients  primarily in the United States. Business Insurance is organized
into the following six groups, which collectively comprise  Business Insurance Core operations:

(cid:127) Select Accounts provides small businesses  with property and casualty products, including

commercial multi-peril, commercial property, general liability, commercial auto and  workers’
compensation insurance.

(cid:127) Commercial Accounts provides mid-sized businesses  with property and casualty products,

including commercial multi-peril, commercial  property, general liability, commercial auto  and
workers’ compensation insurance.

(cid:127) National Accounts provides large companies with casualty products and services, including

workers’ compensation, general liability and automobile  liability, generally utilizing loss-sensitive
products, on both a bundled and unbundled  basis. National Accounts also includes the
Company’s commercial residual market  business,  which  primarily offers workers’ compensation
products and services to the involuntary  market.

(cid:127) Industry-Focused Underwriting. The following units provide targeted  industries with differentiated

combinations of insurance coverage, risk  management, claims  handling and other services:

(cid:127) Construction serves a broad range of construction businesses, offering guaranteed cost
products for small to mid-sized policyholders  and  loss sensitive programs for larger
accounts. For the larger accounts, the customer  and the Company work together in actively
managing and controlling exposure and claims and they share risk through policy features
such as deductibles or retrospective rating.  Products offered include workers’  compensation,
general liability, umbrella and commercial  auto coverages,  and  other risk management
solutions.

(cid:127) Technology serves small to large companies  involved in telecommunications, information
technology, medical technology and electronics  manufacturing, offering a comprehensive
portfolio of products and services. Products offered include commercial property,
commercial auto, general liability, workers’  compensation, umbrella, internet liability,
technology errors and omissions coverages and global companion products.

(cid:127) Public Sector Services provides insurance products and  services to public entities including

municipalities, counties, Indian Nation gaming organizations and selected special
government districts such as water and sewer utilities. The policies written by this unit
typically cover commercial property, commercial auto, general  liability,  professional  liability
and workers’ compensation exposures.

(cid:127) Oil & Gas provides specialized property and  liability  products and  services  for customers

involved in the exploration and production of oil and natural gas, including operators and
drilling contractors, as well as various  service and  supply companies and  manufacturers that
support upstream operations. The policies written  by this business group  cover risks
including physical damage, liability, business interruption and workers’  compensation.

175

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(cid:127) Agribusiness serves small to medium-sized agricultural  businesses, including farms, ranches,

wineries and related operations, offering property  and  liability coverages other than workers’
compensation.

(cid:127) Target  Risk Underwriting. The following units serve commercial businesses  requiring  specialized

product  underwriting, claims handling and risk management  services:

(cid:127) National Property provides traditional and customized property insurance  programs to large

and mid-sized customers, including office  building owners, manufacturers, municipalities and
schools, retailers, and service businesses.  These insurance  programs cover losses  on
buildings, business personal property and business interruption exposures.

(cid:127) Inland Marine provides insurance for goods in transit and movable objects for  customers
such as jewelers, museums, contractors and the transportation industry. Builders’ risk
insurance is also offered to customers during the construction, renovation or repair of
buildings and other structures.

(cid:127) Ocean Marine serves the marine transportation industry and related services, as  well as

other businesses involved in international trade. The Company’s  product offerings in this
unit fall under six  main coverage categories:  marine  liability, cargo, hull  and machinery,
protection and indemnity, pleasure craft,  and  marine property and liability.

(cid:127) Excess Casualty serves small to  mid-sized commercial businesses, offering mono-line

umbrella and excess coverage where  the Company typically does not write the primary
casualty coverage, or where other business units within the Company prefer to access the
underwriting expertise and/or limit capacity  of  the Excess Casualty business unit.

(cid:127) Boiler & Machinery serves small to large  companies,  offering comprehensive breakdown

coverages for equipment, including property and business interruption coverages. Through
the BoilerRe unit, Boiler & Machinery also  serves other  property and casualty carriers that
do not have in-house expertise with reinsurance, underwriting, engineering, claim handling
and risk management services for this type  of coverage.

(cid:127) Global Partner Services provides insurance to foreign  organizations with property  and liability

exposures located in the United States  (reverse-flow), as part of a global  program.

(cid:127) Specialized Distribution. The following units market and underwrite their products to customers
predominantly through licensed wholesale,  general and program agents that manage customers’
unique insurance requirements.

(cid:127) Northland provides insurance coverage for  the commercial transportation industry, as well as

commercial liability and package policies for small, difficult to place specialty classes  of
commercial business on an admitted or excess and  surplus lines  basis.

(cid:127) National Programs offers tailored property and casualty programs on an admitted basis for
customers with common risk characteristics  or coverage requirements.  Programs available
include those for entertainment, architects and engineers, equipment rental, golf services
and owners of franchised businesses.

176

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Business Insurance also includes the Special Liability Group (which manages the Company’s

asbestos and environmental liabilities) and the  assumed  reinsurance and certain other runoff
operations, which collectively are referred to as Business Insurance Other.

Financial, Professional & International Insurance

The Financial, Professional & International Insurance segment  includes surety and financial
liability coverages, which primarily use credit-based underwriting processes, as well as property and
casualty products that are primarily marketed  on  a domestic basis in the  United Kingdom, Canada and
the Republic of Ireland, and on an international basis  through  Lloyd’s. The segment includes the
following groups:

(cid:127) Bond & Financial Products provides a  wide range of customers with bond and insurance products

and risk management services. The range  of  coverages  includes performance, payment and
commercial surety and fidelity bonds for construction and general commercial enterprises;
management liability coverages for losses caused  by the actual or alleged negligence or
misconduct of directors and officers or  employee dishonesty; employment  practices liability
coverages and fiduciary coverages for  public  corporations,  private companies and not-for-profit
organizations; professional liability coverage for actual  or alleged errors and omissions
committed in the course of professional conduct or practice for  a variety  of professionals
including, among others, lawyers, design professionals and  real estate agents; and professional
and management liability, property, workers’ compensation, auto and general liability and fidelity
insurance for financial institutions.

(cid:127) International, through its operations in the United Kingdom,  Canada and the Republic  of

Ireland, offers specialized insurance and risk  management services to several customer groups,
including, among others, those in the technology, public services, and financial and professional
services industry sectors. International, through its Lloyd’s syndicate  (Syndicate 5000), for which
the Company provides 100% of the capital, underwrites  through five principal  business  units—
marine, global property, accident & special risks, power &  utilities and aviation.

In addition, the Company owns 49.5%  of  the common  stock of J. Malucelli Participa¸c˜oes em
Seguros e Resseguros S.A. (JMalucelli), its  joint  venture in Brazil.  JMalucelli  is currently the market
leader in surety in Brazil based on market share, and commenced writing other property and casualty
insurance business in 2012. The Company’s investment in  JMalucelli is accounted for  using  the equity
method and is included in ‘‘other investments’’  on the consolidated balance sheet.

Personal Insurance

The Personal Insurance segment writes  a broad range of property and  casualty insurance covering

individuals’ personal risks. The primary  products of  automobile and homeowners insurance are
complemented by a broad suite of related  coverages.

Automobile policies provide coverage for liability to others  for  both  bodily injury and property

damage,  uninsured motorist protection,  and  for physical damage to an insured’s own  vehicle  from
collision, fire, flood, hail and theft. In  addition, many states require policies  to  provide first-party
personal injury protection, frequently referred to as no-fault coverage.

177

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Homeowners policies provide protection against losses to dwellings and  contents from a variety of
perils (excluding flooding) as well as coverage for  personal  liability.  The  Company writes homeowners
insurance for dwellings, condominiums and tenants,  and  rental properties. The Company writes
coverage for boats and yachts and valuable  personal items such as jewelry,  and also writes  coverages for
umbrella liability, identity fraud, and weddings and special events.

2. SEGMENT INFORMATION

The accounting policies used  to prepare the segment  reporting  data for the Company’s three
reportable business segments  are the same as  those described in  the Summary of Significant Accounting
Policies in note 1.

Except as described below for certain legal entities, the Company  allocates its invested assets and
the related net investment income to  its  reportable  business  segments. Pretax net investment  income  is
allocated based upon an investable funds concept,  which  takes into  account liabilities (net of
non-invested assets) and appropriate capital considerations for each segment. For investable funds, a
benchmark investment yield is developed  that reflects the estimated duration of  the loss  reserves’ future
cash flows, the interest rate environment  at the  time the  losses  were incurred and A+ rated corporate
debt instrument yields. For capital, a benchmark investment yield is developed that reflects the average
yield on the total investment portfolio. The benchmark investment yields are applied  to  each segment’s
investable funds and capital, respectively,  to produce a total notional investment income by segment.
The Company’s actual net investment income is allocated to each segment in proportion to the
respective segment’s notional investment income  to  total notional investment income. There  are certain
legal entities within the Company that  are dedicated to specific reportable business segments.  The
invested assets and related net investment  income from  these legal  entities are reported in the
applicable business segment and are not allocated  among the other business segments.

The cost of the Company’s catastrophe treaty program  is included in the Company’s  ceded

premiums and is allocated among reportable business segments based on an  estimate of actual market
reinsurance pricing using expected losses  calculated by the Company’s  catastrophe model, adjusted for
any experience adjustments.

178

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)

The following tables summarize the components of the  Company’s revenues, operating income

(loss) and total assets by reportable business segments:

(for the year ended December 31, in millions)

2012
Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . .
Fee  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Business
Insurance

$11,691
2,090
322
40

Total operating revenues(1) . . . . . . . . . . . . . . . . . . . .

$14,143

Amortization and depreciation . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income(1) . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,393
539
1,843

2011
Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . .
Fee  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$11,327
2,041
295
31

Total operating revenues(1) . . . . . . . . . . . . . . . . . . . .

$13,694

Amortization and depreciation . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . .
Operating income (loss)(1) . . . . . . . . . . . . . . . . . . . . . .

$ 2,313
134
1,354

2010
Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . .
Fee  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$10,766
2,156
285
28

Total operating revenues(1) . . . . . . . . . . . . . . . . . . . .

$13,235

Amortization and depreciation . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income(1) . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,253
777
2,301

Financial,
Professional &
International
Insurance

Personal
Insurance

Total
Reportable
Segments

$3,045
395
1
26

$3,467

$ 731
255
642

$3,174
414
1
26

$3,615

$ 740
230
647

$3,317
439
2
27

$3,785

$ 754
245
620

$7,621
404
—
66

$8,091

$1,602
32
217

$7,589
424
—
70

$8,083

$1,615
(293)
(332)

$7,349
464
—
75

$7,888

$1,601
134
440

$22,357
2,889
323
132

$25,701

$ 4,726
826
2,702

$22,090
2,879
296
127

$25,392

$ 4,668
71
1,669

$21,432
3,059
287
130

$24,908

$ 4,608
1,156
3,361

(1) Operating revenues for reportable business  segments exclude net  realized  investment gains (losses).
Operating income (loss) for reportable business segments equals net income (loss) excluding  the
after-tax impact of net realized investment gains  (losses).

179

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)

Net written premiums by market were as follows:

(for the year ended December 31, in millions)

2012

2011

2010

Business Insurance:

Select Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
National Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industry-Focused Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Target Risk Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialized Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,775
3,101
907
2,554
1,666
870

Total Business Insurance Core . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business Insurance Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,873
(1)

Total Business Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,872

$ 2,784
2,890
782
2,407
1,587
880

11,330
10

11,340

$ 2,718
2,576
806
2,299
1,573
872

10,844
13

10,857

Financial, Professional & International Insurance:

Bond & Financial Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International

Total Financial, Professional & International  Insurance . . . . . . . . . .

Personal Insurance:

Automobile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Homeowners and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Personal Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,924
1,057

2,981

3,642
3,952

7,594

1,953
1,149

3,102

3,788
3,957

7,745

1,981
1,230

3,211

3,772
3,795

7,567

Total consolidated net written premiums . . . . . . . . . . . . . . . . . . . . . . .

$22,447

$22,187

$21,635

180

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)

Business  Segment Reconciliations

(for the year ended December 31, in millions)

2012

2011

2010

Revenue reconciliation
Earned premiums

Business Insurance:

Workers’ compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial automobile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial multi-peril
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,222
1,943
1,621
1,757
3,113
35

$ 2,899
1,940
1,607
1,738
3,126
17

$ 2,489
1,912
1,669
1,739
2,958
(1)

Total Business Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,691

11,327

10,766

Financial, Professional & International Insurance:

Fidelity and surety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Financial, Professional & International Insurance . . . . . . . . .

Personal Insurance:

Automobile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Homeowners and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Personal Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fee  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

939
850
1,088
168

3,045

3,665
3,956

7,621

22,357
2,889
323
132

970
832
1,218
154

3,174

3,720
3,869

7,589

22,090
2,879
296
127

1,020
866
1,276
155

3,317

3,693
3,656

7,349

21,432
3,059
287
130

Total operating revenues for reportable  segments . . . . . . . . . . . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25,701
(12)
51

25,392
(1)
55

24,908
(60)
264

Total consolidated revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$25,740

$25,446

$25,112

Income reconciliation, net of tax
Total operating income for reportable  segments . . . . . . . . . . . . . . . . . . .
Interest Expense and Other(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,702
(261)

$ 1,669
(279)

$ 3,361
(318)

Total operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,441
32

1,390
36

3,043
173

Total consolidated net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,473

$ 1,426

$ 3,216

(1) The primary component of Interest  Expense and Other  was  after-tax interest expense  of

$246 million, $251 million and $252 million  in 2012, 2011  and 2010,  respectively. Interest Expense
and Other in 2010 included $39 million  of  after-tax expenses related to the Company’s purchase
and retirement of  a significant portion of its 6.25% fixed-to-floating rate junior  subordinated
debentures.

181

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)

(at December 31, in millions)

Asset reconciliation:

2012

2011

Business Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial, Professional & International Insurance . . . . . . . .
Personal Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total assets for reportable segments . . . . . . . . . . . . . . . . .
Other assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 76,972
13,452
14,195

104,619
319

$ 76,909
13,355
13,614

103,878
697

Total consolidated assets . . . . . . . . . . . . . . . . . . . . . . .

$104,938

$104,575

(1) The primary component of other assets at December  31, 2012 was other intangible assets.

The primary components of other assets at December 31, 2011 were deferred  taxes and
other intangible assets.

Enterprise-Wide Disclosures

Revenues from internal customers for  the years ended December 31, 2012, 2011  and 2010 were  not
material. Foreign assets at December  31, 2012 and 2011  also were  not material. The  Company does not
have revenue from transactions with  a single  customer amounting to 10 percent  or more of its
revenues.

The following table presents revenues of the  Company’s operations based on  location:

(for the year ended December 31, in millions)

2012

2011

2010

U.S.
Non-U.S.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$24,827
913

$24,408
1,038

$24,049
1,063

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$25,740

$25,446

$25,112

182

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENTS

Fixed Maturities

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

were as follows:

(at December 31, 2012, in millions)

Amortized
Cost

Gross Unrealized

Gains

Losses

Fair
Value

U.S. Treasury securities and obligations  of U.S. government and

government agencies and authorities . . . . . . . . . . . . . . . . . . . .

$ 2,148

$

75

$ 1

$ 2,222

Obligations of states, municipalities and political subdivisions:

Pre-refunded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,458
27,405

Total obligations of states, municipalities and political

subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities issued by foreign governments . . . . . . . . . . . . . . .
Mortgage-backed securities, collateralized  mortgage obligations

and pass-through securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . .

35,863
2,185

2,744
17,863
26

567
2,262

2,829
72

255
1,360
7

—
11

11
—

2
20
—

9,025
29,656

38,681
2,257

2,997
19,203
33

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$60,829

$4,598

$34

$65,393

(at December 31, 2011, in millions)

Amortized
Cost

Gross Unrealized

Gains

Losses

Fair
Value

U.S. Treasury securities and obligations  of U.S. government and

government agencies and authorities . . . . . . . . . . . . . . . . . . . .

$ 2,396

$ 101

$— $ 2,497

Obligations of states, municipalities and political subdivisions:

Pre-refunded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,820
29,391

Total obligations of states, municipalities and political

subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities issued by foreign governments . . . . . . . . . . . . . . .
Mortgage-backed securities, collateralized  mortgage obligations

and pass-through securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . .

36,211
2,228

3,288
15,845
26

513
2,303

2,816
91

249
1,066
4

1
4

5
1

22
61
—

7,332
31,690

39,022
2,318

3,515
16,850
30

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$59,994

$4,327

$89

$64,232

183

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENTS (Continued)

The amortized cost and fair value of  fixed maturities by  contractual maturity follow. Actual
maturities will differ from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or  prepayment penalties.

(at December 31, 2012, in millions)

Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 1 year through 5 years . . . . . . . . . . . . . . . . . . . . . . .
Due after 5 years through 10 years . . . . . . . . . . . . . . . . . . . . . .
Due after 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amortized
Cost

Fair
Value

$ 5,634
21,498
16,789
14,164

$ 5,719
22,944
18,329
15,404

58,085

62,396

Mortgage-backed securities, collateralized  mortgage obligations

and pass-through securities . . . . . . . . . . . . . . . . . . . . . . . . . .

2,744

2,997

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$60,829

$65,393

Pre-refunded bonds of $9.03 billion and $7.33 billion at  December 31,  2012 and 2011, respectively,
were bonds for which an irrevocable trust (almost exclusively comprised of U.S.  Treasury securities)  has
been established to fund the remaining  payments of principal  and  interest.

The Company’s fixed maturity investment portfolio at  December  31, 2012 and 2011 included

$3.00 billion and $3.52 billion, respectively, of residential  mortgage-backed securities, which include
pass-through securities and collateralized  mortgage  obligations  (CMO). Included  in the totals at
December 31, 2012 and 2011 were $1.44 billion and  $1.82 billion,  respectively, of  GNMA, FNMA and
FHLMC (excluding FHA project loans) guaranteed residential mortgage-backed pass-through securities
classified as available for sale. Also included in those totals were residential CMOs classified as
available for sale with a fair value of $1.56 billion  and $1.70 billion, respectively. Approximately 43%
and 38% of the Company’s CMO holdings  were guaranteed by or fully collateralized  by  securities
issued by GNMA, FNMA or FHLMC  at  December 31, 2012 and 2011,  respectively.  The average credit
rating of the $893 million and $1.05 billion of non-guaranteed CMO holdings at December  31, 2012
and 2011, respectively, was ‘‘B2’’ and ‘‘Ba1,’’ respectively.  The  average credit rating of all of the  above
securities was ‘‘A1’’ and ‘‘Aa3’’ at December 31, 2012 and 2011, respectively.

At December 31, 2012 and 2011, the  Company held commercial mortgage-backed securities

(CMBS, including FHA project loans)  of $453  million  and  $446 million,  respectively, which are
included in ‘‘All other corporate bonds’’ in the  tables above.  At December 31, 2012 and  2011,
approximately $64 million and $81 million  of these  securities, respectively, or the  loans backing such
securities, contained guarantees by the  U.S. government or a government-sponsored enterprise, and
$4 million and $10 million at December 31,  2012 and 2011, respectively, were  comprised of  Canadian
non-guaranteed securities. The average  credit rating of  the $389 million and $365 million of
non-guaranteed securities at December  31, 2012  and  2011,  respectively,  was  ‘‘Aaa’’ at both  dates, and
51% and 71%, respectively, of those securities were issued in  2004 and prior years. The CMBS
portfolio is supported by loans that are  diversified across economic sectors  and geographical  areas. The
average credit rating of the CMBS portfolio was ‘‘Aaa’’ at  both  December 31, 2012 and 2011.

At December 31, 2012 and 2011, the  Company had $403 million and $126 million, respectively, of

securities on loan as part of a tri-party  lending agreement.

184

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENTS (Continued)

Proceeds from sales of fixed maturities classified as  available for sale were $1.09 billion,

$1.16 billion and $3.71 billion in 2012, 2011 and 2010, respectively. Gross gains of $70  million,
$63 million and $106 million and gross  losses of $9 million, $10 million and $11 million were realized
on sales and other fixed maturity-related transactions  (excluding impairments) in 2012,  2011 and 2010,
respectively.

At December 31, 2012 and 2011, the  Company’s  insurance subsidiaries had $4.94 billion and
$4.70 billion, respectively, of securities  on  deposit at financial institutions  in certain states pursuant to
the respective states’ insurance regulatory requirements. Funds deposited with third parties to be used
as collateral to secure various liabilities  on behalf of insureds, cedants and  other creditors had a fair
value of $68 million and $90 million at  December 31,  2012 and 2011, respectively. Other investments
pledged as collateral securing outstanding  letters of credit had a  fair value of $56 million and
$59 million at December 31, 2012 and  2011, respectively.

Equity Securities

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

(at December 31, 2012, in millions)

Gross
Unrealized

Cost

Gains

Losses

Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$366
96

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$462

$148
39

$187

$ 4
—

$ 4

Gross
Unrealized

(at December 31, 2011, in millions)

Cost

Gains

Losses

Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$311
103

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$414

$120
29

$149

$3
1

$4

Fair
Value

$510
135

$645

Fair
Value

$428
131

$559

Proceeds from sales of equity securities were  $37 million,  $135  million and $201  million  in 2012,

2011 and 2010, respectively. Gross gains  of $8 million,  $48 million and $128  million and gross  realized
losses of less than $1 million, $2 million  and  less than $1  million were realized on those sales
(excluding impairments) in 2012, 2011 and 2010,  respectively.  In  2010, proceeds  from the sales of equity
securities and gross gains realized on those  sales included $115 million  and  $102 million, respectively,
from the sale of substantially all of the  Company’s  remaining common stock holdings  in Verisk
Analytics, Inc. (Verisk), a portion of  which was  classified  as  an equity security  at the  time of sale.

In 2010, the Company also sold a portion of its investment in  Verisk that was classified as  an
‘‘other investment’’ at the time of sale due to transfer  restrictions that  were  scheduled to expire  after
one year. Proceeds from that sale of  Verisk shares  in 2010 were  $115 million. Gross gains  realized  on
that sale were $103 million.

185

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENTS (Continued)

Real Estate

The Company’s real estate investments include warehouses, office buildings and other commercial
land  and properties that are directly  owned. The  Company negotiates commercial leases with  individual
tenants through unrelated, licensed real estate brokers. Negotiated terms and conditions include, among
others, rental rates, length of lease period and improvements to the  premises to be provided  by  the
landlord.

Proceeds from the sale of real estate investments were $53 million in 2012. Gross  gains of

$19 million were realized on those sales  and there  were no  gross losses. In 2011, there were  no sales of
real estate investments. Proceeds from the sale of real estate  investments in 2010  were $10 million.
Gross gains of $3 million were realized  on those sales and there were no  gross losses. The  Company
had no real estate held for sale at December 31,  2012  and  2011. Accumulated depreciation  on real
estate held for investment purposes was $255  million and $237 million at December  31, 2012 and 2011,
respectively.

Future minimum rental income on operating leases relating to the Company’s real estate

properties is expected to be $76 million, $69 million,  $59 million, $43 million and $29 million for 2013,
2014, 2015, 2016 and 2017, respectively,  and $49  million  for 2018 and thereafter.

Short-term Securities

The Company’s short-term securities consist of Aaa-rated  registered money market funds,
U.S. Treasury securities, high-quality  commercial paper (primarily A1/P1) and  high-quality corporate
securities purchased within a  year to  their  maturity  with a combined average  of 77 days to maturity at
December 31, 2012. The amortized cost of  these securities, which  totaled $3.48 billion  and $3.59 billion
at December 31, 2012 and 2011, respectively, approximated their fair value.

Variable  Interest Entities

Entities which do not have sufficient  equity at  risk to allow the entity to finance its activities
without additional financial support or in  which the equity investors, as  a group, do not have  the
characteristic of a controlling financial interest are referred to as variable interest entities (VIE).
A VIE is consolidated by the variable interest holder that is determined to have the controlling
financial interest (primary beneficiary) as  a result  of  having both the power to direct the activities  of a
VIE that most significantly impact the VIE’s  economic  performance  and  the  obligation to absorb losses
or right to receive  benefits from the VIE that could potentially be significant to the VIE. The Company
determines whether it is the primary beneficiary of an entity subject to consolidation based on a
qualitative assessment of the VIE’s capital  structure, contractual terms, nature of  the VIE’s operations
and purpose and the Company’s relative exposure to the related risks of the VIE on the date it
becomes initially involved in the VIE.  The Company reassesses its VIE determination with  respect to
an entity on an ongoing basis.

The Company is a passive investor in limited partner equity interests issued by third  party VIEs.

These include certain of the Company’s investments in  private equity limited partnerships, hedge funds
and real  estate partnerships where the  Company  is not related to the general partner. These
investments are generally accounted for  under the  equity method and reported in the Company’s
consolidated balance sheet as other investments unless the Company is deemed the primary beneficiary.

186

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENTS (Continued)

These equity interests generally cannot be  redeemed. Distributions from these investments are received
by the Company as a result of liquidation of the underlying investments of the funds and/or as income
distribution. The Company’s maximum  exposure to loss with respect to these investments is limited to
the investment carrying amounts reported in  the Company’s consolidated balance sheet and any
unfunded commitment. Neither the carrying amounts nor  the unfunded commitments  related to these
VIEs  are material.

Unrealized Investment Losses

The following tables summarize, for all investments  in an unrealized  loss position at  December 31,

2012 and 2011, the aggregate fair value  and gross unrealized loss by length  of time those securities
have been continuously in an unrealized loss  position.  The fair value amounts reported  in the tables are
estimates that are prepared using the process described in note 4. The Company also relies upon
estimates of several factors in its review and evaluation  of  individual investments, using  the process
described in note 1, in determining whether  such  investments are other-than-temporarily impaired.

(at December 31, 2012, in millions)

Fixed maturities
U.S. Treasury securities and obligations  of

U.S. government and government
agencies and authorities . . . . . . . . . . . .

Obligations of states, municipalities and

political subdivisions . . . . . . . . . . . . . . .

Debt securities issued by foreign

governments . . . . . . . . . . . . . . . . . . . . .

Mortgage-backed securities, collateralized
mortgage obligations and pass-through
securities . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . .

All other corporate bonds

Total fixed maturities . . . . . . . . . . . . . .

Equity securities
Common stock . . . . . . . . . . . . . . . . . . . . .
Non-redeemable preferred stock . . . . . . . .

Total equity securities . . . . . . . . . . . . . .

Less than 12 months

12 months or longer

Total

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses

$ 589

$ 1

$ —

$—

$ 589

$ 1

611

186

70
1,097

2,553

40
13

53

9

—

—
13

23

4
—

4

45

2

36
89

172

—
—

—

2

—

2
7

11

—
—

—

656

188

106
1,186

2,725

40
13

53

11

—

2
20

34

4
—

4

Total

. . . . . . . . . . . . . . . . . . . . . . . . . .

$2,606

$27

$172

$11

$2,778

$38

187

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENTS (Continued)

(at December 31, 2011, in millions)

Fixed maturities
U.S. Treasury securities and obligations  of

U.S. government and government
agencies and authorities . . . . . . . . . . . .

Obligations of states, municipalities and

political subdivisions . . . . . . . . . . . . . . .

Debt securities issued by foreign

governments . . . . . . . . . . . . . . . . . . . . .

Mortgage-backed securities, collateralized
mortgage obligations and pass-through
securities . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . .

All other corporate bonds

Total fixed maturities . . . . . . . . . . . . . .

Equity securities
Common stock . . . . . . . . . . . . . . . . . . . . .
Non-redeemable preferred stock . . . . . . . .

Total equity securities . . . . . . . . . . . . . .

Less than 12 months

12 months or longer

Total

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses

$ 356

$—

$ —

$—

$ 356

$—

27

96

362
1,295

2,136

64
37

101

—

1

12
42

55

3
1

4

191

2

155
105

453

—
7

7

5

—

10
19

34

—
—

—

218

98

517
1,400

2,589

64
44

108

5

1

22
61

89

3
1

4

Total

. . . . . . . . . . . . . . . . . . . . . . . . . .

$2,237

$59

$460

$34

$2,697

$93

The following table summarizes, for  all fixed maturities  and equity securities reported at  fair value

for which fair value is less than 80% of amortized  cost  at December 31, 2012, the gross unrealized
investment loss by length of time those securities have continuously  been in an unrealized loss position
of greater than 20% of amortized cost:

(in millions)

Fixed maturities:

Period For Which Fair Value Is Less Than 80% of Amortized  Cost

Greater Than Greater Than

3 Months,
6 Months
or Less

6 Months,
12 Months
or Less

3 Months
or Less

Greater Than
12 Months

Total

Mortgage-backed securities . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total fixed maturities . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$—
—

—
—

$—

$—
1

1
—

$ 1

$—
—

—
—

$—

$—
3

3
—

$ 3

$—
4

4
—

$ 4

188

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENTS (Continued)

These unrealized losses at December  31, 2012 represented  less than 1%  of  the combined fixed
maturity and equity security portfolios  on  a pretax basis and less than 1% of shareholders’ equity on an
after-tax basis.

Impairment Charges

Impairment charges included in net realized investment gains  in the consolidated statement of

income were as follows:

(for the year ended December 31, in millions)

2012

2011

2010

Fixed maturities

U.S. Treasury securities and obligations  of U.S. government and government

agencies and authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$— $— $—
Obligations of states, municipalities and  political subdivisions . . . . . . . . . . . . . . . . — — —
Debt securities issued by foreign governments . . . . . . . . . . . . . . . . . . . . . . . . . . . — — —
Mortgage-backed securities, collateralized mortgage obligations  and pass-through

4
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9
Redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — —

13
5

4
4

Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8

18

13

Equity securities

Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3
6
1 —

Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4

3

6

1

2
1

3

10

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$15

$25

$26

The following tables present a roll-forward of the credit component  of OTTI on fixed maturities

recognized in the consolidated statement  of  income  for which  a portion of  the OTTI was recognized in
other comprehensive income for the years ended  December 31,  2012 and  2011:

Year ended December  31,  2012
(in millions)

Losses

Where No

Recognized for Credit Losses
Securities Held,
Beginning of
Period

Were
Previously
Recognized

Where Credit
Losses Have
Been
Previously
Recognized

Due  to
Sales/Defaults
of  Credit-
Impaired
Securities

Cumulative
OTTI Credit OTTI Securities OTTI Securities Reductions

Additions  for

Additions for

Adjustments to
Book  Value
of Credit-
Impaired
Securities due
to Changes  in
Cash Flows

Cumulative  OTTI
Credit  Losses
Recognized  for
Securities  Still
Held, End of
Period

Fixed maturities
Mortgage-backed securities, collateralized
mortgage obligations and  pass-through
.
.
securities .
.

.
All other corporate  bonds

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.

.

.

.

.

.

Total fixed maturities .

.

.

.

.

.

.

.

.

.

.
.

.

.
.

.

.
.

.

$ 58
94

$152

$—
—

$—

$4
4

$8

$(1)
—

$(1)

$2
4

$6

$ 63
102

$165

189

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENTS (Continued)

Year ended December  31,  2011
(in millions)

Losses

Where No

Recognized for Credit Losses
Securities Held,
Beginning of
Period

Were
Previously
Recognized

Where Credit
Losses Have
Been
Previously
Recognized

Due  to
Sales/Defaults
of  Credit-
Impaired
Securities

Cumulative
OTTI Credit OTTI Securities OTTI Securities Reductions

Additions  for

Additions for

Adjustments to
Book  Value
of Credit-
Impaired
Securities due
to Changes  in
Cash Flows

Cumulative  OTTI
Credit  Losses
Recognized  for
Securities  Still
Held, End of
Period

Fixed maturities
Mortgage-backed securities, collateralized
mortgage obligations and  pass-through
.
.
securities .
.

.
All other corporate  bonds

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.

.

.

.

.

.

Total fixed maturities .

.

.

.

.

.

.

.

.

.

.
.

.

.
.

.

.
.

.

$ 47
88

$135

$—
2

$ 2

$12
2

$14

$—
(4)

$(4)

$(1)
6

$ 5

$ 58
94

$152

Concentrations and Credit Quality

Concentrations of credit risk arise from  exposure to counterparties that  are engaged in similar
activities and have similar economic characteristics that could  cause their  ability to meet  contractual
obligations to be similarly affected by  changes in economic or other conditions. The Company seeks to
mitigate credit risk by actively monitoring  the creditworthiness of counterparties, obtaining collateral  as
deemed appropriate, and applying controls that include credit approvals, limits of credit exposure, and
other monitoring procedures.

At December 31, 2012 and 2011, other than U.S.  Treasury securities and  obligations of U.S.

government and government agencies and  authorities, the Company was not exposed to any
concentration of credit risk of a single issuer greater than 5%  of shareholders’  equity of the Company.

Included in fixed maturities are below investment  grade assets totaling  $2.05 billion  and

$1.96 billion at December 31, 2012 and 2011, respectively. The  Company defines  its below investment
grade assets as those securities rated below investment  grade by external  rating  agencies, or  the
equivalent by the Company when a public rating  does not exist. Such assets include  publicly traded
below investment grade bonds and certain  other  privately issued bonds that are classified as below
investment grade loans.

Net Investment Income

(for the year ended December 31, in millions)

2012

2011

2010

Gross investment income
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gross investment income . . . . . . . . . . . . . . . . . . . . . . .
Investment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,439
28
10
34
414

2,925
36

$2,543
29
12
34
292

2,910
31

$2,710
31
13
35
304

3,093
34

Net investment income . . . . . . . . . . . . . . . . . . . . . . . .

$2,889

$2,879

$3,059

190

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENTS (Continued)

Changes in net unrealized gains on investment  securities that are included as a separate

component of other comprehensive income  were as follows:

(at and for the year ended December 31, in millions)

2012

2011

2010

Changes in net unrealized investment gains
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Related tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Change in net unrealized gain on investment securities .
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . .

$ 326
38
(2)

$1,588
(2)
(14)

$ 114
69
(178)

362
130

232
2,871

1,572
560

1,012
1,859

5
2

3
1,856

Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,103

$2,871

$1,859

Derivative Financial Instruments

The Company uses U.S. Treasury note futures  transactions to modify the effective  duration of
specific  assets within the investment  portfolio  and enters into 90-day  futures contracts on  2-year, 5-year,
10-year and 30-year U.S. Treasury notes  which require a daily mark-to-market and settlement with the
broker. The notional value of the open  U.S. Treasury futures contracts was $800 million and
$900 million at December 31, 2012 and  2011, respectively. Net realized investment gains in 2012,  2011
and 2010 included net losses of $14 million, $62 million and $30  million,  respectively, related to U.S.
Treasury futures contracts.

In 2010, the Company recorded a net realized investment gain of $5 million related to its holdings

of six million stock purchase warrants of  Platinum Underwriters Holdings, Ltd., a  publicly-held
company. These warrants were not designated  and did not qualify for hedge  accounting, and,  as such,
the mark-to-market changes in fair value were reflected in net  realized investment gains. In October
2010, the Company sold these stock purchase warrants for proceeds that approximated their carrying
value at the date of sale.

The Company purchases investments  that have  embedded derivatives, primarily convertible debt
securities. These embedded derivatives are carried at fair value with changes in  value reflected in net
realized investment gains. Derivatives  embedded in  convertible debt securities are  reported on a
combined basis with their host instrument  and are classified  as fixed maturity securities. The Company
recorded  net realized investment losses  of less than $1 million  in 2012, and $2  million and $1  million in
2011 and 2010, respectively, related to these  embedded  derivatives.

4. FAIR VALUE MEASUREMENTS

The Company’s estimates of fair value for financial assets  and financial  liabilities are based on  the

framework established in the fair value accounting  guidance. The  framework is based on the inputs
used in valuation, gives the highest priority to quoted  prices in active markets and  requires that
observable inputs be used in the valuations  when available. The disclosure of  fair value  estimates in the
fair value accounting guidance hierarchy  is based on  whether  the  significant inputs into the  valuation

191

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. FAIR VALUE MEASUREMENTS  (Continued)

are observable. In determining the level  of the hierarchy  in which the estimate is disclosed, the highest
priority is given to unadjusted quoted  prices  in  active markets and the lowest priority to unobservable
inputs that reflect the Company’s significant market assumptions. The level in the  fair value hierarchy
within which the fair value measurement is reported is based on the lowest level input that is significant
to the measurement in its entirety. The  three levels of  the hierarchy are  as follows:

(cid:127) Level 1—Unadjusted quoted market  prices for identical assets or liabilities in  active  markets  that

the Company has the ability to access.

(cid:127) Level 2—Quoted prices for similar assets or  liabilities in  active markets; quoted prices for

identical or similar assets or liabilities  in inactive  markets; or  valuations  based on models  where
the significant inputs are observable (e.g.,  interest rates, yield curves, prepayment speeds, default
rates, loss severities, etc.) or can be corroborated  by observable market data.

(cid:127) Level 3—Valuations based on models where significant  inputs are not observable. The

unobservable inputs reflect the Company’s own  assumptions about the inputs that market
participants would use.

Valuation of Investments Reported at Fair  Value  in Financial Statements

The fair value of a financial instrument  is the estimated amount at which the instrument could be

exchanged in an orderly transaction between knowledgeable,  unrelated, willing parties, i.e., not in a
forced transaction. The estimated fair  value of a financial instrument may differ from  the amount that
could be realized if the security was sold in an immediate sale, e.g., a forced transaction. Additionally,
the valuation of investments is more  subjective when markets are less liquid due to the lack  of market
based inputs, which may increase the  potential  that the  estimated fair value  of an investment is not
reflective of the price at which an actual transaction would occur.

For investments that have quoted market prices in active markets, the Company uses the
unadjusted quoted market prices as fair value and includes these prices in the amounts disclosed in
Level 1 of the hierarchy. The Company  receives the quoted market prices from  a third party, nationally
recognized pricing service (pricing service). When quoted market prices are unavailable, the Company
utilizes a pricing service to determine  an  estimate of fair value, which is mainly used for its  fixed
maturity investments. The fair value estimates provided from this pricing service are  included in the
amount disclosed in Level 2 of the hierarchy.  If quoted market prices  and an estimate from a  pricing
service are unavailable, the Company produces an estimate of fair value based on internally developed
valuation techniques, which, depending  on the  level of observable market inputs, will render the fair
value estimate as Level 2 or Level 3. The Company bases all of its estimates of fair value for assets on
the bid price as it represents what a third-party market participant would be willing to pay in an arm’s
length transaction.

Fixed Maturities

The Company utilizes a pricing service to estimate fair value measurements  for approximately 98%

of its fixed maturities. The pricing service  utilizes market quotations for fixed maturity securities that
have quoted prices in active markets.  Since fixed maturities other than U.S. Treasury securities
generally do not trade on a daily basis, the pricing service prepares estimates of fair value
measurements for these securities using  its proprietary  pricing applications, which include available

192

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. FAIR VALUE MEASUREMENTS  (Continued)

relevant market information, benchmark curves, benchmarking of like securities, sector groupings and
matrix pricing. Additionally, the pricing  service uses  an Option  Adjusted Spread model to develop
prepayment and interest rate scenarios.

The pricing service evaluates each asset class based on relevant  market  information, relevant credit

information, perceived market movements  and sector news. The market inputs utilized in the pricing
evaluation, listed in the approximate order of  priority, include: benchmark yields, reported trades,
broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids,  offers, reference
data, and industry and economic events. The  extent of  the use of each market input depends on the
asset class and the market conditions. Depending  on  the security, the priority of  the use of  inputs  may
change or some market inputs may not  be relevant. For  some securities, additional inputs may be
necessary.

The pricing service utilized by the Company has indicated that they will only produce an estimate
of fair value if there is objectively verifiable information to produce a valuation. If the pricing service
discontinues pricing an investment, the  Company would be required to produce an estimate of fair
value using some of the same methodologies as the  pricing service but would have to make
assumptions for market-based inputs that  are unavailable due to market conditions.

The fair value estimates of most fixed maturity investments are based on observable market

information rather than market quotes. Accordingly,  the estimates of fair value for such fixed
maturities, other than U.S. Treasury securities, provided  by the pricing service are  included in the
amount disclosed in Level 2 of the hierarchy.  The  estimated fair value of U.S.  Treasury securities is
included in the amount disclosed in Level 1 as the estimates  are based on unadjusted  market prices.

The Company also holds certain fixed maturity investments which are not priced  by  the pricing
service and, accordingly, estimates the  fair  value of such fixed maturities using an internal matrix  that  is
based on market information regarding  interest rates,  credit spreads and liquidity. The underlying
source data for calculating the matrix of  credit spreads  relative  to  the U.S.  Treasury curve are the BofA
Merrill Lynch U.S. Corporate Index and  the BofA  Merrill Lynch High Yield BB Rated Index. The
Company includes  the fair value estimates of these corporate bonds in Level 2, since all significant
inputs are market observable.

While the vast majority of the Company’s municipal bonds and corporate bonds are included in
Level 2, the Company holds a number  of municipal bonds and corporate  bonds which are  not  valued
by the pricing service and estimates the  fair value  of  these bonds using an internal pricing matrix with
some unobservable inputs that are significant to the valuation. Due to the limited  amount  of observable
market information, the Company includes  the fair value estimates for these particular bonds in
Level 3. The fair value of the fixed maturities for which the  Company used an internal pricing matrix
was $102 million and $88 million at December 31, 2012 and 2011,  respectively. Additionally, the
Company holds a small amount of other  fixed maturity  investments that have  characteristics  that  make
them unsuitable for matrix pricing. For these  fixed  maturities,  the Company obtains a quote  from a
broker (primarily the market maker). The  fair value of the fixed maturities for which  the Company
received a broker quote was $128 million  and $162 million at  December 31,  2012 and 2011,
respectively. Due to the disclaimers on the quotes  that indicate that  the price is  indicative only, the
Company includes  these fair value estimates  in  Level  3.

193

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. FAIR VALUE MEASUREMENTS  (Continued)

Equities—Public Common and Preferred

For public common and preferred stocks,  the Company  receives prices from a nationally

recognized pricing service that are based on observable market transactions and includes  these
estimates in the amount disclosed in  Level 1. Infrequently, current market quotes in active markets are
unavailable for certain non-redeemable  preferred stocks held by the Company. In  these instances, the
Company receives an estimate of fair value  from the pricing service that provides fair  value estimates
for the Company’s fixed maturities. The service utilizes some of the same methodologies to price  the
non-redeemable preferred stocks as it  does for the fixed maturities. The Company includes the  fair
value estimate for these non-redeemable preferred  stocks  in  the amount disclosed in Level 2.

Other Investments

The Company holds investments in various publicly-traded securities which are reported in other

investments. These investments include securities in the  Company’s trading portfolio, mutual funds and
other small holdings. The $46 million and $42  million fair  value of these investments at December 31,
2012 and 2011, respectively, was disclosed in Level 1.  At December 31,  2012 and 2011, the Company
held investments in non-public common  and preferred equity securities, with fair  value estimates of
$54 million and $44 million, respectively,  reported in  other  investments, where  the fair value estimate  is
determined either internally or by an  external fund manager based on recent filings, operating results,
balance sheet stability, growth and other business and market sector fundamentals. Due to the
significant unobservable inputs in these valuations, the Company includes the total  fair value estimate
for all of these investments at December 31, 2012  and  2011  in the amount disclosed in Level  3.

Derivatives

At December 31, 2012 and 2011, the  Company held $21  million  and  $22 million, respectively, of
convertible bonds containing embedded  conversion options that are valued  separately from the host
bond contract in the amount disclosed in  Level  2—fixed  maturities.

Fair  Value Hierarchy

The following tables present the level  within  the fair value hierarchy  at which  the Company’s

financial assets and financial liabilities are measured  on a  recurring basis at December 31, 2012 and
2011. An investment transferred between  levels during  a period  is transferred at its fair value as of the
beginning of that period.

194

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. FAIR VALUE MEASUREMENTS  (Continued)

(at December 31, 2012, in millions)

Total

Level 1

Level 2

Level 3

Invested assets:
Fixed maturities

U.S. Treasury securities and obligations of U.S.

government and government agencies and authorities . . $ 2,222 $2,205 $

17

$ —

Obligations of states, municipalities and political

subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities issued by foreign governments . . . . . . . . .
Mortgage-backed securities, collateralized mortgage

obligations and pass-through securities . . . . . . . . . . . . .
All other corporate bonds . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . .

38,681
2,257

2,997
19,203
33

— 38,653
— 2,257

— 2,992
— 19,006
1
32

Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . .

65,393

2,237

62,926

Equity securities
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-redeemable preferred stock . . . . . . . . . . . . . . . . . . . . .

Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . .

Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

510
135

645

100

510
92

602

46

—
43

43

—

28
—

5
197
—

230

—
—

—

54

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $66,138 $2,885 $62,969

$284

The Company did not have any material transfers  between Levels 1  and 2 during the year ended

December 31, 2012.

195

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. FAIR VALUE MEASUREMENTS  (Continued)

(at December 31, 2011, in millions)

Total

Level 1

Level 2

Level 3

Invested assets:
Fixed maturities

U.S. Treasury securities and obligations of U.S.

government and government agencies and authorities . . $ 2,497 $2,465 $

32

$ —

Obligations of states, municipalities and political

subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities issued by foreign governments . . . . . . . . .
Mortgage-backed securities, collateralized mortgage

obligations and pass-through securities . . . . . . . . . . . . .
All other corporate bonds . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . .

39,022
2,318

3,515
16,850
30

— 39,002
— 2,318

— 3,514
— 16,621
1
29

Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . .

64,232

2,494

61,488

Equity securities
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-redeemable preferred stock . . . . . . . . . . . . . . . . . . . . .

Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . .

Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

428
131

559

86

428
96

524

42

—
35

35

—

20
—

1
229
—

250

—
—

—

44

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $64,877 $3,060 $61,523

$294

The Company did not have any material transfers  between Levels 1  and 2 during the year ended

December 31, 2011.

The following tables present the changes in the  Level  3 fair value category for  the years ended

December 31, 2012 and 2011.

196

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. FAIR VALUE MEASUREMENTS  (Continued)

(in millions)

Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total realized and unrealized investment  gains (losses):

Reported in net realized investment gains(1) . . . . . . . . . . . . . . . . . . .
Reported in increases (decreases) in other comprehensive income . . . .

Purchases, sales and settlements/maturities:

Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements/maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross transfers into Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross transfers out of Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fixed
Maturities

Other
Investments

$250

$44

Total

$294

4
5

79
—
(94)
10
(24)

5
2

3
—
—
—
—

9
7

82
—
(94)
10
(24)

Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$230

$54

$284

Amount of total realized investment gains  (losses) for the period

included in the consolidated statement of income attributable to
changes in the fair value of assets still  held  at the reporting date . . . . .

$ —

$—

$ —

(1) Includes impairments on investments  held  at the end  of the  period  as well as  amortization  on fixed

maturities.

(in millions)

Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total realized and unrealized investment  gains (losses):

Reported in net realized investment gains(1) . . . . . . . . . . . . . . . . . . .
Reported in increases (decreases) in other comprehensive income . . . .

Purchases, sales and settlements/maturities:

Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements/maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross transfers into Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross transfers out of Level 3(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fixed
Maturities

Other
Investments

$230

$ 57

Total

$287

1
—

154
(15)
(43)
19
(96)

38
(9)

5
(47)
—
—
—

39
(9)

159
(62)
(43)
19
(96)

Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$250

$ 44

$294

Amount of total realized investment gains  (losses) for  the period

included in the consolidated statement of  income  attributable to
changes in the fair value of assets still  held at  the reporting date . . . . .

$ —

$ —

$ —

(1) Includes impairments on investments  held  at the end  of the  period  as well as  amortization  on fixed

maturities.

(2) During the year ended December 31,  2011, approximately  $81 million  of  municipal fixed maturity
securities were valued using observable market data which resulted  in a transfer out of Level 3
into Level 2. In prior periods, these securities  were valued  internally using  unobservable inputs.

197

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. FAIR VALUE MEASUREMENTS  (Continued)

The Company had no material assets or liabilities  that were measured at fair value on  a

non-recurring basis during the years ended December  31, 2012 and 2011.

Financial Instruments Disclosed, But Not  Carried, At Fair  Value

The Company uses various financial instruments  in the normal course of its business. The
Company’s insurance contracts are excluded from fair  value of financial  instruments accounting
guidance and, therefore, are not included  in the amounts  discussed below. The following tables present
the carrying value and fair value of the Company’s financial assets and financial  liabilities disclosed, but
not carried, at fair value at December  31, 2012 and 2011,  and the level within the  fair value hierarchy
at which such assets and liabilities are  measured on a recurring  basis.

(at December 31, 2012, in millions)

Financial assets:
Short-term securities . . . . . . . . . . . . . .

Financial liabilities:
Debt . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . .

(at December 31, 2011, in millions)

Financial assets:
Short-term securities . . . . . . . . . . . . . .

Financial liabilities:
Debt . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . .

Carrying
Value

Fair
Value

Level 1

Level  2

Level 3

$3,483

$3,483

$1,448

$1,957

$78

$6,250
$ 100

$7,715
$ 100

$ — $7,715
— $ 100

$—
—

Carrying
Value

Fair
Value

Level 1

Level  2

Level 3

$3,594

$3,594

$2,472

$1,029

$93

$6,505
$ 100

$7,583
$ 100

$ — $7,583
— $ 100

$—
—

The Company utilized a pricing service to estimate fair value for approximately 95% and 94% of

short-term securities at December 31,  2012 and  2011, respectively. A description of the process and
inputs used by the pricing service to estimate fair value is discussed in  the ‘‘Fixed Maturities’’ section
above. Estimates of fair value for U.S.  Treasury  securities  and  money  market funds are based on
market quotations received from the pricing service and are disclosed in Level 1 of the hierarchy.  The
fair value of other short-term fixed maturity securities is estimated by the pricing service using
observable market inputs and is disclosed  in Level 2 of  the hierarchy.  For short-term securities where
an estimate is not obtained from the pricing service,  the carrying  value approximates fair value and is
included in Level 3 of the hierarchy.

The Company utilized a pricing service to estimate fair value for 100% of  its debt, including
commercial paper, at both December  31, 2012 and 2011. The pricing service utilizes market quotations
for debt that have quoted prices in active  markets. Since fixed maturities other  than U.S. Treasury
securities generally do not trade on a  daily basis, the fair value estimates are based on market
observable inputs and disclosed at Level 2 in the hierarchy.  For  the small amount of the  Company’s
debt securities for which a pricing service is not used, the  Company utilizes pricing estimates from a
nationally recognized broker/dealer to estimate  fair  value. If estimates of fair value are unavailable
from the pricing service or the broker/dealer, the  Company produces  an estimate of fair value  based on

198

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. FAIR VALUE MEASUREMENTS  (Continued)

internally developed valuation techniques  which are based  on a discounted cash flow methodology and
incorporates all available relevant observable market inputs. Estimates  of  fair value developed internally
and from broker quotes are disclosed in  Level  3 of the hierarchy.

5. REINSURANCE

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

The Company utilizes general catastrophe reinsurance treaties with unaffiliated reinsurers to
manage its exposure to losses resulting  from catastrophes.  In addition  to  the coverage provided  under
these treaties, the Company also utilizes  a catastrophe bond program and  a Northeast catastrophe
reinsurance treaty to protect against losses resulting from catastrophes in the Northeastern United
States. The Company also utilizes an excess-of-loss  treaty in its National Property business unit of the
Business Insurance segment to protect  against  earthquake  losses  up to a certain threshold.

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

Included  in  reinsurance  recoverables  are  amounts  related  to  involuntary  reinsurance  arrangements.

The Company is required to participate in various involuntary reinsurance arrangements through
assumed reinsurance, principally with regard to residual market mechanisms in workers’ compensation
and automobile insurance, as well as homeowners’ insurance in certain coastal areas.  In addition, the
Company provides services for several of these  involuntary arrangements (‘‘mandatory pools and
associations’’) under which it writes such residual market business directly, then cedes  100% of this
business to the mandatory pool. Such participations and servicing arrangements are arranged to
mitigate credit risk to the Company,  as any ceded  balances are jointly backed by all the pool members.

Also  included  in  reinsurance  recoverables  are  amounts  related  to  structured  settlements.

Structured settlements are annuities purchased from various life insurance companies to settle certain
personal physical injury claims, of which workers’ compensation claims comprise a significant portion.
In cases  where the Company did not receive a release from  the claimant, the structured settlement is
included in reinsurance recoverables  as the Company retains the contingent liability to the claimant. In
the event that the life insurance company fails to make the required annuity  payments, the  Company
would be required to make such payments  if and to the extent not paid by state guaranty associations.

199

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. REINSURANCE (Continued)

The following is a summary of reinsurance financial data reflected in  the consolidated statement of

income:

(for the year ended December 31, in millions)

2012

2011

2010

Written premiums
Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$23,614
695
(1,862)

$23,220
667
(1,700)

$22,634
668
(1,667)

Total net written premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$22,447

$22,187

$21,635

Earned premiums
Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$23,509
691
(1,843)

$23,146
641
(1,697)

$22,533
664
(1,765)

Total net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$22,357

$22,090

$21,432

Percentage of assumed earned premiums to net  earned premiums . . . .

3.1%

2.9%

3.1%

Ceded claims and claim adjustment  expenses incurred . . . . . . . . . . . .

$ 1,357

$

737

$

404

Ceded premiums included the premiums paid to Longpoint  Re Ltd., Longpoint  Re II  Ltd. and

Long Point Re III Ltd. for coverage under the Company’s catastrophe bond programs.

Reinsurance recoverables include amounts  recoverable on  both paid  and  unpaid claims and were

as follows:

(at December 31, in millions)

2012

2011

Gross reinsurance recoverables on paid and unpaid claims and claim adjustment

expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for uncollectible reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,256
(258)

$ 6,255
(345)

Net reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mandatory pools and associations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Structured settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,998
2,549
3,165

5,910
2,020
3,225

Total  reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$10,712

$11,155

Terrorism Risk Insurance Program

The Terrorism Risk Insurance Program  (the  Program)  is a Federal program administered by the
Department of the Treasury that provides  for a system  of  shared public  and private compensation for
certain insured losses resulting from  acts of terrorism or war committed by or on  behalf of a foreign
interest. The Program has been authorized through 2014.

In order for a loss to be covered under  the Program (subject losses), the loss must meet certain

aggregate industry loss minimums and must be the result  of an event that  is certified as an act of
terrorism by the U.S. Secretary of the Treasury,  in concurrence with the  Secretary of State and the
Attorney General of the United States.  The annual aggregate industry loss minimum  is $100 million

200

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. REINSURANCE (Continued)

through 2014. The Program excludes  from participation the  following  types of insurance: Federal crop
insurance, private mortgage insurance,  financial guaranty  insurance, medical malpractice  insurance,
health or life insurance, flood insurance, reinsurance,  commercial automobile, professional liability
(other than directors and officers’), surety,  burglary  and theft, and farm-owners  multi-peril.  In the case
of a war declared by Congress, only workers’ compensation losses are covered by the Program.  All
commercial property and casualty insurers licensed in the United States are generally required  to
participate in the Program. Under the Program, a participating insurer is entitled to be reimbursed by
the Federal Government for 85% of subject losses, after an insurer  deductible, subject to an annual
cap.

The deductible for any calendar year  is equal to 20%  of  the insurer’s direct earned  premiums for
covered lines for the preceding calendar  year. The Company’s estimated deductible under the Program
is $2.26 billion for 2013. The annual cap  limits the amount of aggregate subject  losses for all
participating insurers to $100 billion. Once subject  losses have reached the $100 billion aggregate
during a program year, participating insurers will not be liable  under the Program for  additional
covered terrorism losses for that program year. The  Company has had no terrorism-related losses since
the Program was established. Since the  law is untested, there is substantial uncertainty as to how it will
be applied to specific circumstances. It is also possible  that future  legislative action could change the
Program. Further, given the unpredictable  frequency  and  severity of terrorism  losses, as well as the
limited terrorism coverage in the Company’s own  reinsurance program, future losses from  acts of
terrorism, particularly involving nuclear, biological, chemical or radiological  events, could be material to
the Company’s operating results, financial position and/or liquidity in  future periods. While the
Company seeks to manage its exposure  to  man-made catastrophic events involving conventional means,
there can be no assurance that the Company  would have  sufficient resources to respond to claims
arising out of one or more man-made  catastrophic events involving  nuclear, biological, chemical or
radiological means.

6. GOODWILL AND OTHER INTANGIBLE  ASSETS

Goodwill

The following table presents the carrying amount of the  Company’s goodwill  by  segment at

December 31, 2012 and 2011:

(in millions)

2012

2011

Business Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial, Professional & International Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . .
Personal Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,168
557
613
27

$2,168
557
613
27

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,365

$3,365

201

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. GOODWILL AND OTHER INTANGIBLE  ASSETS  (Continued)

Other Intangible Assets

The following presents a summary of the Company’s  other  intangible assets by major  asset class at

December 31, 2012 and 2011:

(at December 31, 2012, in millions)

Intangibles subject to amortization
Customer-related(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value adjustment on claims and  claim adjustment expense  reserves

and reinsurance recoverables(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total intangible assets subject to amortization . . . . . . . . . . . . . . . . . . .
Intangible assets not subject to amortization . . . . . . . . . . . . . . . . . . . . .

Gross
Carrying
Amount

Accumulated
Amortization

Net

$455

$383

$ 72

191

646
216

98

481
—

93

165
216

Total other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$862

$481

$381

(at December 31, 2011, in millions)

Intangibles subject to amortization
Customer-related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value adjustment on claims and  claim adjustment expense  reserves

and reinsurance recoverables(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total intangible assets subject to amortization . . . . . . . . . . . . . . . . . . .
Intangible assets not subject to amortization . . . . . . . . . . . . . . . . . . . . .

Gross
Carrying
Amount

Accumulated
Amortization

Net

$ 935

$830

$105

191

1,126
216

79

909
—

112

217
216

Total other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,342

$909

$433

(1) Certain intangible assets related to renewal rights became fully  amortized during the first quarter

of 2012.

(2) The fair value adjustment of $191 million was recorded in  connection with  the merger of The
St. Paul Companies, Inc. and Travelers Property Casualty Corp. in 2004  and was based on
management’s estimate of nominal claims  and claim adjustment expense reserves and reinsurance
recoverables. The method used calculated  a risk adjustment to a risk-free  discounted reserve that
would, if reserves ran off as expected, produce results that yielded  the assumed cost-of-capital on
the capital supporting the loss reserves. The fair value  adjustment is reported as an other
intangible asset on the consolidated balance  sheet,  and the amounts measured in accordance with
the acquirer’s accounting policies for  insurance contracts have been  reported as part of the claims
and claim adjustment expense reserves and reinsurance recoverables. The intangible asset  is being
recognized into income over the expected payment pattern. Because the  time value of money and
the risk adjustment (cost of capital) components  of the intangible asset run off  at different rates,
the amount recognized in income may be a net benefit in some periods and a net expense in other
periods.

202

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. GOODWILL AND OTHER INTANGIBLE  ASSETS  (Continued)

The following presents a summary of the Company’s  amortization expense for other intangible

assets by major asset class:

(for the year ended December 31, in millions)

Customer-related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value adjustment on claims and  claim  adjustment expense  reserves and

2012

2011

2010

$33

$47

$61

reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19

22

25

Total amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$52

$69

$86

Intangible asset amortization expense is estimated to be $45 million in 2013, $43 million in 2014,

$23 million in 2015, $9 million in 2016  and $8 million in  2017.

7. INSURANCE CLAIM RESERVES

Claims and claim adjustment expense  reserves were  as follows:

(at December 31, in millions)

2012

2011

Property-casualty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accident and health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$50,888
34

$51,353
39

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$50,922

$51,392

203

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. INSURANCE CLAIM RESERVES  (Continued)

The following table presents a reconciliation of beginning  and  ending property casualty reserve

balances for claims and claim adjustment expenses:

(at and for the year ended December 31, in millions)

2012

2011

2010

Claims and claim adjustment expense  reserves at beginning of year . . . . .
Less reinsurance recoverables on unpaid losses . . . . . . . . . . . . . . . . . . .

$51,353
10,434

$51,537
11,282

$53,529
12,588

Net reserves at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . .

40,919

40,255

40,941

Estimated claims and claim adjustment  expenses for claims arising  in the
current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Estimated decrease in claims and claim  adjustment expenses for claims

15,559

16,937

14,452

arising in prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1,074)

(842)

(1,417)

Total increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,485

16,095

13,035

Claims and claim adjustment expense  payments for claims  arising in:

Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,507
8,326

7,751
7,653

5,949
7,748

Total payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,833

15,404

13,697

Unrealized foreign exchange (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . .

63

(27)

(24)

Net reserves at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus reinsurance recoverables on unpaid losses . . . . . . . . . . . . . . . . . . . .

40,634
10,254

40,919
10,434

40,255
11,282

Claims and claim adjustment expense  reserves at end of year . . . . . . . . .

$50,888

$51,353

$51,537

Gross claims and claim adjustment expense reserves at  December 31, 2012 and  2011 decreased by
$465 million and $184 million from the  respective prior year-end, primarily reflecting the impact of net
favorable prior year reserve development as  well as  payments related to operations in  runoff, including
asbestos and environmental claims, partially offset by the increase in  loss cost  trends. Additionally, the
decrease in reserves at December 31,  2011 from the  prior year-end was partially offset by the impact of
significant catastrophe losses incurred  in  2011.

The $180 million and $848 million decline  in reinsurance recoverables at December 31,  2012 and

2011, respectively, compared with the respective prior year-end  reflected  cash collections,  including
commutation agreements, and the impact  of net favorable prior year reserve development.

Prior Year Reserve Development

The following disclosures regarding reserve development are on a  ‘‘net  of reinsurance’’ basis.

2012.

In 2012, estimated claims and claim adjustment expenses incurred included $1.07 billion  of net
favorable development for claims arising  in  prior years, including $940  million  of  net favorable prior
year reserve development impacting the Company’s results of operations  and $48 million of accretion
of discount.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. INSURANCE CLAIM RESERVES  (Continued)

Business  Insurance. Net favorable prior year reserve development  of  $467 million in 2012 was
concentrated in the general liability product line for  accident years 2010 and prior (excluding increases
to asbestos and environmental reserves discussed below),  which reflected what the  Company believes
are more favorable legal and judicial  environments than what the Company  previously  expected;  the
commercial property product line primarily for accident  years  2009 through 2011,  driven by higher  than
expected subrogation and salvage recoveries and by  favorable  loss development related to catastrophe
losses incurred in 2011; and the workers’ compensation product line, primarily driven  by  better  than
expected frequency and severity related to lifetime  medical  claims for accident years 2008 and prior.
Lower than expected claim department expenses also contributed to net  favorable prior  year reserve
development in 2012. These factors were partially offset by  $167 million and  $90 million increases to
asbestos and environmental reserves, respectively, which are discussed  in further detail in the  ‘‘Asbestos
and  Environmental Reserves’’ section below, net unfavorable prior  year reserve development  in the
commercial automobile line of business, driven by higher than expected severity in the bodily  injury
coverage primarily for accident years 2010  and 2011, and net unfavorable prior year reserve
development in the general liability product line for  the 2011 accident  year resulting from higher  than
expected claim frequency.

Financial, Professional & International Insurance. Net favorable prior year reserve development in
2012 was $298 million. In Bond & Financial  Products,  net favorable prior  year reserve development  in
2012 reflected better than expected results in the surety product line primarily for  the contract surety
business for accident years 2008 and prior, and better  than expected results for management liability
business primarily for the errors & omissions and fiduciary products for accident  years  2007 and prior.
In International, net favorable prior  year  reserve development in 2012  occurred in several  lines of
business in Canada and in the Company’s operations at Lloyd’s, partially  offset by an  $8 million
increase to asbestos reserves.

Personal Insurance. Net favorable prior year reserve development  of  $175 million in 2012 was
primarily  driven by better than expected  loss development in  the Homeowners and  Other  product line
related to catastrophe losses incurred  for 2011 and non-catastrophe losses incurred for  accident years
2010 and 2011, as well as favorable loss  development in the umbrella  line  of business for  accident years
2007 through 2011. These factors were partially offset  by unfavorable prior year reserve development in
the personal automobile line of business,  driven primarily  by higher than expected bodily injury severity
for accident year 2011.

2011.

In 2011, estimated claims and claim adjustment expenses incurred included $842 million of net
favorable development for claims arising in  prior years, including $715  million  of  net favorable prior
year reserve development impacting the Company’s results of operations  and $45 million of accretion
of discount. Overall, accident years prior to and  including  2009 experienced $1.10 billion of net
favorable reserve development, while the 2010  accident year  experienced  $383  million  of  net
unfavorable reserve development.

Business Insurance. Net favorable prior year reserve development  in 2011 was $245  million,

primarily  driven by better than expected  loss development in  the general  liability  product line
(excluding increases to asbestos and environmental reserves discussed below)  which was concentrated in
excess coverages for accident  years 2005 through 2008 and reflected what the Company  believes are

205

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. INSURANCE CLAIM RESERVES  (Continued)

more favorable legal and judicial environments than what the Company previously expected, as well  as
net favorable prior year reserve development in the commercial property product line that reflected
better than expected loss development for  the 2008 and 2009 accident years. The workers’
compensation line of business also contributed slightly to net favorable prior year reserve  development
in 2011, as favorable loss development for  accident years 2003 through 2009 was largely  offset by net
unfavorable loss development for the 2010 accident year. These factors were partially offset  by
$175 million and $76 million increases to asbestos and environmental reserves in 2011, respectively
(discussed in further detail in the ‘‘Asbestos and  Environmental Reserves’’  section  below), unfavorable
prior year reserve  development in the commercial multi-peril product  line driven by late reporting of
hail claims incurred in 2010 and unfavorable  prior  year reserve development in the commercial
automobile product line that reflected worse  than expected severity for accident years 2009 and 2010.

Financial, Professional & International Insurance. Net favorable prior year reserve development in

2011 was $360 million. In Bond & Financial  Products,  net favorable development in 2011 primarily
reflected better than expected results  for accident years 2008 and prior for the  contract surety business,
and better than expected loss development for liability lines of business, driven by the fiduciary product
for accident years 2008 and prior. In International, net favorable development in 2011  reflected  better
than expected loss development in Canada, primarily in the surety, directors and  officers, and  general
liability lines of business for recent accident years and better than expected development in  the
Company’s operation at Lloyd’s in the aviation, kidnap  & ransom, and property lines for recent
accident years.

Personal Insurance. Net favorable prior year reserve development  in 2011 was $110  million, driven
by better than expected loss development related to catastrophe losses incurred  in the first half of 2010,
as well as better than expected loss development  for accident years 2006  through 2010 in  the umbrella
line  of business in  the Homeowners and  Other  product line,  partially offset by unfavorable prior  year
reserve development in the Automobile product line that was driven by worse than expected loss
experience for accident years 2007 through 2010.

2010.

In 2010, estimated claims and claim adjustment expenses incurred included $1.42 billion  of net
favorable development for claims arising in  prior years, including $1.25  billion of net  favorable prior
year reserve development impacting the Company’s results of operations  and $45 million of accretion
of discount.

Business Insurance. Net favorable prior year reserve development  in 2010 totaled $901 million,
driven by better than expected loss development in the  commercial property, general liability (excluding
increases to asbestos and environmental reserves discussed below) and workers’  compensation product
lines for multiple accident years, as well  as in assumed  reinsurance, which  is in  runoff. The  commercial
property product line improvement primarily occurred in the  2008 and  2009 accident  years  as a result
of better than expected loss development  in Industry-Focused Underwriting and Target Risk
Underwriting. The general liability product line improvement was concentrated  in excess coverages for
accident years 2006 and prior and reflected  what the Company  believes  are more favorable  legal and
judicial environments than what the Company previously expected. Net  favorable prior  year  reserve
development in the workers’ compensation product line was  concentrated  in accident years 2007 and
prior and resulted from better than expected loss development. The improvement in assumed

206

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. INSURANCE CLAIM RESERVES  (Continued)

reinsurance resulted primarily from favorable  resolutions of claims and disputes from accident  years
2002 and prior. In addition, better than  expected loss development in  the Business  Insurance  segment
in recent years resulted in a favorable  re-estimation of reserves for unallocated loss adjustment
expenses in 2010. The net favorable prior year  reserve development in these product  lines in 2010 was
partially offset by $140 million and $35  million increases to asbestos  and environmental reserves,
respectively.

Financial, Professional & International Insurance. Net favorable prior year reserve development

totaled $259 million in 2010. In Bond  &  Financial Products, net  favorable prior year  reserve
development in 2010 was driven by better than  expected loss development  in the surety and
management liability lines of business due  to  lower than expected claim activity and loss severity in  the
2008 and prior accident years. In International, the majority of net  favorable prior year  reserve
development in 2010 occurred at the  Company’s operation at Lloyd’s,  in Canada and  in the United
Kingdom.

Personal Insurance. Net favorable prior year reserve development  of  $87 million in 2010 was

concentrated in the Homeowners and  Other product line, primarily driven by favorable loss
development in the 2008 and prior accident  years,  primarily for the  umbrella line  of business, partially
offset by unfavorable loss development  in the 2009  accident year  for the homeowners line  of business
that was driven by higher than anticipated late-reported claims related to storms in  2009.

Asbestos and Environmental Reserves

At December 31, 2012 and 2011, the  Company’s claims  and claim adjustment expense  reserves
included $2.73 billion and $2.78 billion, respectively, for  asbestos and environmental-related claims, net
of reinsurance.

It is difficult to estimate the reserves for  asbestos and  environmental-related claims  due  to  the

vagaries of court coverage decisions,  plaintiffs’ expanded theories  of liability, the risks inherent in
complex litigation and other uncertainties, including, without limitation, those which  are set forth
below.

Asbestos Reserves. Because each policyholder presents different liability and coverage issues, the
Company generally reviews the exposure presented by each  policyholder at  least annually. Among the
factors which the Company may consider  in the course  of  this review  are: available insurance coverage,
including the role of any umbrella or excess insurance the Company  has issued to the policyholder;
limits and deductibles; an analysis of the policyholder’s  potential  liability; the  jurisdictions involved;  past
and  anticipated future claim activity and loss  development  on  pending  claims; past settlement values of
similar claims; allocated claim adjustment expense; potential role of other  insurance;  the role, if any, of
non-asbestos claims or potential non-asbestos claims in any resolution process; and applicable coverage
defenses or determinations, if any, including  the determination as to whether or  not  an asbestos claim
is a products/completed operation claim subject to an aggregate limit and the available coverage, if any,
for that claim.

In the third quarter of 2012, the Company completed its annual in-depth asbestos claim review. As
in prior years, the annual claim review considered  active policyholders and litigation cases  for potential
product and ‘‘non-product’’ liability. The Company noted the following trends:

(cid:127) continued high level of litigation activity  in certain jurisdictions  involving individuals alleging

serious asbestos-related illness;

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. INSURANCE CLAIM RESERVES  (Continued)

(cid:127) while overall payment patterns have  been generally stable, there has been an increase in severity

for certain policyholders due to the continued high level  of litigation activity;

(cid:127) continued moderate level of asbestos-related bankruptcy activity; and

(cid:127) the absence of new theories of liability or  new  classes  of defendants.

While the Company believes that over the  past  several years there has been a reduction  in the
volatility associated with the Company’s overall asbestos exposure, there nonetheless remains a high
degree of uncertainty with respect to future  exposure  from asbestos claims.

During  2012, total gross and net asbestos-related payments decreased when compared with 2011,

primarily resulting from a decline in  both  gross and net payments to policyholders with whom the
Company has entered into settlement agreements.  The Home Office and Field Office categories, which
account for the vast majority of policyholders  with active asbestos-related claims, experienced a modest
reduction in gross asbestos-related payments during 2012 when compared with 2011, while net asbestos
payments were flat. Payments on behalf of  policyholders in these categories continue  to  be  influenced
by the high level of litigation activity  in  a  limited number of jurisdictions where  individuals alleging
serious asbestos-related injury continue  to  target previously peripheral defendants. The number of
policyholders tendering asbestos claims  for the  first time in 2012 and the number  of policyholders with
open asbestos claims both increased slightly when compared with 2011.

The Company’s quarterly asbestos reserve reviews include an analysis of  exposure and claim
payment patterns by policyholder category, as  well  as  recent settlements, policyholder  bankruptcies,
judicial rulings and legislative actions. The Company also  analyzes developing payment patterns among
policyholders in the Home Office, Field Office and Assumed Reinsurance and Other categories as well
as projected reinsurance billings and recoveries.  In addition, the Company reviews its historical gross
and net loss and expense paid experience, year-by-year, to  assess any emerging trends, fluctuations,  or
characteristics suggested by the aggregate  paid activity. Conventional actuarial methods are not utilized
to establish asbestos reserves nor have  the Company’s evaluations resulted in any way of determining a
meaningful average asbestos defense  or indemnity  payment.

The completion of these reviews and analyses in 2012, 2011 and 2010 resulted in  $175 million,

$175 million and $140 million increases, respectively, in the Company’s net asbestos reserves in  each
period. In each year, the reserve increases were primarily driven by  increases in the Company’s
estimate of projected settlement and defense costs related  to  a broad number of  policyholders in the
Home Office category and by higher  projected payments on assumed reinsurance accounts. The
increase in the estimate of projected  settlement and defense costs resulted  from payment trends that
continue to be moderately higher than previously anticipated due to the impact of the  current litigation
environment discussed above. The increase in 2010 also  reflected  increases in costs of litigating
asbestos-related coverage matters and  was  partially offset by a $70 million benefit from the reduction in
the allowance for uncollectible reinsurance resulting from a  favorable  ruling related  to  a reinsurance
dispute. Notwithstanding these trends,  the  Company’s overall view of the  underlying  asbestos
environment is essentially unchanged  from  recent periods, and there remains  a high degree of
uncertainty with respect to future exposure to asbestos claims.

Net asbestos losses paid in 2012, 2011 and 2010 were $236 million, $284 million and $350 million,

respectively. Approximately 6%, 19% and  32% of total net paid losses in 2012, 2011 and 2010,

208

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. INSURANCE CLAIM RESERVES  (Continued)

respectively, related to policyholders  with  whom the Company had entered into settlement  agreements
limiting the Company’s liability.

Environmental Reserves.

In establishing environmental reserves, the Company  evaluates the

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

The Company has received and continues to receive  notices from policyholders tendering claims
for the first time, frequently under policies issued prior  to  the mid-1980’s. These  policyholders continue
to present smaller exposures, have fewer sites and are  lower tier defendants. Further, in  many
instances, clean-up costs have been reduced  because regulatory agencies are willing to accept risk-based
site analyses and more efficient clean-up technologies. Overall  net environmental  claim  payments in
2012 were essentially unchanged from  2011. Over the past several years, the Company has experienced
generally favorable trends in the number of new policyholders tendering environmental claims for the
first time and in the number of pending declaratory  judgment actions  relating  to  environmental
matters. The degree to which those favorable trends have continued,  however, has been less than
anticipated. As a result, in 2012 and 2011,  the Company increased its net environmental reserves  by
$90 million and $76 million, respectively.  In 2010, the Company increased its net  environmental
reserves by $35 million due to a modest  upward development in the  expected defense and settlement
costs for certain of its pending policyholders.

Asbestos and Environmental Reserves. As a result of the processes and procedures discussed

above, management believes that the reserves  carried  for asbestos and environmental claims  at
December 31, 2012 are appropriately established based  upon known  facts, current law  and
management’s judgment. However, the  uncertainties surrounding the final resolution of these claims
continue, and it is difficult to determine the  ultimate exposure for asbestos and environmental claims
and related litigation. As a result, these reserves are subject to revision  as new  information becomes
available and as claims develop. The continuing uncertainties include, without limitation, the  risks  and
lack of predictability inherent in complex litigation,  any impact from the bankruptcy protection  sought
by various asbestos producers and other asbestos defendants,  a  further increase or decrease  in the cost
to resolve, and/or the number of, asbestos and  environmental  claims beyond  that  which is  anticipated,
the role of any umbrella or excess policies the Company has issued,  the  resolution  or adjudication  of
disputes pertaining to the amount of  available coverage for  asbestos and environmental  claims in a
manner inconsistent with the Company’s previous assessment of these  claims,  the number  and outcome

209

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. INSURANCE CLAIM RESERVES  (Continued)

of direct actions against the Company, future developments pertaining to the Company’s ability to
recover reinsurance for asbestos and  environmental claims and the unavailability of  other insurance
sources  potentially available to policyholders, whether through exhaustion  of policy  limits or through
the insolvency of other participating insurers. In addition,  uncertainties  arise from the insolvency or
bankruptcy of policyholders and other  defendants.  It  is also not possible to predict changes in  the legal,
regulatory and legislative environment and their impact  on the future development  of asbestos  and
environmental claims. This environment could  be  affected  by changes in applicable legislation and
future court and regulatory decisions and interpretations,  including the outcome of legal challenges to
legislative and/or judicial reforms establishing  medical criteria for the  pursuit of asbestos claims. It is
also difficult to predict the ultimate outcome of complex coverage disputes until settlement negotiations
near completion and significant legal  questions are  resolved or, failing settlement,  until the dispute is
adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations often
involve a large number of claimants  and  other  parties and require court approval to be effective. As
part of its continuing analysis of asbestos  and  environmental reserves,  the Company continues to study
the implications of these and other developments.

Because of the uncertainties set forth above,  additional liabilities  may  arise for amounts in excess

of the Company’s current reserves. In  addition, the Company’s estimate  of  claims and claim adjustment
expenses may change. These additional  liabilities  or increases in estimates, or a  range of either, cannot
now be reasonably estimated and could result in income  statement charges that could be material to
the Company’s operating results in future  periods.

Catastrophe Exposure

The Company has geographic exposure  to  catastrophe losses, which can  be  caused by a variety of

events, including, among others, hurricanes, tornadoes and other windstorms, earthquakes, hail,
wildfires, severe winter weather, floods,  tsunamis and volcanic eruptions. Catastrophes can also result
from a terrorist attack (including those involving nuclear, biological,  chemical or  radiological events),
explosions, infrastructure failures or as  a  consequence  of  political instability. The incidence and severity
of catastrophes are inherently unpredictable.  The extent  of  losses  from a catastrophe is a function of
both the total amount of insured exposure in the  area  affected by  the event and the severity  of the
event. Most catastrophes are restricted to small geographic areas;  however, hurricanes and earthquakes
may produce significant damage in larger areas, especially those that are  heavily populated. The
Company generally seeks to mitigate its  exposure  to  catastrophes through  individual risk  selection and
the purchase of catastrophe reinsurance.

There are also risks which impact the estimation of ultimate costs for catastrophes.  For example,

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

210

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. DEBT

Debt outstanding was as follows:

(at December 31, in millions)

Short-term:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.00% Senior notes due March 15, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.375% Senior notes due June 15, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2012

2011

$ 100
500
—

$ 100
—
250

Total short-term debt

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

600

350

Long-term:
5.00% Senior notes due March 15, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.50% Senior notes due December 1, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.25% Senior notes due June 20, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.75% Senior notes due December 15, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.80% Senior notes due May 15, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.90% Senior notes due June 2, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.90% Senior notes due November 1, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.75% Senior notes due April 15, 2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.625% Junior subordinated debentures  due December 15, 2027 . . . . . . . . . . . . . . . .
6.375% Senior notes due March 15, 2033 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.75% Senior notes due June 20, 2036 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.25% Senior notes due June 15, 2037 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.35% Senior notes due November 1, 2040 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.50% Junior subordinated debentures  due December 15, 2045 . . . . . . . . . . . . . . . . .
8.312% Junior subordinated debentures  due July 1, 2046 . . . . . . . . . . . . . . . . . . . . .
6.25% Fixed-to-floating rate junior subordinated debentures due  March 15, 2067 . . . .

—
400
400
450
500
500
500
200
125
500
400
800
750
56
73
107

500
400
400
450
500
500
500
200
125
500
400
800
750
56
73
115

Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,761

6,269

Total debt principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized fair value adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,361
52
(63)

6,619
53
(67)

Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$6,350

$6,605

2012 Debt Repayments. On May 29, 2012, the Company purchased  and retired $8.5 million

aggregate principal amount of its 6.25% fixed-to-floating  rate junior  subordinated debentures due
March 15, 2067. On June 15, 2012, the  Company’s  $250 million, 5.375% senior notes  matured and were
fully paid.

2011 Debt Repayment. On June 1, 2011, the Company repaid the  remaining  $9 million principal

balance on its 7.22% real estate non-recourse debt.

Description of Debt

Commercial Paper—The Company maintains an $800  million commercial  paper program,

supported by a $1.0 billion bank credit  agreement that expires on June 10,  2013. (See  ‘‘Line of Credit

211

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. DEBT (Continued)

Agreement’’ discussion that follows).  Interest rates on commercial  paper issued in  2012 ranged from
0.1% to 0.2%, and in 2011 ranged from  0.1% to 0.3%.

Senior Notes—The Company’s various senior debt issues are unsecured obligations that rank

equally  with one another. Interest payments are made semi-annually. The Company generally may
redeem some or all of the notes prior  to  maturity in accordance  with terms unique to each debt
instrument.

Junior Subordinated Debentures—The Company’s $107  million remaining aggregate principal
amount of 6.25% fixed-to-floating rate debentures bear interest at an annual  rate of 6.25% from the
date  of  issuance to, but excluding, March  15, 2017, payable semi-annually in arrears on  March 15 and
September 15. From and including March 15,  2017,  the debentures will bear interest at an annual rate
equal to three-month LIBOR plus 2.215%, payable quarterly on March 15, June 15,  September 15 and
December 15 of each year. The Company can redeem  the debentures at its option, in whole or in part,
at any time on or after March 15, 2017 at a redemption price of 100% of the principal amount being
redeemed plus accrued but unpaid interest. The Company can redeem the debentures at its option
prior to March 15, 2017 (a) in whole  at any time or in part from time to time  or (b)  in whole, but not
in part, in the event of certain tax or  rating agency events relating to the debentures, at a redemption
price equal to the greater of 100% of the  principal amount being redeemed and the applicable
make-whole amount, in each case plus any accrued and  unpaid interest.

The Company has the right, on one or more occasions, to defer the payment of  interest on the

debentures. The Company will not be required to settle deferred interest until it has deferred interest
for five consecutive years or, if earlier, made a payment of current interest during a deferral period.
The Company may defer interest for up  to  ten consecutive years without giving rise to an event of
default. Deferred interest will accumulate additional interest at an annual rate equal to the annual
interest rate then applicable to the debentures.

The debentures have a final maturity date of March 15, 2067 and a scheduled maturity date of
March 15, 2037. The Company can redeem the debentures at its  option any time (as described above)
using any source of funds, including cash. If  the Company chooses not to redeem the debentures, then
during the 180-day period ending not more than  15  and not less than ten business days prior to the
scheduled maturity date, the Company will be required to use commercially reasonable efforts  to  sell
enough qualifying capital securities to  permit repayment  of the debentures at the scheduled  maturity
date.  If any debentures remain outstanding  after the scheduled maturity date, unless and until the
Company redeems the debentures (as described above) using any source of funds, including cash,  the
Company shall be required to use its commercially reasonable efforts on a quarterly basis to raise
sufficient proceeds from the sale of qualifying  capital securities to permit the repayment in full  of the
debentures. If there are remaining debentures at the final maturity date, the Company is required to
redeem the debentures using any source of funds. Qualifying  capital securities are securities (other than
common stock, qualifying warrants, mandatorily convertible preferred stock,  debt exchangeable  for
common equity, and debt exchangeable for  preferred equity) which generally are treated by the  ratings
agencies as having similar equity content  to the debentures.

The Company’s three other junior subordinated debenture instruments are all similar in nature to

each  other. Three separate business trusts  issued preferred securities  to  investors and used the  proceeds

212

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. DEBT (Continued)

to purchase the Company’s subordinated  debentures. Interest on each of the instruments is paid
semi-annually.

The Company’s consolidated balance  sheet includes the  debt  instruments acquired in the  merger,

which  were recorded at fair value as  of the  acquisition  date. The resulting fair value  adjustment is
being amortized over the remaining life  of the respective debt instruments  using the effective-interest
method. The amortization of the fair value adjustment  reduced interest expense by $1 million for each
of the years ended December 31, 2012 and  2011.

The following table presents merger-related  unamortized fair value adjustments and the related

effective interest rate:

(in millions)

Issue Rate Maturity Date

2012

2011

Subordinated debentures . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7.625% Dec. 2027
8.500% Dec. 2045
8.312% Jul. 2046

$17
16
19

$52

$18
16
19

$53

Unamortized
Fair Value
Purchase
Adjustment at
December 31,

Effective
Interest Rate
to Maturity

6.147%
6.362%
6.362%

The Travelers Companies, Inc. fully and unconditionally  guarantees the payment  of  all  principal,

premiums, if any, and interest on certain  debt obligations of its subsidiaries  TPC and Travelers
Insurance Group Holdings Inc. (TIGHI). The guarantees pertain  to  the $500 million 5.00%  notes due
2013, the $200 million 7.75% notes due  2026 and the $500 million 6.375%  notes due 2033.

Maturities—The amount of debt obligations, other than commercial paper, that become due in
each  of the next five years is as follows: 2013,  $500 million; 2014, none; 2015,  $400 million; 2016,  $400
million; and 2017, $450 million.

Line of Credit Agreement

The Company is party to a three-year, $1.0 billion revolving credit  agreement with a  syndicate of

financial institutions that expires in June  2013. Pursuant to the  credit agreement covenants, the
Company must maintain a minimum consolidated  net worth (generally  defined as  shareholders’ equity
plus certain trust preferred and mandatorily  convertible securities,  reduced for  goodwill and other
intangible assets) of $14.35 billion. The  Company must  also maintain a ratio of total debt to the sum of
total debt plus consolidated net worth  of not greater than 0.40 to 1.00.  In addition, the  credit
agreement contains other customary  restrictive  covenants as well as certain  customary events  of default,
including with respect to a change in control,  which is  defined  to  include  the acquisition of 35% or
more of the Company’s voting stock  and  certain changes in  the composition  of the Company’s  board of
directors. At December 31, 2012, the Company  was in compliance with  these covenants. Generally, the
cost of borrowing under this agreement will range from LIBOR plus  100 basis points to LIBOR plus
175 basis points depending on the Company’s credit ratings. At  December 31, 2012, that cost would
have been LIBOR plus 125 basis points  had there  been any  amounts outstanding under the credit
agreement. This line of credit also supports the  Company’s commercial paper  program.

213

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. DEBT (Continued)

Shelf Registration

In December 2011, the Company filed with the Securities and Exchange Commission a universal
shelf registration statement for the potential offering  and sale of securities to replace  the Company’s
previous registration statement that had expired in the normal course of business. The Company may
offer these securities from time to time at  prices  and  on other terms to be determined at the time of
offering.

9. SHAREHOLDERS’ EQUITY AND  DIVIDEND AVAILABILITY

Common Stock

The Company is governed by the Minnesota Business Corporation Act. All authorized shares  of
voting common stock have no par value.  Shares  of  common stock reacquired  are considered authorized
and unissued shares. The number of authorized shares of the company is 1.75 billion,  consisting of
1.745 billion shares of voting common stock and five million undesignated shares. The Company’s
articles of incorporation authorize the board  of directors to establish, from the undesignated shares,
one or more classes and series of shares, and to further designate the type of shares and terms thereof.

Treasury Stock

The Company’s board of directors has approved common share repurchase authorizations  under

which  repurchases may be made from  time to time in the open market, pursuant to pre-set trading
plans meeting the requirements of Rule  10b5-1 under the Securities Exchange Act of 1934,  in private
transactions or otherwise. The authorizations do not have a stated expiration date. The timing and
actual number of shares to be repurchased in the future will depend on a variety of factors, including
the Company’s financial position, earnings, common share price, catastrophe losses, funding of the
Company’s qualified pension plan, capital requirements of the Company’s  operating subsidiaries, legal
requirements, regulatory constraints,  other  investment opportunities (including mergers and
acquisitions), market conditions and other factors. The following table summarizes repurchase  activity
in 2012 and remaining repurchase capacity at December 31, 2012.

Quarterly Period Ending
(in millions,  except per share amounts)

Number of
shares
purchased

Cost of shares
repurchased

Average price paid
per share

Remaining capacity
under share  repurchase
authorization

March 31, 2012 . . . . . . . . . . . . . . . . .
June 30, 2012 . . . . . . . . . . . . . . . . . .
September 30, 2012 . . . . . . . . . . . . . .
December 31, 2012 . . . . . . . . . . . . . .

6.0
5.6
5.4
5.4

Total . . . . . . . . . . . . . . . . . . . . . . .

22.4

$ 350
350
350
400

$1,450

$58.73
$62.40
$65.00
$73.00

$64.64

$3,259
$2,909
$2,559
$2,159

$2,159

The Company’s Amended and Restated  2004 Stock Incentive  Plan provides settlement  alternatives

to employees in which the Company retains  shares to cover tax withholding costs and  exercise  costs.
During  the years ended December 31, 2012  and  2011, the Company acquired $55 million  and
$82 million, respectively, of its common stock under  this  plan.

Common shares acquired are reported as  treasury stock in  the consolidated balance sheet.

214

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. SHAREHOLDERS’ EQUITY AND  DIVIDEND AVAILABILITY (Continued)

Preferred Stock

The Company’s preferred shareholders’  equity at December 31, 2010 represented the par value of

preferred shares outstanding  related  to  a  legacy Stock  Ownership Plan (SOP) Trust which was
subsequently merged into The Travelers 401(k) Savings Plan (the Savings  Plan). The SOP Trust could
at any time convert any or all of the preferred  shares into shares  of  the Company’s common stock at a
rate of eight shares of common stock for  each preferred share. In May 2011,  the Company’s board of
directors authorized the redemption  of  the Company’s  preferred stock held by the  Savings Plan and
gave notice of that redemption to the appropriate fiduciaries of the Savings Plan. Following a  fiduciary
review, the Savings Plan exercised its  right to convert  each preferred share into eight shares of the
Company’s common stock. As a result, all  preferred shares outstanding  on June 7, 2011 (190,083
shares) were converted into a total of 1.52  million shares of the Company’s  common stock.

Dividend Availability

The Company’s U.S. insurance subsidiaries, domiciled  principally in the state of Connecticut, are
subject to various regulatory restrictions  that limit  the maximum amount of dividends available to be
paid by each insurance subsidiary to its respective parent company without prior approval of insurance
regulatory authorities. A maximum of  $2.05 billion  is  available by the end of 2013 for such dividends
without prior approval of the Connecticut  Insurance Department. The Company may choose  to
accelerate the timing within 2013 and/or increase the amount of dividends from its insurance
subsidiaries in 2013, which could result in certain dividends being subject to approval by the
Connecticut Insurance Department.

The holding company is not dependent on dividends or other  forms of repatriation from  its foreign

operations to support its liquidity needs.  The undistributed  earnings of the  Company’s foreign
operations are not material and are intended to be permanently reinvested in those operations.

The holding company received $1.96 billion of dividends in 2012, all of which was  received from its

U.S. insurance subsidiaries.

Statutory Net Income and Policyholder  Surplus

Statutory net income of the Company’s domestic and international insurance subsidiaries was

$2.84 billion, $1.50 billion and $3.69 billion for the years ended December 31, 2012, 2011 and 2010,
respectively. Policyholder surplus of the  Company’s  domestic  and international  insurance subsidiaries
was $20.05 billion and $19.17 billion  at December  31, 2012 and 2011, respectively.

215

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE
INCOME

The following table presents the changes in the  Company’s accumulated  other comprehensive

income (AOCI) for the years  ended December  31,  2012, 2011 and 2010.

Changes in Net

Changes in Net

Unrealized Gains on Unrealized Gains  on

Investment
Securities Having
No Credit Losses
Recognized in the
Consolidated

Investment
Securities Having
Credit Losses
Recognized in the
Consolidated

(in millions)

Statement of Income Statement of Income

Net Benefit Plan
Assets and
Obligations
Recognized in
Shareholders’
Equity

Net  Unrealized
Foreign  Currency
Translation and
Other

Total Accumulated
Other
Comprehensive
Income

Balance, December 31,

2009 . . . . . . . . . . . .

Other comprehensive

income (OCI) before
reclassifications
. . . .
Amounts reclassified

from AOCI . . . . . . .

Net OCI, current

period . . . . . . . . .

Balance, December 31,

2010 . . . . . . . . . . . .

OCI before

reclassifications
Amounts reclassified

. . . .

from AOCI . . . . . . .

Net OCI, current

period . . . . . . . . .

Balance, December 31,

2011 . . . . . . . . . . . .

OCI before

reclassifications
Amounts reclassified

. . . .

from AOCI . . . . . . .

Net OCI,  current

period . . . . . . . . .

Balance, December 31,

2012 . . . . . . . . . . . .

$1,796

$ 60

$(637)

$ —

$1,219

130

(207)

(77)

1,719

1,091

(81)

1,010

2,729

228

(49)

179

74

6

80

140

(8)

10

2

142

48

5

53

(13)

40

27

(610)

(251)

50

(201)

(811)

(104)

58

(46)

6

—

6

6

(61)

—

(61)

(55)

45

—

45

197

(161)

36

1,255

771

(21)

750

2,005

217

14

231

$2,908

$195

$(857)

$(10)

$2,236

216

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE
INCOME (Continued)

The following table presents the pretax components  of the Company’s other comprehensive  income

and the related income tax expense (benefit)  for the years ended December 31, 2012, 2011 and  2010.

(for the year ended December 31, in millions)

2012

2011

2010

Changes in net pretax unrealized gains  on investment securities:

Having no credit losses recognized in  the consolidated statement of income .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$281
102

$1,570
560

$(118)
(41)

Net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

179

1,010

(77)

Having credit losses recognized in the consolidated statement of  income . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net pretax changes in benefit plan assets  and obligations . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net pretax changes in unrealized foreign  currency translation and  other

changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

81
28

53

(69)
(23)

(46)

43
(2)

45

4
2

2

(307)
(106)

(201)

(90)
(29)

(61)

Total pretax other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

336
105

1,177
427

123
43

80

39
12

27

12
6

6

56
20

Total  other comprehensive income, net of  taxes . . . . . . . . . . . . . . . . . .

$231

$ 750

$ 36

217

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE
INCOME (Continued)

The following table presents the pretax and related  income tax expense (benefit) components of

the amounts reclassified from the Company’s accumulated other comprehensive income to the
Company’s consolidated statement of  income for the years ended December 31, 2012, 2011  and 2010.

(for the year ended December 31, in millions)

2012

2011

2010

Reclassification adjustments related to net  pretax unrealized gains on investment

securities:
Having no credit losses recognized in  the consolidated statement of income . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(75) $(125) $(318)
(111)
(44)
(26)

Net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(49)

(81)

(207)

Having credit losses recognized in the consolidated statement of  income . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit

Net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Reclassification adjustment related to benefit  plan assets and obligations . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total pretax reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8
3

5

88
30

58

21
7

16
6

10

76
26

50

9
3

6

57
17

40

(33)
(12)

(252)
(91)

Total  reclassifications, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 14

$ (21) $(161)

218

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. EARNINGS PER SHARE

Basic earnings per share was computed by dividing income available  to  common shareholders by
the weighted  average number of common shares outstanding during the period. The computation of
diluted earnings per share reflected the effect of potentially dilutive securities.

The following is a reconciliation of the  income and share data used in the basic and diluted

earnings per share computations:

(for the year ended December 31, in millions, except per  share amounts)

2012

2011

2010

Basic
Net income, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Participating share-based awards—allocated income . . . . . . . . . . . . . . . . . .
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,473
(19)
—

$1,426
(11)
(1)

$3,216
(25)
(3)

Net income available to common shareholders—basic . . . . . . . . . . . . . .

$2,454

$1,414

$3,188

Diluted
Net income available to common shareholders . . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive securities:

$2,454

$1,414

$3,188

Participating share-based awards—re-allocated income . . . . . . . . . . . . . . .
Convertible preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
—

—
1

2
3

Net income available to common shareholders—diluted . . . . . . . . . . . .

$2,454

$1,415

$3,193

Common Shares
Basic
Weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted
Weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average effects of dilutive securities:

386.2

415.8

476.5

386.2

415.8

476.5

Stock options and performance shares . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.6
—

4.0
0.7

4.2
1.8

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

389.8

420.5

482.5

Net income Per Common Share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 6.35

$ 3.40

$ 6.69

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 6.30

$ 3.36

$ 6.62

219

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. INCOME TAXES

(for the year ended December 31, in millions)

2012

2011

2010

Composition of income tax expense (benefit)  included in  the consolidated

statement of income
Current expense (benefit):

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 406
45
3

$ (176)
34
3

$ 846
78
10

Total current tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . .

454

(139)

934

Deferred expense (benefit):

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total deferred tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total income tax expense (benefit) included in the consolidated statement
of income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

223
16

239

693

63
2

65

178
(22)

156

(74)

1,090

Composition of income tax included in  common  shareholders’  equity
Expense (benefit) relating to stock-based compensation,  and the expense

(benefit) related to the changes in unrealized appreciation  on
investments, unrealized loss on foreign exchange,  unrealized loss  on
derivatives and other comprehensive income . . . . . . . . . . . . . . . . . . . .

Total income tax expense included in  the consolidated financial

57

399

(2)

statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 750

$ 325

$1,088

(for the year ended December 31, in millions)

2012

2011

2010

Effective tax rate
Income before federal, foreign and state  income taxes . . . . . . . . . . . . . . .
Statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Expected federal income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax  effect of:

$3,166

$1,352

$4,306

35%

35%

35%

1,108

473

1,507

Nontaxable investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Favorable resolution of prior year tax matters . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(427)
—
12

(449)
(104)
6

(476)
—
59

Total income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 693

$ (74)

$1,090

Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

22%

(5)%

25%

The current income tax payable was $102 million  at December  31, 2012 and was included in other

liabilities in the consolidated balance sheet.  The current income  tax  receivable was $119  million at
December 31, 2011 and was included in  other  assets in  the consolidated balance sheet.

Income, before income taxes, from domestic operations for the years ended December 31, 2012,

2011 and 2010 was $3.00 billion, $1.23  billion  and $4.20  billion, respectively.  Income, before income
taxes, from foreign operations for the years ended  December 31,  2012, 2011 and 2010 was $166  million,
$122 million and $106 million, respectively.

220

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. INCOME TAXES (Continued)

The net deferred tax asset (liability) comprises the  tax effects of temporary differences related to

the following assets and liabilities:

(at December 31, in millions)

Deferred tax assets
Claims and claim adjustment expense  reserves . . . . . . . . . . . . . . . .
Unearned premium reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2012

2011

$ 888
689
741

$ 936
680
844

Total gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . .

2,318

2,460

Deferred tax liabilities
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Internally developed software . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . .

590
1,800
134
132

2,656

585
1,650
128
90

2,453

Total deferred tax asset (liability)

. . . . . . . . . . . . . . . . . . . . . . .

$ (338) $

7

If the Company determines that any  of its deferred  tax  assets will  not result in future tax  benefits,

a valuation allowance must be established  for the portion of these  assets that are not expected to be
realized. Based upon a review of the  Company’s  anticipated  future taxable income, and  also including
all other available evidence, both positive and negative, the Company’s  management concluded  that  it
is more likely than not that the gross  deferred tax  assets will  be  realized.

For tax return purposes, as of December 31,  2012, the Company had net operating  loss (NOL)
carryforwards on a regular tax basis and  an alternative minimum tax  (AMT) basis  of  approximately
$37 million and $3 million, respectively.  These  NOL carryforwards  expire, if unused, in 2018.  In
addition, the Company has AMT credit  carryforwards of $17  million  which are  available to reduce
future federal regular income taxes over  an indefinite period. The amount and timing of  realizing the
benefits of NOL and AMT credit carryforwards  depend on future taxable income and limitations
imposed by tax laws. The benefits of the  NOL and AMT credit carryforwards have been  recognized in
the consolidated financial statements and  are  included in net  deferred tax assets.

U.S. income taxes have not been recognized on  $755 million of the Company’s foreign  operations’

undistributed earnings as of December 31, 2012,  as such earnings are intended to be permanently
reinvested in those operations. Furthermore, any taxes  paid to foreign governments  on these earnings
may be used as credits against the U.S.  tax on  any  dividend distributions  from such earnings.

221

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. INCOME TAXES (Continued)

The following is a reconciliation of the  beginning  and  ending amount of unrecognized tax benefits

for the years ended December 31, 2012 and 2011:

(in millions)

Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . .
Reductions for tax positions of prior  years . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to current year . . . . . . . . . . .

2012

2011

$ 37
2
(15)
—

$103
1
(68)
1

Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 24

$ 37

Included in the balances at December  31, 2012 and 2011 were $3 million and  $2 million,

respectively, of unrecognized tax benefits  that,  if  recognized, would  affect the annual effective tax rate.
Also included in the balances at those dates were $21  million and $35 million, respectively,  of tax
positions for which the ultimate deductibility is  certain, but for which there is uncertainty about  the
timing of  deductibility. The timing of  such  deductibility would not  affect the  annual effective tax rate.

The Company recognizes accrued interest and penalties, if any,  related to unrecognized tax

benefits in income taxes. During the  years  ended December 31, 2012 and 2011, the Company
recognized approximately $46 million and  $(122)  million in interest, respectively.  The Company had
approximately $94 million and $48 million accrued  for the payment  of  interest at December 31,  2012
and 2011, respectively.

The IRS is conducting an examination of the Company’s U.S. income tax returns  for 2009 and
2010. The Company does not expect any significant changes  to  its  liability  for unrecognized tax  benefits
during the next twelve months.

13. SHARE-BASED INCENTIVE COMPENSATION

The Company has a share-based incentive  compensation  plan,  The Travelers Companies, Inc.
Amended and Restated 2004 Stock Incentive Plan (the 2004 Incentive Plan),  which replaced prior
share-based incentive compensation plans (legacy plans).  The purposes of the 2004  Incentive  Plan  are
to align the interests of the Company’s non-employee directors, executive officers and other employees
with those of the Company’s shareholders, and to attract and  retain personnel by providing incentives
in the form of stock-based awards. The  2004 Incentive Plan  permits  grants of nonqualified  stock
options, incentive stock options, stock  appreciation rights, restricted stock, restricted stock units,
deferred stock, deferred stock units, performance awards and other  stock-based or stock-denominated
awards with respect to the Company’s  common stock. The number  of  shares of  the Company’s common
stock authorized for grant under the 2004  Incentive Plan is 35 million shares,  subject to additional
shares that may be available for awards  as described below.  The  Company has a  policy  of  issuing new
shares to settle the exercise of stock  option awards  and  the vesting of  other  equity awards.

In connection with the adoption of the 2004 Incentive Plan, legacy share-based incentive

compensation plans were terminated. Outstanding  grants were not  affected by the termination of these
legacy plans, including the grant of reload options  related to prior  option grants under the legacy plans.
As of December 31, 2012, there were  no longer any  options eligible for reload.

222

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. SHARE-BASED INCENTIVE COMPENSATION (Continued)

The 2004 Incentive Plan is the only plan pursuant to which  future stock-based awards may be
granted. In addition to the 35 million shares  initially authorized for issuance under the  2004 Incentive
Plan, the following will not be counted  towards the 35 million shares available and will  be  available for
future grants under the 2004  Incentive Plan:  (i) shares of common stock  subject to an award that
expires unexercised, that is forfeited, terminated or canceled, that is settled in cash or other forms  of
property, or otherwise does not result  in the issuance of shares of common stock, in whole or in part;
(ii) shares that are used to pay the exercise price of stock options and shares used to pay withholding
taxes on  awards generally; and (iii) shares purchased by the Company on the open market using cash
option exercise proceeds; provided, however, that the increase in the  number of shares of common
stock available for grant pursuant to  such  market  purchases shall not be greater than the  number that
could be repurchased at fair market value  on the date of exercise of the stock  option giving rise to such
option proceeds. These provisions also  apply to awards granted under the legacy share-based incentive
compensation plans that were outstanding  on  the effective date of the 2004  Incentive Plan.

The Company also has a compensation  program for non-employee directors (the Director
Compensation Program). Under the Director Compensation Program, non-employee directors’
compensation consists of an annual retainer, a  deferred stock award, committee chair fees and a lead
director fee. Each non-employee director  may choose to receive all or a portion of his or  her annual
retainer in the form of cash or deferred  stock units which vest upon  grant. The annual deferred stock
awards vest in full one day prior to the  date  of the Company’s annual meeting of shareholders
occurring in the year following the year of the grant date, subject to continued service. Any of the
deferred stock awards may accumulate,  including reinvestment dividends, until  distribution either in a
lump sum six months after termination  of  service as  a director or, if the director so elects, in  annual
installments beginning at least six months following termination of service as a  director. The shares of
deferred stock units issued under the  Director  Compensation Program are awarded under the 2004
Incentive Plan.

Stock Option Awards

Stock option awards granted to eligible officers and key employees have a ten-year term. Prior to

January 1, 2007, stock options were granted with an exercise price equal  to  the fair market value of the
Company’s common stock on the day  preceding the date of grant.  Beginning January  1, 2007, all stock
options are granted with an exercise price  equal to the  closing price  of the Company’s common stock
on the date of grant. The stock options  granted generally vest upon meeting certain  years  of service
criteria. Except as the Compensation  Committee of the Board may allow in the future, stock options
cannot be sold or transferred by the participant. The  stock options granted under  the 2004 Incentive
Plan vest three years after grant date  (cliff vest).

In addition to the stock option awards described above,  certain stock  option awards that were
granted under legacy plans permitted an  employee exercising an  option to be granted  a new option (a
reload option) at an exercise price equal to the  closing  price  of the Company’s  common stock on  the
date  on which the original option was exercised. The  reload option was permitted on certain stock
option awards granted prior to January  2003 at  an amount equal to the  number of shares of the
common stock used to satisfy both the exercise  price and  withholding taxes due upon exercise of an
option and vest either six months or  one year after the grant date and are exercisable for the remaining
term of the related original option. At  December  31, 2012, there were no longer any options  eligible
for reload.

223

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. SHARE-BASED INCENTIVE COMPENSATION (Continued)

The fair value of each option award is estimated on the date of grant by application of a variation

of the Black-Scholes option pricing model  using the assumptions noted in the following  table. The
expected term of newly granted stock options is  the time to vest  plus half  the remaining time to
expiration. This considers the vesting  restriction and  represents an even pattern of exercise behavior
over the remaining term. Reload options were  exercisable for the remaining term  of the original option
and therefore generally had a shorter  expected term.  Beginning in April 2010, due to the Company
having attained sufficient history with respect to changes in its stock prices over  time, the  expected
volatility assumption is based on the  historical volatility of the Company’s common  stock for the same
period as the estimated option term based on the  mid-month of the option grant. Prior to April 2010,
the expected volatility was based on the  average historical volatility of the common stock  of an industry
peer group of entities due to the limited  Company stock  history. The expected dividend is based upon
the Company’s current quarter dividend annualized  and  assumed to be constant over the expected
option term. The risk-free interest rate  for each option is the interpolated market yield  for the
mid-month of the  option grant on a U.S. Treasury bill with a term comparable to the expected option
term of the granted stock option. Shares received  through option exercises under the reload program
were subject to either a one-year or two-year  restriction on sale. A discount, as measured by the
estimated cost of protecting against changes in market value - 5% for one-year sales restrictions  and
10% for two-year sales restrictions - had been applied to the fair value of reload options granted to
reflect these sales restrictions. The following  assumptions were used in  estimating the fair value of
options on grant date for the years ended  December 31, 2012, 2011 and  2010:

2012

Original Grants

Reload Grants

Expected term of stock options . . . . . . . . . . . . . .
Expected volatility of the Company’s stock . . . . . .
Weighted average volatility . . . . . . . . . . . . . . . . . .
Expected annual dividend per share . . . . . . . . . . .
Risk-free rate . . . . . . . . . . . . . . . . . . . . . . . . . . .

6 years

1 year
28.5% - 28.6% 22.9% - 23.5%
23.4%
$1.64 - $1.84
1.02% - 1.17% 0.10% - 0.17%

28.6%
$1.64 - $1.84

2011

Original Grants

Reload Grants

Expected term of stock options . . . . . . . . . . . . . .
Expected volatility of the Company’s stock . . . . . .
Weighted average volatility . . . . . . . . . . . . . . . . . .
Expected annual dividend per share . . . . . . . . . . .
Risk-free rate . . . . . . . . . . . . . . . . . . . . . . . . . . .

6 years

1 year
28.0% - 28.6% 15.7% - 17.6%
15.9%
$1.44 - $1.64
1.19% - 2.62% 0.10% - 0.29%

28.2%
$1.44 - $1.64

2010

Original Grants

Reload Grants

6 years

1 - 2 years
28.3% - 29.1% 18.3% - 41.6%
21.1%
$1.32 - $1.44
1.68% - 2.71% 0.20% - 0.95%

28.4%
$1.32 - $1.44

Expected term of stock options . . . . . . . . . . . . . .
Expected volatility of the Company’s stock . . . . . .
Weighted average volatility . . . . . . . . . . . . . . . . . .
Expected annual dividend per share . . . . . . . . . . .
Risk-free rate . . . . . . . . . . . . . . . . . . . . . . . . . . .

224

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. SHARE-BASED INCENTIVE COMPENSATION (Continued)

A summary of stock option activity under the Company’s  2004  Incentive Plan and legacy share-

based incentive compensation plans as  of  and  for the  year ended December 31,  2012 is as follows:

Stock Options

Number

Weighted
Average
Exercise
Price

Weighted
Average
Contractual
Life
Remaining

Aggregate
Intrinsic
Value
($  in  millions)

Outstanding, beginning of year . . . . . . . . . . .
Granted:

Original
. . . . . . . . . . . . . . . . . . . . . . . . .
Reload . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . .

16,212,961

$47.33

2,442,017
4,920
(5,679,770)
(383,920)

59.75
63.80
45.03
53.68

Outstanding, end of year . . . . . . . . . . . . . . .

12,596,208

$50.58

6.2 Years

Vested at end of year(1) . . . . . . . . . . . . . . .

9,010,201

$48.34

5.4 Years

Exercisable at end of year . . . . . . . . . . . . . .

5,785,428

$44.27

3.9 Years

$268

$212

$159

(1) Represents awards for which the requisite service has been rendered, including those that are

retirement eligible.

The following table presents additional information regarding original  and reload grants  for the

years ended December 31, 2012, 2011 and 2010.

2012

Original Grants

Reload Grants

Weighted average grant-date fair value of  options  granted (per share) . . .
Total intrinsic value of options exercised  during the year (in millions) . . .

$12.08
$ 102

$4.49
5
$

2011

Original Grants

Reload Grants

Weighted average grant-date fair value of  options granted (per  share) . . .
Total intrinsic value of options exercised  during the year (in millions) . . .

$12.94
76
$

$3.19
$ 11

2010

Original Grants

Reload Grants

Weighted average grant-date fair value of  options granted (per  share) . . .
Total intrinsic value of options exercised  during the year (in millions) . . .

$11.94
77
$

$3.46
3
$

On  February  5,  2013,  the  Company,  under  the  2004  Stock  Incentive  Plan,  granted  1,861,434  stock

option awards with an exercise price  of  $78.65 per share.  The fair  value attributable to the stock option
awards on the date of grant was $17.09  per share.

Restricted Stock Units, Deferred Stock Units and Performance Share  Award Programs

The Company, commencing with equity grants on  or after January 1, 2007, issues restricted stock

unit awards to eligible officers and key employees  under the Equity Awards program  established
pursuant to the 2004 Incentive Plan. A restricted stock unit represents the  right to receive a  share of
common stock. These restricted stock unit awards are granted at market price, generally vest three

225

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. SHARE-BASED INCENTIVE COMPENSATION (Continued)

years from the date of grant, do not have  voting rights and the underlying shares of common stock are
not issued until the vesting criteria is  satisfied.  In addition, the Company’s board of  directors can be
issued deferred stock unit awards from  (i) an  annual award; (ii) deferred compensation  (in  lieu of cash
retainer); and (iii) dividend reinvestment  shares earned  on outstanding deferred compensation.

The Company also has a Performance  Share Awards Program pursuant to the 2004 Incentive Plan

which  became effective beginning in 2006.  Under the program, the Company may issue performance
share awards to certain employees of the  Company  who hold  positions of Vice President (or its
equivalent) or above. The performance awards  provide the recipient the right  to  earn shares  of the
Company’s common stock based upon  the  Company’s attainment of certain performance goals. The
performance goals for performance awards  are based on the  Company’s adjusted return on  equity over
a three-year performance period. Vesting  of any  performance shares is contingent upon the Company
attaining the relevant performance period minimum threshold return on equity. If the performance
period return on equity is below the  minimum  threshold, none of the shares will vest. If  performance
meets or exceeds the minimum performance threshold, a  range of performance shares  will vest (50%—
160% for awards granted prior to and  including February  2009; 50%—150% for awards granted in
February 2010; and 50%—130% for awards granted  in February 2011, 2012 and  2013); depending on
the actual return on equity attained.

The fair value of restricted stock units, deferred stock  units and  performance shares is measured at

the market price of the Company stock at date of grant.

The total fair value of shares that vested during  the years ended December 31, 2012, 2011  and

2010 was $146 million, $121 million and $113  million,  respectively.

A summary of restricted stock units, deferred stock units  and performance share activity under the
Company’s 2004 Incentive Plan and legacy plans as  of  and for the year ended  December 31, 2012 is  as
follows:

Restricted and Deferred Stock
Units

Performance Shares

Other Equity  Instruments

Outstanding, beginning of year . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . .
. . . . . .
Performance-based adjustment

Number

2,780,504
953,630
(1,379,608)(1)
(158,144)
—

Outstanding, end of year . . . . . . . . . . . .

2,196,382

Weighted Average
Grant-Date
Fair Value

$48.03
60.18
42.90
52.96
—

$56.17

Number

1,547,402
719,841
(868,250)(2)
(70,856)
110,084(3)

1,438,221

Weighted Average
Grant-Date
Fair  Value

$53.79
59.48
51.82
55.15
54.06

$58.22

(1) Represents awards for which the requisite service has been rendered.

(2) Reflects the number of performance shares attributable to the performance goals attained over  the
completed performance period (three  years) and  for which  service conditions have been met.

(3) Represents the current year change  in estimated performance shares to reflect the attainment  of
performance goals for the awards that were  granted in each of  the  years  2009 through 2012.

226

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. SHARE-BASED INCENTIVE COMPENSATION (Continued)

On  February  5,  2013,  the  Company,  under  the  2004  Stock  Incentive  Plan,  granted  1,268,572

common stock awards in the form of  restricted stock  units, deferred stock units and  performance share
awards to participating officers, non-employee directors and other  key  employees. The restricted stock
units and deferred stock units totaled 713,198  shares while the performance share awards  totaled
555,374 shares. The fair value per share attributable to the common  stock awards on the date of grant
was $78.65.

Share-Based Compensation Cost Recognition

The amount of compensation cost for  awards subject  to  a service  condition is based on the  number

of shares expected to be issued and is  recognized over the time period for which service is to be
provided (requisite service period). Awards  granted to retiree-eligible  employees or to employees who
become  retiree-eligible before an award’s  vesting date are considered to have met the requisite service
condition. The compensation cost for  awards  subject to a performance condition is based upon the
probable outcome of the performance condition,  which  on the grant date reflects an  estimate of
attaining 100% of the performance shares granted. The compensation cost reflects an estimated  annual
forfeiture rate from 3.5% to 4% over  the requisite service period of the  awards. That  estimate is
revised if subsequent information indicates  that the actual number of instruments  expected to vest is
likely to differ from previous estimates.  Compensation  costs for  awards are recognized on a
straight-line basis over the requisite service  period. For awards  that have a graded vesting  schedule, the
compensation cost is recognized on a  straight-line  basis over the requisite service period  for each
separate vesting portion of the award as  if the award was, in substance, multiple awards. The total
compensation cost for all share-based incentive compensation awards recognized in earnings for the
years ended December 31, 2012, 2011 and 2010  was  $120  million, $121 million and $128 million,
respectively. Included in these amounts are compensation cost adjustments of $4  million, $4 million and
$10 million, for the years ended December 31, 2012, 2011 and 2010,  respectively, that reflected the cost
associated with the updated estimate  of  performance shares due to attaining certain performance levels
from the date of the initial grant of the performance awards. The related tax  benefits recognized in
earnings were $42 million, $42 million and $44 million for the  years  ended December  31, 2012, 2011
and 2010, respectively.

At December 31, 2012, there was $112 million  of total  unrecognized compensation cost  related to

all nonvested share-based incentive compensation awards.  This includes stock options, restricted  and
deferred stock units and performance shares  granted under the 2004 Incentive Plan. The unrecognized
compensation cost is expected to be recognized over a weighted-average period of  1.7 years.

Cash received from the exercise of employee stock options under share-based compensation plans

totaled $295 million and $314 million in 2012 and 2011, respectively.  The tax benefit realized for tax
deductions from employee stock options exercised during  2012 and 2011 totaled $36 million  and
$30 million, respectively.

14. PENSION PLANS, RETIREMENT BENEFITS AND  SAVINGS PLANS

The Company sponsors a qualified non-contributory  defined benefit pension plan, which covers
substantially all U.S. domestic employees and provides benefits under a cash balance formula,  except
that employees satisfying certain age  and service requirements remain  covered by a prior final average
pay formula. In addition, the Company  sponsors: a  nonqualified  defined  benefit pension plan which

227

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. PENSION PLANS, RETIREMENT BENEFITS AND  SAVINGS PLANS  (Continued)

covers certain highly-compensated employees, pension  plans for employees  of its  foreign subsidiaries,
and a postretirement health and life insurance benefit plan for employees satisfying certain age and
service requirements and for certain retirees.

Obligations and Funded Status

The following tables summarize the funded status,  obligations and amounts recognized in the

consolidated balance sheet for the Company’s benefit plans. The Company uses a December 31
measurement date for its pension and  postretirement  benefit plans.

Qualified
Domestic
Pension Plan

Nonqualified
and Foreign
Pension Plans

Total

(at and for the year ended December 31, in millions)

2012

2011

2012

2011

2012

2011

Change in projected benefit obligation:
Benefit obligation at beginning of year . . . . . . . . . .
Benefits earned . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost on benefit obligation . . . . . . . . . . . . .
Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange rate change . . . . . . . . . .

$2,706
107
129
225
(112)
—

$2,399
93
125
207
(118)
—

$ 183
6
9
17
(13)
4

$173
5
10
7
(12)
—

$2,889
113
138
242
(125)
4

$2,572
98
135
214
(130)
—

Benefit obligation at end of year . . . . . . . . . . . . .

$3,055

$2,706

$ 206

$183

$3,261

$2,889

Change in plan assets:
Fair value of plan assets at beginning  of  year . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . .
Company contributions . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange rate change . . . . . . . . . .

$2,414
242
217
(112)
—

$2,342
5
185
(118)
—

$ 86
10
11
(13)
4

$ 83
3
12
(12)
—

$2,500
252
228
(125)
4

$2,425
8
197
(130)
—

Fair value of plan assets at end of year . . . . . . . . . .

2,761

2,414

98

86

2,859

2,500

Funded status of plan at end of year . . . . . . . . . . .

$ (294) $ (292) $(108) $ (97) $ (402) $ (389)

Amounts recognized in the statement of  financial

position consist of:
Accrued under-funded benefit plan liabilities . . . .

Amounts  recognized  in  accumulated  other

comprehensive income consist of:

Prior service benefit . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Net actuarial loss

$ (294) $ (292) $(108) $ (97) $ (402) $ (389)

$ — $ — $ — $ — $ — $ —
1,275
1,300

1,220

1,363

55

63

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,300

$1,220

$ 63

$ 55

$1,363

$1,275

228

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. PENSION PLANS, RETIREMENT BENEFITS AND  SAVINGS PLANS  (Continued)

(at and for the year ended December 31, in millions)

Change in projected benefit obligation:
Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost on benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Postretirement
Benefit Plans

2012

2011

$ 246
—
(31)
11
12
(16)

$ 254
—
—
13
(4)
(17)

Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 222

$ 246

Change in plan assets:
Fair value of plan assets at beginning  of  year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Company contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 19
1
14
(16)

$ 20
1
15
(17)

Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18

19

Funded status of plan at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(204) $(227)

Amounts recognized in the statement of  financial position consist of:

Accrued under-funded benefit plan liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(204) $(227)

Amounts  recognized  in  accumulated  other  comprehensive  income  consist  of:

Net actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (50) $ (31)

Effective January 1, 2013, the Company converted its current prescription drug program for

Medicare-eligible retirees to a group-based company-sponsored Medicare Part  D Employer Group
Waiver Plan (EGWP) program. The EGWP structure  was made financially attractive for companies  due
to changes stemming from health care  reform legislation. Under EGWP, the federal direct  capitation
payments will be paid to the Company  while  the federal  reinsurance  and  pharmaceutical rebates  will be
used to offset claims. The Company  estimates  that  the transition to EGWP will lower prescription drug
liabilities by approximately $31 million.

The total accumulated benefit obligation for the Company’s defined benefit pension plans  was

$3.21 billion and $2.83 billion at December  31, 2012 and 2011, respectively. The Qualified  Domestic
Plan accounted for $3.01 billion and $2.65  billion of the  total  accumulated benefit obligation at
December 31, 2012 and 2011, respectively, whereas the Nonqualified and  Foreign Plans accounted  for
$0.20 billion and $0.18 billion of the total accumulated  benefit obligation at December  31, 2012 and
2011, respectively.

For pension plans with an accumulated benefit obligation in excess of plan  assets, the aggregate

projected benefit obligation was $3.25  billion and the aggregate accumulated  benefit obligation was
$3.20 billion at December 31, 2012. The fair value of plan assets for the  above plans was $2.85 billion
and $2.49 billion at December 31, 2012 and 2011, respectively.

229

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. PENSION PLANS, RETIREMENT BENEFITS AND  SAVINGS PLANS  (Continued)

The Company has discretion regarding whether to provide additional funding  and when to provide

such funding to its qualified pension  plan.  In  2012, 2011 and 2010, the Company voluntarily made
contributions totaling $217 million, $185  million and  $35 million, respectively, to the qualified pension
plan.  The Company has not determined whether or  not  additional funding will be made  during 2013.
There is  no required contribution to the  qualified pension plan during 2013.

The following table summarizes the components of net  periodic benefit cost and other  amounts

recognized in other comprehensive income related  to  the benefit plans for the years ended
December 31, 2012, 2011 and 2010.

(in millions)

Net Periodic Benefit Cost:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost on benefit obligation . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . .
Amortization of unrecognized:

Pension Plans

Postretirement
Benefit Plans

2012

2011

2010

2012

2011

2010

$ 113
138
(187)

$ 98
135
(182)

$ 96
128
(185)

$ — $— $ 1
14
13
(1)
(1)

12
(1)

Prior service benefit . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . .

—
89

—
76

(3) — — —
(1) — —
60

Net benefit expense . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 153

$ 127

$ 96

$ 10

$12

$14

Other Changes in Benefit Plan Assets  and Benefit
Obligations Recognized in Other Comprehensive
Income:

Prior service benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service benefit . . . . . . . . . . . . . . . . .
Amortization of net actuarial gain (loss) . . . . . . . . . . . . . .

Total other changes recognized in other comprehensive
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total other changes recognized in net  benefit expense

$ — $ — $ — $ — $— $—
27
(8)
— (31) — —
— — —
3
1 — —
(60)

176
—
—
(89)

388
—
—
(76)

(5)

11

87

312

(30)

(19)

(5)

(8)

and other comprehensive income . . . . . . . . . . . . . .

$ 240

$ 439

$ 66

$ (9) $ 7

$ 6

For  the  defined  benefit  pension  plans,  the  estimated  net  actuarial  loss  that  will  be  reclassified

(amortized)  from  accumulated  other  comprehensive  income  into  net  income  as  part  of  net  periodic
benefit cost over the next fiscal year  is  $107 million, and  there is no estimated prior service benefit  to
be amortized over the next fiscal year. For  the postretirement benefit  plans, the estimated net  actuarial
loss  that  will  be  reclassified  (amortized)  from  accumulated  other  comprehensive  income  into  net
income as part of net periodic benefit cost over the next fiscal year is  less than $1 million,  and the
estimated prior service cost to be amortized over the  next fiscal year  is $3 million.

230

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. PENSION PLANS, RETIREMENT BENEFITS AND  SAVINGS PLANS  (Continued)

Assumptions  and Health Care Cost Trend  Rate Sensitivity

(at and for the year ended December 31,)

Assumptions used to determine benefit obligations
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Future compensation increase rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Assumptions used to determine net periodic benefit cost
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected long-term rate of return on  pension plans’  assets . . . . . . . . . . . . . . . . . . . . . .
Expected long-term rate of return on  postretirement  benefit plans’  assets . . . . . . . . . . . .

2012

2011

4.15% 4.90%
4.00% 4.00%

4.90% 5.37%
7.50% 8.00%
5.00% 5.00%

Assumed health care cost trend rates
Following year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate to which the cost trend rate is assumed to decline (ultimate trend rate) . . . . . . . . .
Year that the rate reaches the ultimate trend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7.50% 8.00%
5.00% 5.00%
2018

2018

The discount rate assumption used to determine the benefit obligation  was based on a yield-curve

approach. Under this approach, a weighted  average yield is determined  from  a hypothetical portfolio of
high quality fixed maturity corporate  bonds (rated Aa) available at  the year-end  valuation date for
which  the timing and amount of cash outflows correspond with the  timing and  amount  of the estimated
benefit payouts of the Company’s benefit  plan.

In choosing the expected long-term rate of return  on plan assets, the Company selected the rate

that was set as the return objective by  the Company’s Benefit Plans Investment Committee,  which had
considered the historical returns of equity and fixed maturity  markets in conjunction with prevailing
economic and financial market conditions.

As an indicator of sensitivity, increasing the assumed  health care cost trend  rate by 1% would have

increased the accumulated postretirement  benefit obligation by $22 million at  December 31,  2012, and
the aggregate of the service and interest cost components of net postretirement benefit expense by
$1 million for the year ended December  31, 2012.  Decreasing  the assumed health care cost  trend rate
by 1% would have decreased the accumulated  postretirement benefit obligation  at December 31, 2012
by $19 million and the aggregate of the  service and interest cost components of net postretirement
benefit expense by $1 million for the  year ended December 31,  2012.

Plan Assets

Pension plan assets are invested for the exclusive benefit of  the plan participants  and beneficiaries

and are intended,  over time, to satisfy  the benefit obligations under the plan. Risk tolerance is
established through consideration of plan liabilities,  plan funded status, and corporate  financial
position. The asset mix guidelines have been established  and are reviewed quarterly. These  guidelines
are intended to serve as tools to facilitate  the investment of plan assets to maximize long-term total
return  and the ongoing oversight of the plan’s investment performance. Investment risk  is measured
and monitored on an ongoing basis through daily and monthly  investment  portfolio  reviews, annual
liability measurements, and periodic asset/liability  studies.

231

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. PENSION PLANS, RETIREMENT BENEFITS AND  SAVINGS PLANS  (Continued)

The Company’s overall investment strategy is to achieve a mix  of  approximately 85% to 90% of

investments for long-term growth and 10% to 15%  for near-term benefit  payments with a wide
diversification of asset types, fund strategies  and fund managers.  The  current target allocations  for plan
assets are 55% to 65% equity securities  and 20%  to  40% fixed income securities, with  the remainder
allocated to short-term securities. Equity  securities primarily include investments  in large, medium and
small-cap companies primarily located  in the United States. Fixed income securities include  corporate
bonds of companies from diversified  industries, mortgage-backed securities, U.S. Treasury securities and
debt  securities  issued  by  foreign  governments.  Other  investments  include  two  private  equity  funds  held
by the Company’s qualified defined benefit pension  plan.  One private equity fund is focused on
financial companies, and the other is focused on real estate-related investments. Other  investments at
December 31, 2011 also included a hedge fund which was a multi-strategy ‘‘fund of funds.’’

Fair Value Measurement—Pension Plans  and Other Postretirement Benefit Assets

For a  discussion of the methods employed  by the Company  to  measure the fair value of invested

assets, see note 4. The following discussion of fair value measurements applies exclusively to the
Company’s pension plans and other postretirement  benefit assets.

Fair value estimates for equity and bond mutual  funds held by the pension plans reflect prices
received from an external pricing service that are  based on observable market transactions. These
estimates are included in Level 1.

Short-term securities are carried at fair  value which  approximates cost plus  accrued interest or
amortized discount. The fair value or  market  value of these is periodically compared to this amortized
cost and is based on significant observable inputs  as  determined by an external pricing service.
Accordingly, the estimates of  fair value  for such short-term  securities, other than U.S. Treasury
securities and money market mutual funds, provided by an external pricing service are included in the
amount disclosed in Level 2 of the hierarchy.  The  estimated fair value of U.S.  Treasury securities and
money market mutual funds is included in  the amount disclosed in  Level 1  as the estimates are based
on unadjusted market prices.

232

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. PENSION PLANS, RETIREMENT BENEFITS AND  SAVINGS PLANS  (Continued)

Fair Value Hierarchy—Pension Plans

The following tables present the level  within  the fair value hierarchy  at which  the financial assets

of the Company’s pension plans are  measured on a  recurring basis at December 31, 2012 and 2011.

(at December 31, 2012, in millions)

Total

Level 1

Level 2

Level 3

Invested assets:
Fixed maturities

Obligations of states, municipalities and political
subdivisions . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities issued by foreign governments . .
Mortgage-backed securities, collateralized
mortgage obligations and pass-through
securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other corporate bonds . . . . . . . . . . . . . . . .

Total fixed maturities . . . . . . . . . . . . . . . . .

$

7
14

$ — $
—

7
14

$—
—

9
383

413

—
9
— 383

— 413

Mutual funds

Equity mutual funds . . . . . . . . . . . . . . . . . . . .
Bond mutual funds . . . . . . . . . . . . . . . . . . . . .

Total mutual funds . . . . . . . . . . . . . . . . . . . .

1,143
406

1,549

1,143
406

1,549

Equity securities . . . . . . . . . . . . . . . . . . . . . . . . .

Other investments(1) . . . . . . . . . . . . . . . . . . . . .

Cash and short-term securities

U.S. Treasury securities . . . . . . . . . . . . . . . . . .
Money market mutual funds . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total cash and short-term securities . . . . . .

450

6

132
22
287

441

450

—

132
22
17

171

—
—

—

—

—

—
—
270

270

—
—

—

—
—

—

—

6

—
—
—

—

Total . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,859

$2,170

$683

$ 6

(1) The fair value estimates of the two private  equity  funds comprising these investments are
determined by an external fund manager based on recent filings,  operating results,
balance sheet stability, growth and other business and  market sector  fundamentals. Due
to the significant unobservable inputs  in these valuations, the  total  fair value estimates are
disclosed in Level 3.

233

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. PENSION PLANS, RETIREMENT BENEFITS AND  SAVINGS PLANS  (Continued)

(at December 31, 2011, in millions)

Total

Level 1

Level 2

Level 3

Invested assets:
Fixed maturities

U.S. Treasury securities and obligations of U.S.
government and government agencies and
authorities . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities issued by foreign governments . .
Mortgage-backed securities, collateralized
mortgage obligations and pass-through
securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other corporate bonds . . . . . . . . . . . . . . . .

Total fixed maturities . . . . . . . . . . . . . . . . .

Mutual funds

Equity mutual funds . . . . . . . . . . . . . . . . . . . .
Bond mutual funds . . . . . . . . . . . . . . . . . . . . .

$

$

15
13

15
—

$ — $—
—

13

14
214

256

932
443

12
—
— 214

15

239

932
443

2
—

2

—
—

—

—

16

—
—
—

—

—
—

—

—

—

—
—
298

298

Total mutual funds . . . . . . . . . . . . . . . . . . . .

1,375

1,375

Equity securities . . . . . . . . . . . . . . . . . . . . . . . . .

Other investments(1) . . . . . . . . . . . . . . . . . . . . .

Cash and short-term securities

U.S. Treasury securities . . . . . . . . . . . . . . . . . .
Money market mutual funds . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total cash and short-term securities . . . . . .

352

16

141
50
310

501

352

—

141
50
12

203

Total . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,500

$1,945

$537

$18

(1) The fair value estimates of the hedge fund and two private  equity funds comprising  these

investments are determined by an external fund manager based  on  recent filings,
operating results, balance sheet stability,  growth and other business  and  market sector
fundamentals. Due to the significant unobservable  inputs  in these valuations, the  total  fair
value estimates are disclosed in Level 3.

234

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. PENSION PLANS, RETIREMENT BENEFITS AND  SAVINGS PLANS  (Continued)

The following table presents the changes in the  Level  3  fair value category for the years ended

December 31, 2012 and 2011.

(at and for the year ended December 31, in millions)

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets:

Other
Investments

2012

2011

$ 18

$18

Relating to assets still held . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Relating to assets sold during the year . . . . . . . . . . . . . . . . . . . . . . .

(1)
2
— —

Purchases, sales, settlements and maturities:

Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements/maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross transfers into Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross transfers out of Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2
—
(12)
(1)
— —
— —
(2) —

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 6

$18

Other  Postretirement Benefit Plan

The Company’s overall investment strategy is to achieve a mix  of  approximately 35% to 65% of

investments for long-term growth and 35% to 60%  for near-term insurance payments  with a wide
diversification of asset types, fund strategies and fund managers.  The  current target allocations  for plan
assets are 25% to 75% fixed income securities, with the remainder allocated to short-term securities.
Fixed income securities include corporate bonds  of  companies from diversified industries, mortgage-
backed securities and U.S. Treasuries.

Fair Value—Other Postretirement Benefit  Plan

The Company’s other postretirement benefit plan had  financial assets of $18 million and
$19 million at December 31, 2012 and  2011, respectively, which are measured  at fair  value on a
recurring basis. The assets are primarily  short-term securities and  corporate  bonds, and categorized as
level  2 in the fair value hierarchy.

235

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. PENSION PLANS, RETIREMENT BENEFITS AND  SAVINGS PLANS  (Continued)

Estimated Future Benefit Payments

The following table presents the estimated benefits expected to be paid by  the Company’s pension
and postretirement benefit plans for  the next ten years (reflecting estimated future employee service).

(in millions)

Benefits Expected to be Paid

Pension Plans

Postretirement
Benefit Plans

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 through 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 152
165
176
187
198
1,118

$15
15
15
15
15
70

Savings  Plan

The Company has a savings plan, The Travelers 401(k) Savings Plan  (the  Savings Plan),  in which

substantially all U.S. domestic Company employees are  eligible to participate. Under the Savings  Plan,
the Company matches employee contributions up to 5% of eligible  pay, with a  maximum annual  match
of $5,000 which becomes 100% vested after three  years  of  service. For the year ended December 31,
2011, existing employees whose annual  base  salary on  December 31,  2010 was $175,000 or more, and
employees hired during 2011 at an annual base salary  of $175,000 or  more, were  not  eligible for  the
Company’s matching contribution. The Company’s matching contribution is made in  cash and invested
according to the employee’s current investment elections. The Company’s matching contribution  can  be
reinvested at any time into any other investment option. The Company’s  non-U.S. employees
participate in separate savings plans.  The  total expense  related to all of  the savings plans  was
$92 million, $90 million and $94 million  for the years ended December 31,  2012, 2011 and 2010,
respectively.

Included in the Savings Plan are a legacy Savings  Plus Plan (SPP)  and a Stock Ownership Plan
(SOP) in which substantially all employees who were hired by legacy SPC before  April 1,  2004 were
eligible to participate. In 2004 under  the SPP, the Company matched 100%  of  employees’ contributions
up to a maximum of 6% of their salary. The match  was  in the form of preferred shares, to the extent
available in the SOP, or in the Company’s common shares. Also allocated to participants were
preferred shares equal to the value of dividends on  previously  allocated shares. Each  share of preferred
stock paid a dividend of $11.72 annually  and  was  convertible into eight  shares of the  Company’s
common stock. The SOP has no preferred shares available for future allocations. As  described in  more
detail in note 9 above, all preferred shares outstanding on June 7,  2011 (190,083 shares) were
converted into a total of 1.52 million  shares of  the Company’s common stock.

All common shares held by the Savings  Plan are considered  outstanding for diluted  EPS

computations and dividends paid on  all  shares are charged to retained earnings.

15. LEASES

Rent expense was $192 million, $191 million and $206 million in 2012,  2011 and  2010, respectively.

236

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. LEASES (Continued)

Future minimum annual rental payments under  noncancellable operating leases  for 2013, 2014,

2015, 2016 and 2017 are $164 million,  $141 million, $118 million, $95 million and  $59 million,
respectively, and $89 million for 2018  and thereafter. Future sublease rental income aggregating
approximately $6 million will partially offset  these commitments.

16. CONTINGENCIES, COMMITMENTS AND GUARANTEES

Contingencies

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

Asbestos- and Environmental-Related Proceedings

In  the  ordinary  course  of  its  insurance  business,  the  Company  has  received  and  continues  to
receive claims for insurance arising under policies issued by the  Company asserting alleged  injuries and
damages from asbestos- and environmental-related  exposures that are the subject of  related coverage
litigation, including, among others, the  litigation described below. The Company  is defending asbestos-
and environmental-related litigation vigorously  and  believes that it  has meritorious defenses; however,
the outcomes of these disputes are uncertain. In  this regard, the Company employs dedicated specialists
and aggressive resolution strategies to  manage asbestos  and environmental loss exposure, including
settling litigation under appropriate circumstances.

Asbestos Direct Action Litigation—In  October 2001  and  April 2002, two purported class action suits
(Wise v. Travelers and Meninger v. Travelers) were filed against Travelers Property Casualty  Corp. (TPC)
and other insurers (not including The St.  Paul Companies, Inc. (SPC)) in state court in West Virginia.
These and other cases subsequently filed  in West Virginia were consolidated into a single proceeding in
the Circuit Court of Kanawha County,  West Virginia.  The plaintiffs  allege that the insurer  defendants
engaged in unfair trade practices in violation of state statutes by inappropriately handling and settling
asbestos claims. The plaintiffs seek to  reopen large  numbers of settled asbestos  claims and to impose
liability for damages, including punitive  damages, directly on insurers. Similar lawsuits alleging
inappropriate handling and settling of asbestos claims  were filed  in Massachusetts and Hawaii  state
courts. These suits are collectively referred to as the Statutory and Hawaii Actions.

In March 2002, the plaintiffs in consolidated asbestos  actions  pending before a mass tort panel of

judges in West Virginia state court amended their  complaint to include TPC as a  defendant, alleging
that TPC and other insurers breached  alleged duties to certain users of asbestos products. The
plaintiffs seek damages, including punitive damages. Lawsuits  seeking  similar relief and raising similar
allegations, primarily violations of purported common law duties to third parties, have  also been
asserted in various state courts against  TPC and SPC.  The claims  asserted in these  suits are  collectively
referred to as the Common Law Claims.

In response to these claims, TPC moved  to  enjoin  the Statutory Actions and  the Common Law

Claims in the federal bankruptcy court  that had presided over the bankruptcy of TPC’s former
policyholder Johns-Manville Corporation on the ground  that the suits violated injunctions entered in
connection with confirmation of the  Johns-Manville bankruptcy (the ‘‘1986 Orders’’). The bankruptcy
court issued a temporary restraining order and referred  the parties to mediation. In November 2003,

237

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. CONTINGENCIES, COMMITMENTS AND GUARANTEES (Continued)

the parties reached a settlement of the Statutory  and  Hawaii  Actions, which included a lump-sum
payment of up to $412 million by TPC, subject to a number of significant contingencies. In May 2004,
the parties reached a settlement resolving  substantially all  pending and similar future Common Law
Claims against TPC, which included  a payment of up to $90 million by TPC, subject to similar
contingencies. Among the contingencies  for each of these settlements was that the bankruptcy court
issue an order, which must become a  final  order, clarifying that all of these claims, and similar future
asbestos-related claims against TPC, as well as related contribution claims,  are barred  by  the 1986
Orders.

On August 17, 2004, the bankruptcy court entered an order  approving the settlements and
clarifying that the 1986 Orders barred  the pending  Statutory and Hawaii Actions and substantially all
Common Law Claims pending against  TPC (the ‘‘Clarifying Order’’). The Clarifying Order also applies
to similar direct action claims that may  be filed in the future. Although the  District Court substantially
affirmed the Clarifying Order, on February  15, 2008, the Second Circuit issued an opinion vacating on
jurisdictional grounds the District Court’s  approval  of the Clarifying Order.

On December 12, 2008, the United States  Supreme  Court  granted TPC’s Petition for Writ of
Certiorari and, on June 18, 2009, the  Supreme  Court reversed the Second Circuit’s February 15, 2008
decision, finding, among other things, that the 1986  Orders are final and therefore may  not  be
collaterally challenged on jurisdictional grounds. The Supreme Court further  ruled that the bankruptcy
court had jurisdiction to issue the Clarifying Order. However, since the Second  Circuit had not ruled
on certain additional issues, principally related to procedural matters and the adequacy of notice
provided to certain parties, the Supreme  Court remanded the case to the Second Circuit  for further
proceedings on those specific issues.

On March 22, 2010, the Second Circuit issued an opinion in which it found that the notice of the

1986 Orders provided to one remaining  objector  was  insufficient to bar contribution claims by that
objector against TPC. TPC’s Petition  for Rehearing and  Rehearing En Banc were denied May 25, 2010
and, its Petition for Writ of Certiorari and Petition for a Writ of Mandamus  were denied by the United
States Supreme Court on November  29,  2010.

The plaintiffs in the Statutory and Hawaii actions and the Common Law  Claims  actions thereafter

filed motions in the bankruptcy court  to  compel TPC to make payment under the settlement
agreements, arguing that all conditions precedent  to  the settlements had  been met. On December 16,
2010, the bankruptcy court granted the  plaintiffs’ motions and ruled that  TPC  was required  to  fund  the
settlements. The court entered judgment  against TPC on January  20, 2011  in accordance with  this
ruling and ordered TPC to pay the settlement amounts plus prejudgment interest. The bankruptcy
court’s judgment was reversed by the district court  on March 1, 2012, the district court having  found
that the conditions to the settlements had not been met in  view of the Second  Circuit’s  March 22, 2010
ruling permitting the filing of contribution claims against TPC. The plaintiffs appealed the district
court’s March 1, 2012 decision to the  Second Circuit Court of Appeals. Oral argument  before  the
Second Circuit took place on January 10, 2013,  and  the parties  await the court’s decision.

SPC, which is not covered by the Manville  bankruptcy  court rulings  or  the settlements  described

above, from time to time has been named as  a defendant in direct action cases  in Texas state court
asserting common law claims. All such  cases that  are still  pending and in which  SPC has been  served
are currently on the inactive docket in  Texas state court. If  any  of  those cases  becomes active, SPC
intends to litigate those cases vigorously.  SPC was previously a defendant  in similar direct actions in

238

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. CONTINGENCIES, COMMITMENTS AND GUARANTEES (Continued)

Ohio  state court, which have been dismissed  following  favorable  rulings by Ohio  trial and appellate
courts. From time to time, SPC and/or  its subsidiaries  have been named  in similar individual direct
actions in other jurisdictions.

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

Other  Proceedings Not Arising Under Insurance Contracts  or Reinsurance Agreements

Broker Anti-Trust Litigation—In 2005,  four putative class action lawsuits  were brought  against a

number of insurance brokers and insurers, including the Company,  by plaintiffs who allegedly
purchased insurance products through  one or more of  the defendant brokers. The plaintiffs  alleged that
various insurance brokers conspired with each other and with  various insurers, including  the Company,
to artificially inflate premiums, allocate brokerage customers and  rig bids for  insurance products
offered to those customers. To the extent  they were not originally  filed there, the federal class  actions
were transferred to the U.S. District  Court  for the  District of New Jersey and were  consolidated  for
pre-trial proceedings with other class actions  under the  caption In re Insurance Brokerage Antitrust
Litigation. On August 1, 2005, various  plaintiffs, including the four named  plaintiffs in the above-
referenced class actions, filed an amended  consolidated class action complaint naming various  brokers
and insurers, including the Company, on  behalf of a putative nationwide class of policyholders. The
complaint included causes of action under  the Sherman Act, the  Racketeer Influenced  and Corrupt
Organizations Act (RICO), state common law and the laws  of  the various states prohibiting antitrust
violations. The complaint sought monetary  damages, including punitive  damages  and trebled damages,
permanent injunctive relief, restitution, including  disgorgement of  profits, interest and  costs, including
attorneys’ fees. All defendants moved  to  dismiss the complaint  for failure to state  a claim. After giving
plaintiffs multiple opportunities to replead,  the court  dismissed  the Sherman  Act claims on August 31,
2007 and the RICO claims on September  28, 2007, both  with prejudice, and declined to exercise
supplemental jurisdiction over the state  law  claims. The plaintiffs appealed the  district court’s decisions
to the U.S. Court of Appeals for the  Third Circuit. On  August 16, 2010, the Third Circuit affirmed the
district court’s dismissal of all Sherman  Act and RICO  claims against  certain  defendants, including  the
Company, except for Sherman Act and  RICO  claims involving the  sale of excess  casualty  insurance
through a single defendant broker, as well as  all  state law claims, which they remanded to the district
court for further proceedings. On October 1, 2010, defendants,  including  the Company, filed renewed
motions to dismiss the remanded claims.  On March  18, 2011, the  Company and certain other
defendants entered into an agreement with  the plaintiffs to settle the lawsuit, under which  the
Company agreed to pay $6.75 million. Preliminary  approval of the settlement was granted on June  27,
2011. On September 14, 2011, the court conducted a  final fairness  hearing, and on  March 30, 2012,  the
court granted final approval of the settlement.  On April  27, 2012, three  members of the settlement
class appealed the court’s order granting  final approval of  the settlement to the U.S. Court of Appeals

239

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. CONTINGENCIES, COMMITMENTS AND GUARANTEES (Continued)

for the Third Circuit. Each of those appeals has been  dismissed. Accordingly, the settlement  will
proceed in accordance with the district court’s final approval  order and the Company’s involvement in
these class actions is concluded.

Other—In addition to those described above, the Company is involved in other lawsuits, including
lawsuits alleging extra-contractual damages relating to insurance contracts  or reinsurance agreements,
that do not arise under insurance contracts or reinsurance agreements. Based upon currently available
information, the Company does not believe it is reasonably possible that any  such lawsuit or related
lawsuits would be material to the Company’s results of  operations or have a material adverse effect  on
the Company’s financial position or liquidity.

Gain Contingencies

On August 17, 2010, in a reinsurance dispute in New York state court captioned United States
Fidelity & Guaranty Company v. American  Re-Insurance Company, et al., the trial court granted summary
judgment for United States Fidelity and  Guaranty Company (USF&G),  a subsidiary of the Company,
and denied summary judgment for American Re-Insurance  Company, a subsidiary of Munich  Re
(American Re), and three other reinsurers.  By order dated October 22,  2010, the trial court corrected
certain clerical errors and made certain  clarifications  to  the August 17, 2010 order. On October 25,
2010, judgment was entered against American Re  and  the other three insurers,  awarding  USF&G
$420 million, comprising $251 million ceded under the terms of the disputed reinsurance contract  plus
interest of 9% amounting to $169 million as of that date.  The judgment,  including the  award  of
interest, was appealed by the reinsurers  to  the New York Supreme Court, Appellate Division, First
Department. On January 24, 2012, the Appellate Division affirmed the judgment. On January  30, 2012,
the reinsurers filed a motion with the Appellate Division seeking permission to appeal its decision to
the New York Court of Appeals, and  on  March  12, 2012, the  Appellate Division  granted the reinsurers’
motion. On February 7, 2013, the Court  of Appeals  issued  an opinion that largely affirmed the
summary judgment in USF&G’s favor, while  modifying in part the  summary  judgment with respect to
two  discrete  issues  and  remanding  the  case  to  the  trial  court  for  determination  of  those  issues.  The
Company believes it has a meritorious  position on  each of these issues  and  intends to pursue its  claim
vigorously. At December 31, 2012, the  claim  totaled $470 million, comprising $251 million of
reinsurance recoverable plus interest which  had grown to $219 million  as of that date. Interest will
continue  to  accrue  at  9%  until  the  claim  is  paid.  The  $251  million  of  reinsurance  recoverable  owed  to
USF&G under the terms of the disputed  reinsurance contract has  been reported as  part of  reinsurance
recoverables in the Company’s consolidated balance sheet. The interest that would  be  owed as part of
any judgment ultimately entered in favor of USF&G is treated for accounting purposes as a gain
contingency in accordance with FASB Topic 450, Contingencies, and accordingly has not  been
recognized in the Company’s consolidated financial  statements.

In an unrelated action, The Travelers  Indemnity  Company is  one  of  the Settlement Class plaintiffs

and a class member in a class action  lawsuit captioned Safeco Insurance  Company of America, et  al. v.
American International Group, Inc. et  al. (U.S. District Court, N.D. Ill.) in  which the defendants  are
alleged to have engaged in the under-reporting of workers’ compensation premium in connection with
a workers’ compensation reinsurance pool in which several  subsidiaries of  the Company participate.  On
July 26, 2011, the court granted preliminary  approval of a  class settlement pursuant to which the
defendants agreed to pay $450 million  to  the class. The settlement includes  a plan of  allocation  of the

240

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. CONTINGENCIES, COMMITMENTS AND GUARANTEES (Continued)

settlement proceeds among the class  members. On December 21, 2011, the court entered an order
granting final approval of the settlement,  and on  February 28, 2012, the district court issued a written
opinion regarding its approval of the settlement. On March 27, 2012,  three parties who objected  to  the
settlement appealed the court’s orders approving  the settlement to the U.S. Court  of Appeals  for the
Seventh Circuit. On January 11, 2013, all  parties, including the three parties who had objected to the
settlement, filed a Stipulation of Dismissal indicating that  there were no longer any objections to the
settlement. All parties are awaiting an  order from the  Seventh Circuit in response to the  Stipulation of
Dismissal. The Company anticipates  that  its  allocation from the settlement fund, in the event the
settlement becomes final, will be approximately $90 million. This amount is  treated for accounting
purposes  as a gain contingency in accordance with FASB Topic 450, Contingencies, and accordingly will
be recognized in the Company’s consolidated  financial  statements during the period in which it  is
received by the Company.

Other Commitments and Guarantees

Commitments

Investment Commitments—The Company has unfunded commitments to private equity limited
partnerships and real estate partnerships in which it  invests. These  commitments totaled $1.27  billion
and $1.15 billion at December 31, 2012 and 2011, respectively.

Guarantees

In the ordinary course of selling business entities  to  third parties, the Company  has agreed to
indemnify purchasers for losses arising  out of breaches of representations and warranties with respect
to the business entities being sold, covenants  and  obligations of the Company  and/or its subsidiaries
following the closing, and in certain cases  obligations arising from  undisclosed  liabilities,  adverse
reserve  development, imposition of additional taxes due to either a change in  the tax  law  or an adverse
interpretation of the tax law, or certain named litigation. Such  indemnification provisions  generally
survive for periods ranging from seven  years following the applicable closing date to the expiration  of
the relevant statutes of limitations, although, in some cases, there may be other agreed upon term
limitations or no term limitations. Certain  of these contingent obligations are subject  to  deductibles
which  have to be incurred by the obligee  before the Company  is obligated to make payments. The
maximum amount of the Company’s  contingent obligation  for indemnifications related to the  sale of
business entities that are quantifiable was $471 million at  December 31,  2012, of which  $9 million was
recognized on the balance sheet at that date.

The Company also has contingent obligations for  guarantees related to certain  investments, third-

party loans related to certain investments, certain insurance  policy obligations  of former insurance
subsidiaries, and various other indemnifications. The  Company also provides standard indemnifications
to service providers in the normal course of business. The indemnification clauses are  often  standard
contractual terms. Certain of these guarantees  and  indemnifications  have no stated or notional amounts
or limitation to the maximum potential future payments, and, accordingly,  the Company is unable to
develop an estimate of the maximum potential payments for such  arrangements. The maximum amount
of the Company’s obligation for guarantees  of certain investments and third-party loans related to
certain investments that are quantifiable  was $129 million at December 31, 2012,  approximately
$63 million of which is indemnified by a  third  party. The maximum amount of  the Company’s

241

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. CONTINGENCIES, COMMITMENTS AND GUARANTEES (Continued)

obligation related to the guarantee of certain  insurance policy  obligations of a former insurance
subsidiary was $480 million at December  31,  2012, all  of  which is indemnified  by  a third party.

17. NONCASH INVESTING AND FINANCING  ACTIVITIES

There were no material noncash financing or investing  activities during the years ended

December 31, 2012, 2011 and 2010.

18. CONSOLIDATING FINANCIAL  STATEMENTS OF THE  TRAVELERS COMPANIES, INC. AND
SUBSIDIARIES

The following consolidating financial statements of the Company have been prepared pursuant to

Rule 3-10 of Regulation S-X. These consolidating financial statements have  been prepared from the
Company’s financial information on the  same basis of accounting  as the consolidated financial
statements. The Travelers Companies, Inc.  has  fully and unconditionally guaranteed certain debt
obligations of TPC, its wholly-owned  subsidiary, which  totaled $1.20 billion  at December 31, 2012.

Prior to the merger of TPC and SPC in  2004, TPC fully  and  unconditionally guaranteed  the
payment of all principal, premiums, if  any, and interest  on certain debt obligations of  its wholly-owned
subsidiary TIGHI. Concurrent with the  merger, The Travelers Companies, Inc. fully and  unconditionally
assumed such guarantee obligations of TPC.  TPC is deemed to have no assets or operations
independent of TIGHI. Consolidating  financial  information for  TIGHI  has not been presented herein
because such financial information would be substantially the same as the financial information
provided for TPC.

242

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. CONSOLIDATING FINANCIAL  STATEMENTS OF THE  TRAVELERS COMPANIES, INC. AND
SUBSIDIARIES (Continued)

CONSOLIDATING STATEMENT OF INCOME (Unaudited)
For the year ended December 31, 2012

(in millions)

TPC

Other
Subsidiaries

Travelers(2)

Eliminations

Consolidated

Revenues
Premiums . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . .
Fee  income . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains(1) . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . .

$15,158
1,912
321
29
87

Total  revenues . . . . . . . . . . . . . . . . . . .

17,507

Claims and expenses
Claims and claim adjustment expenses . . .
Amortization of deferred acquisition  costs .
General and administrative expenses . . . . .
Interest expense . . . . . . . . . . . . . . . . . . .

9,908
2,636
2,445
73

Total  claims and expenses . . . . . . . . . .

15,062

Income (loss) before income taxes . . . . .
Income tax expense (benefit) . . . . . . . . . .
Net income of subsidiaries . . . . . . . . . . . .

2,445
588
—

$7,199
968
2
22
34

8,225

4,768
1,274
1,161
—

7,203

1,022
224
—

$ —
9
—
—
(1)

$ —
—
—
—
—

8

—
—
4
305

309

—

—
—
—
—

—

(301)
(119)
2,655

—
—
(2,655)

$22,357
2,889
323
51
120

25,740

14,676
3,910
3,610
378

22,574

3,166
693
—

Net income . . . . . . . . . . . . . . . . . . . . .

$ 1,857

$ 798

$2,473

$(2,655)

$ 2,473

(1) Total other-than-temporary impairment  (OTTI) for the year ended December 31, 2012, and  the

amounts comprising total OTTI that were  recognized in net  realized investment gains and in other
comprehensive income (OCI) were as follows:

(in millions)

Total OTTI gains . . . . . . . . . . . . . . . . . . . . .
OTTI losses recognized in net realized

TPC

$18

investment gains . . . . . . . . . . . . . . . . . . . .
OTTI gains recognized in OCI . . . . . . . . . . . .

$ (9)
$27

Other
Subsidiaries

$ 9

$ (6)
$15

Travelers(2)

Eliminations

Consolidated

$—

$—
$—

$—

$—
$—

$ 27

$(15)
$ 42

(2) The Travelers Companies, Inc., excluding its  subsidiaries.

243

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. CONSOLIDATING FINANCIAL  STATEMENTS OF THE  TRAVELERS COMPANIES, INC. AND
SUBSIDIARIES (Continued)

CONSOLIDATING STATEMENT OF INCOME (Unaudited)
For the year ended December 31, 2011

(in millions)

TPC

Other
Subsidiaries

Travelers(2)

Eliminations

Consolidated

Revenues
Premiums . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . .
Fee  income . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains (losses)(1) . .
Other revenues . . . . . . . . . . . . . . . . . . . .

$14,903
1,933
294
10
103

Total  revenues . . . . . . . . . . . . . . . . . . .

17,243

Claims and expenses
Claims and claim adjustment expenses . . .
Amortization of deferred acquisition  costs .
General and administrative expenses . . . . .
Interest expense . . . . . . . . . . . . . . . . . . .

Total  claims and expenses . . . . . . . . . .

Income (loss) before income taxes . . . . .
Income tax expense (benefit) . . . . . . . . . .
Net income of subsidiaries . . . . . . . . . . . .

10,906
2,594
2,377
73

15,950

1,293
111
—

$7,187
938
2
50
23

8,200

5,370
1,282
1,152
—

7,804

396
14
—

$ —
8
—
(5)
—

$ —
—
—
—
—

3

—
—
27
313

340

—

—
—
—
—

—

(337)
(199)
1,564

—
—
(1,564)

$22,090
2,879
296
55
126

25,446

16,276
3,876
3,556
386

24,094

1,352
(74)
—

Net income . . . . . . . . . . . . . . . . . . . . .

$ 1,182

$ 382

$1,426

$(1,564)

$ 1,426

(1) Total other-than-temporary impairment  (OTTI) for the year ended December 31, 2011, and  the

amounts comprising total OTTI that were  recognized in net  realized investment gains (losses) and
in other comprehensive income (OCI) were as follows:

(in millions)

Total OTTI gains . . . . . . . . . . . . . . . . . . . . .
OTTI losses recognized in net realized

TPC

$ 15

investment gains (losses) . . . . . . . . . . . . . .
OTTI gains recognized in OCI . . . . . . . . . . .

$(15)
$ 30

Other
Subsidiaries

$ 15

$(10)
$ 25

Travelers(2)

Eliminations

Consolidated

$—

$—
$—

$—

$—
$—

$ 30

$(25)
$ 55

(2) The Travelers Companies, Inc., excluding its  subsidiaries.

244

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. CONSOLIDATING FINANCIAL  STATEMENTS OF THE  TRAVELERS COMPANIES, INC. AND
SUBSIDIARIES (Continued)

CONSOLIDATING STATEMENT OF INCOME (Unaudited)
For the year ended December 31, 2010

(in millions)

TPC

Other
Subsidiaries

Travelers(2)

Eliminations

Consolidated

Revenues
Premiums . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . .
Fee  income . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains(1) . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . .

$14,445
2,078
285
57
111

Total  revenues . . . . . . . . . . . . . . . . . . .

16,976

Claims and expenses
Claims and claim adjustment expenses . . .
Amortization of deferred acquisition  costs .
General and administrative expenses . . . . .
Interest expense . . . . . . . . . . . . . . . . . . .

8,786
2,548
2,306
74

Total  claims and expenses . . . . . . . . . .

13,714

Income (loss) before income taxes . . . . .
Income tax expense (benefit) . . . . . . . . . .
Net income of subsidiaries . . . . . . . . . . . .

3,262
798
—

$6,987
970
2
200
20

8,179

4,424
1,254
1,086
—

6,764

1,415
382
—

$ —
11
—
7
(60)

(42)

—
—
14
315

329

(371)
(90)
3,497

$ —
—
—
—
(1)

(1)

—
—
—
(1)

(1)

—
—
(3,497)

$21,432
3,059
287
264
70

25,112

13,210
3,802
3,406
388

20,806

4,306
1,090
—

Net income . . . . . . . . . . . . . . . . . . . . .

$ 2,464

$1,033

$3,216

$(3,497)

$ 3,216

(1) Total other-than-temporary impairment  (OTTI) for the year ended December 31, 2010, and  the

amounts comprising total OTTI that were  recognized in net  realized investment gains and in other
comprehensive income (OCI) were as follows:

(in millions)

Total OTTI gains (losses) . . . . . . . . . . . . . . .
OTTI losses recognized in net realized

TPC

$ 10

investment gains . . . . . . . . . . . . . . . . . . . .
OTTI gains recognized in OCI . . . . . . . . . . .

$(12)
$ 22

Other
Subsidiaries

$ (3)

$(14)
$ 11

Travelers(2)

Eliminations

Consolidated

$—

$—
$—

$—

$—
$—

$ 7

$(26)
$ 33

(2) The Travelers Companies, Inc., excluding its  subsidiaries.

245

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. CONSOLIDATING FINANCIAL  STATEMENTS OF THE  TRAVELERS COMPANIES, INC. AND
SUBSIDIARIES (Continued)

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME  (Unaudited)
For the year ended December 31, 2012

(in millions)

TPC

Other
Subsidiaries

Travelers(1)

Eliminations

Consolidated

Net income . . . . . . . . . . . . . . . . . . . . . . . .

$1,857

$798

$2,473

$(2,655)

$2,473

Other comprehensive income:
Changes in net unrealized gains on

investment securities:
Having no credit losses recognized in  the
consolidated statement of income . . . .

Having credit losses recognized in the

consolidated statement of income . . . .

Net changes in benefit plan assets and

obligations . . . . . . . . . . . . . . . . . . . . . . .

Net changes in unrealized foreign currency

248

57

(6)

translation and other changes . . . . . . . . .

(19)

23

24

(5)

62

Other comprehensive income (loss)
before income taxes and other
comprehensive income of
subsidiaries . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . .

Other comprehensive income (loss),

net  of taxes, before other
comprehensive income of
subsidiaries . . . . . . . . . . . . . . . . . .
Other comprehensive income of subsidiaries

Other comprehensive income . . . . . . .

280
101

104
21

179
—

179

83
—

83

10

—

(58)

—

(48)
(17)

(31)
262

231

—

—

—

—

—
—

—
(262)

(262)

281

81

(69)

43

336
105

231
—

231

Comprehensive income . . . . . . . . . . . .

$2,036

$881

$2,704

$(2,917)

$2,704

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

246

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. CONSOLIDATING FINANCIAL  STATEMENTS OF THE  TRAVELERS COMPANIES, INC. AND
SUBSIDIARIES (Continued)

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME  (Unaudited)
For the year ended December 31, 2011

(in millions)

TPC

Other
Subsidiaries

Travelers(1)

Eliminations

Consolidated

Net income . . . . . . . . . . . . . . . . . . . . . . . .

$1,182

$382

$1,426

$(1,564)

$1,426

—

—

—

—

—
—

1,570

4

(307)

(90)

1,177
427

Other comprehensive income:
Changes in net unrealized gains on

investment securities:
Having no credit losses recognized in  the
consolidated statement of income . . . .

Having credit losses recognized in the

1,100

472

consolidated statement of income . . . .

(10)

Net changes in benefit plan assets and

obligations . . . . . . . . . . . . . . . . . . . . . . .

(5)

Net changes in unrealized foreign currency

14

1

(2)

—

(303)

translation and other changes . . . . . . . . .

(76)

(14)

—

Other comprehensive income (loss)
before income taxes and other
comprehensive income of
subsidiaries . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . .

Other comprehensive income (loss),

net  of taxes, before other
comprehensive income of
subsidiaries . . . . . . . . . . . . . . . . . .
Other comprehensive income of subsidiaries

Other comprehensive income . . . . . . .

1,009
356

473
177

(305)
(106)

653
—

653

296
—

296

(199)
949

750

—
(949)

(949)

750
—

750

Comprehensive income . . . . . . . . . . . .

$1,835

$678

$2,176

$(2,513)

$2,176

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

247

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. CONSOLIDATING FINANCIAL  STATEMENTS OF THE  TRAVELERS COMPANIES, INC. AND
SUBSIDIARIES (Continued)

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME  (Unaudited)
For the year ended December 31, 2010

(in millions)

TPC

Other
Subsidiaries

Travelers(1)

Eliminations

Consolidated

Net income . . . . . . . . . . . . . . . . . . . . . . . .

$2,464

$1,033

$3,216

$(3,497)

$3,216

Other comprehensive income:
Changes in net unrealized gains on

investment securities:
Having no credit losses recognized in  the
consolidated statement of income . . . .

Having credit losses recognized in the

(77)

(42)

consolidated statement of income . . . .

85

38

Net changes in benefit plan assets and

obligations . . . . . . . . . . . . . . . . . . . . . . .

Net changes in unrealized foreign currency

translation and other changes . . . . . . . . .

Other comprehensive income before

income taxes and other
comprehensive income of
subsidiaries . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . .

Other comprehensive income (loss),

net  of taxes, before other
comprehensive income of
subsidiaries . . . . . . . . . . . . . . . . . .
Other comprehensive income of subsidiaries

Other comprehensive income (loss) . . .

3

4

15
—

15
—

15

3

8

7
9

(2)
—

(2)

1

—

33

—

34
11

23
13

36

—

—

—

—

—
—

—
(13)

(13)

(118)

123

39

12

56
20

36
—

36

Comprehensive income . . . . . . . . . . . .

$2,479

$1,031

$3,252

$(3,510)

$3,252

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

248

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. CONSOLIDATING FINANCIAL  STATEMENTS OF THE  TRAVELERS COMPANIES, INC. AND
SUBSIDIARIES (Continued)

CONSOLIDATING BALANCE SHEET (Unaudited)
At December 31, 2012

TPC

Other
Subsidiaries

Travelers(1)

Eliminations

Consolidated

(in millions)

Assets
Fixed maturities, available for sale, at fair value
(amortized cost $60,829) . . . . . . . . . . . . . . .
Equity securities, available for sale, at fair value
(cost $462) . . . . . . . . . . . . . . . . . . . . . . . .
Real estate investments . . . . . . . . . . . . . . . . .
Short-term securities . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . .

$44,336

$21,019

$

38

$

153
33
1,187
2,443

386
850
338
990

—

—
—
—
—

—

—
—
—
—
—
—
—
—
—
(28,562)
—

$ 65,393

645
883
3,483
3,434

73,838

330
752
5,872
10,712
856
1,792
4,806
3,365
381
—
2,234

106
—
1,958
1

2,103

2
5
—
—
—
—
—
—
—
28,562
18

Total investments . . . . . . . . . . . . . . . . . . . .

48,152

23,583

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income accrued . . . . . . . . . . . . . .
Premiums receivable . . . . . . . . . . . . . . . . . . .
Reinsurance recoverables . . . . . . . . . . . . . . . .
Ceded unearned premiums . . . . . . . . . . . . . . .
Deferred acquisition costs
. . . . . . . . . . . . . . .
Contractholder receivables . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . .

177
507
3,944
7,112
698
1,560
3,540
2,411
268
—
1,930

151
240
1,928
3,600
158
232
1,266
954
113
—
286

Total assets . . . . . . . . . . . . . . . . . . . . . . . .

$70,299

$32,511

$ 30,690

$(28,562)

$104,938

Liabilities
Claims and claim adjustment expense reserves . .
Unearned premium reserves . . . . . . . . . . . . . .
Contractholder payables . . . . . . . . . . . . . . . . .
Payables for reinsurance premiums . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . .
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . .

$33,598
7,751
3,540
151
316
1,191
4,107

Total  liabilities . . . . . . . . . . . . . . . . . . . . .

50,654

Shareholders’ equity
Common stock (1,750.0 shares authorized;

377.4 shares issued and outstanding) . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . .
Treasury stock, at cost (372.3 shares) . . . . . . . .

Total shareholders’ equity . . . . . . . . . . . . . .

—
11,135
6,404
2,106
—

19,645

$17,324
3,490
1,266
195
123
—
1,186

23,584

390
6,501
1,113
923
—

8,927

$

—
—
—
—
(101)
5,159
237

5,295

21,161
—
21,342
2,236
(19,344)

25,395

$

—
—
—
—
—
—
—

—

(390)
(17,636)
(7,507)
(3,029)
—

(28,562)

$ 50,922
11,241
4,806
346
338
6,350
5,530

79,533

21,161
—
21,352
2,236
(19,344)

25,405

Total liabilities and  shareholders’ equity . . . .

$70,299

$32,511

$ 30,690

$(28,562)

$104,938

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

249

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. CONSOLIDATING FINANCIAL  STATEMENTS OF THE  TRAVELERS COMPANIES, INC. AND
SUBSIDIARIES (Continued)

CONSOLIDATING BALANCE SHEET (Unaudited)
At December 31, 2011

TPC

Other
Subsidiaries

Travelers(1)

Eliminations

Consolidated

(in millions)

Assets
Fixed maturities, available for sale, at fair value
(amortized cost $59,994) . . . . . . . . . . . . . . .
Equity securities, available for sale, at fair value
(cost $414) . . . . . . . . . . . . . . . . . . . . . . . .
Real estate investments . . . . . . . . . . . . . . . . .
Short-term securities . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . .

$43,438

$20,761

$

33

$

146
33
879
2,446

319
832
376
1,004

Total investments . . . . . . . . . . . . . . . . . . . .

46,942

23,292

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income accrued . . . . . . . . . . . . . .
Premiums receivable . . . . . . . . . . . . . . . . . . .
Reinsurance recoverables . . . . . . . . . . . . . . . .
Ceded unearned premiums . . . . . . . . . . . . . . .
Deferred acquisition costs
. . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . .
Contractholder receivables . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . .

114
517
3,865
7,372
656
1,536
(82)
3,891
2,411
297
—
1,983

98
251
1,865
3,783
172
250
(47)
1,295
954
136
—
52

—

—
—
—
—

—

—
—
—
—
—
—
—
—
—
—
(27,565)
—

$ 64,232

559
865
3,594
3,451

72,701

214
768
5,730
11,155
828
1,786
7
5,186
3,365
433
—
2,402

94
—
2,339
1

2,467

2
—
—
—
—
—
136
—
—
—
27,565
367

Total assets . . . . . . . . . . . . . . . . . . . . . . . .

$69,502

$32,101

$ 30,537

$(27,565)

$104,575

Liabilities
Claims and claim adjustment expense reserves . .
Unearned premium reserves . . . . . . . . . . . . . .
Contractholder payables . . . . . . . . . . . . . . . . .
Payables for reinsurance premiums . . . . . . . . .
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . .

$33,727
7,644
3,891
178
1,190
3,910

Total  liabilities . . . . . . . . . . . . . . . . . . . . .

50,540

Shareholders’ equity
Common stock (1,750.0 shares authorized;

392.8 shares issued and outstanding) . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . .
Treasury stock, at cost (349.0 shares) . . . . . . . .

Total shareholders’ equity . . . . . . . . . . . . . .

—
11,135
5,900
1,927
—

18,962

$17,665
3,458
1,295
211
—
859

23,488

390
6,501
882
840
—

8,613

$

—
—
—
—
5,415
655

6,070

20,732
—
19,569
2,005
(17,839)

24,467

$

—
—
—
—
—
—

—

(390)
(17,636)
(6,772)
(2,767)
—

(27,565)

$ 51,392
11,102
5,186
389
6,605
5,424

80,098

20,732
—
19,579
2,005
(17,839)

24,477

Total liabilities and  shareholders’ equity . . . .

$69,502

$32,101

$ 30,537

$(27,565)

$104,575

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

250

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. CONSOLIDATING FINANCIAL  STATEMENTS OF THE  TRAVELERS COMPANIES, INC. AND
SUBSIDIARIES (Continued)

CONSOLIDATING STATEMENT OF CASH  FLOWS  (Unaudited)
For the twelve months ended December  31, 2012

TPC

Other
Subsidiaries

Travelers(1)

Eliminations

Consolidated

$ 1,857

$

798

$ 2,473

$(2,655)

$ 2,473

715

2,572

7

805

(700)

1,773

735

(1,920)

5,905

2,462

355
16
53
280

(3,077)
(28)
(95)
(163)
44
(36)
—

(189)

—
—
—

—

—

—
(567)

(567)

4

53
98

2

2
—
—
—

(9)
(2)
—
—
381
(1)
—

373

(258)
(694)
295

(1,474)

(53)

38
—

(2,146)

—

—
2

2

—

—
—
—
—

—
—
—
—
—
—
—

—

—
—
—

—

—

—
1,920

1,920

—

—
—

$ —

$ —
$ —

$

151

$

$
108
$ —

$ (207)
302
$

757

3,230

8,369

1,087
37
53
835

(10,447)
(48)
(95)
(534)
117
(23)
(323)

(972)

(258)
(694)
295

(1,474)

(53)

38
—

(2,146)

4

116
214

330

188
375

$

$
$

(in millions)

Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net adjustments to  reconcile  net income  to  net  cash
provided by operating  activities . . . . . . . . . . . .

Net  cash provided by operating activities . . . . . . .

Cash flows from  investing activities
Proceeds  from maturities of  fixed maturities . . . . .
Proceeds  from sales of  investments:

Fixed  maturities . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . .
Real estate  investments
. . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . .

Purchases of investments:

Fixed  maturities . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . .
Real estate  investments
. . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . .
Net sales (purchases) of  short-term securities . . . . .
Securities transactions in course of settlement . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net  cash provided by (used in)  investing  activities .

Cash flows from financing  activities
Payment of debt . . . . . . . . . . . . . . . . . . . . . . . .
Dividends  paid to  shareholders . . . . . . . . . . . . . .
Issuance of common stock—employee  share  options
Treasury stock acquired—share  repurchase

authorization . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock acquired—net employee  share-based
compensation . . . . . . . . . . . . . . . . . . . . . . . .

Excess  tax benefits  from share-based payment

arrangements . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid to  parent company . . . . . . . . . . . .

Net  cash used in  financing activities . . . . . . . . . .

Effect  of exchange rate changes  on cash . . . . . . . .

Net increase in  cash . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Cash  at  beginning of  year

Cash at  end of year . . . . . . . . . . . . . . . . . . . . .

Supplemental disclosure of cash flow  information
Income  taxes paid  (received) . . . . . . . . . . . . . . .
Interest  paid . . . . . . . . . . . . . . . . . . . . . . . . . .

730
21
—
555

(7,361)
(18)
—
(371)
(308)
14
(323)

(1,156)

—
—
—

—

—

—
(1,353)

(1,353)

—

63
114

177

287
73

$

$
$

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

251

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. CONSOLIDATING FINANCIAL  STATEMENTS OF THE  TRAVELERS COMPANIES, INC. AND
SUBSIDIARIES (Continued)

CONSOLIDATING STATEMENT OF CASH  FLOWS  (Unaudited)
For the twelve months ended December  31, 2011

(in millions)

Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net adjustments to  reconcile  net income  to  net  cash
provided by operating  activities . . . . . . . . . . . .

Net  cash provided by operating activities . . . . . . .

Cash flows from  investing activities
Proceeds  from maturities of  fixed maturities . . . . .
Proceeds  from sales of  investments:

Fixed  maturities . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . .
Real estate  investments
. . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . .

Purchases of investments:

Fixed  maturities . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . .
Real estate  investments
. . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . .
Net sales (purchases) of  short-term securities . . . . .
Securities transactions in course of settlement . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net  cash provided by (used in)  investing  activities .

Cash flows from financing  activities
Payment of debt . . . . . . . . . . . . . . . . . . . . . . . .
Dividends  paid to  shareholders . . . . . . . . . . . . . .
Issuance of common stock—employee  share  options
Treasury stock acquired—share  repurchase

authorization . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock acquired—net employee  share-based
compensation . . . . . . . . . . . . . . . . . . . . . . . .

Excess  tax benefits  from share-based payment

arrangements . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid to  parent company . . . . . . . . . . . .
Capital  contributions, loans and other transactions

TPC

Other
Subsidiaries

Travelers(1)

Eliminations

Consolidated

$ 1,182

$

382

$ 1,426

$(1,564)

$ 1,426

736

1,918

98

480

635

2,061

(726)

(2,290)

4,902

2,502

720
82
1
343

(5,714)
(30)
(24)
(711)
717
(46)
(351)

(111)

—
—
—

—

—

—
(1,779)

—

28
86

440
53
—
251

(2,978)
(71)
(42)
(178)
25
46
(20)

28

(8)
—
—

—

—

—
(521)

10

(519)

(1)

(12)
110

—

1
—
—
—

(12)
(30)
—
—
1,276
—
—

1,235

—
(665)
314

(2,919)

(46)

18
—

—

(3,298)

—

(2)
4

2

(97)
309

$

$
$

—

—
—
—
—

—
—
—
—
—
—
—

—

—
—
—

—

—

—
2,300

(10)

2,290

—

—
—

$ —

$ —
$ —

743

2,169

7,404

1,161
135
1
594

(8,704)
(131)
(66)
(889)
2,018
—
(371)

1,152

(8)
(665)
314

(2,919)

(46)

18
—

—

(3,306)

(1)

14
200

214

218
382

$

$
$

between  subsidiaries

. . . . . . . . . . . . . . . . . . .

—

Net  cash used  in financing activities . . . . . . . . . .

(1,779)

Effect  of exchange rate changes  on cash . . . . . . . .

Net increase (decrease) in cash . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Cash  at  beginning of  year

Cash at  end of year . . . . . . . . . . . . . . . . . . . . .

Supplemental disclosure of cash flow  information
Income  taxes paid  (received) . . . . . . . . . . . . . . .
Interest  paid . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$
$

114

$

98

206
73

$
109
$ —

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

252

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. CONSOLIDATING FINANCIAL  STATEMENTS OF THE  TRAVELERS COMPANIES, INC. AND
SUBSIDIARIES (Continued)

CONSOLIDATING STATEMENT OF CASH  FLOWS  (Unaudited)
For the twelve months ended December  31, 2010

TPC

Other
Subsidiaries

Travelers(1)

Eliminations

Consolidated

$ 2,464

$ 1,033

$ 3,216

$(3,497)

$ 3,216

(77)

3,626

6,842

(3,197)

(6,694)

(in millions)

Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net adjustments to  reconcile  net income  to  net  cash
provided by operating  activities . . . . . . . . . . . .

Net  cash provided by operating activities . . . . . . .

2,387

Cash flows from  investing activities
Proceeds  from maturities of  fixed maturities . . . . .
Proceeds  from sales of  investments:

Fixed  maturities . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . .
Real estate  investments
. . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . .

Purchases of investments:

Fixed  maturities . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . .
Real  estate investments
. . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . .
Net sales (purchases) of  short-term securities . . . . .
Securities transactions in course of settlement . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,920

2,289
29
—
338

(4,201)
(2)
—
(305)
632
(4)
(313)

Net  cash provided by (used in)  investing  activities .

2,383

Cash flows from financing  activities
Payment of debt . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of debt . . . . . . . . . . . . . . . . . . . . . . . .
Dividends  paid to  shareholders . . . . . . . . . . . . . .
Issuance of common stock—employee  share  options
Treasury stock acquired—share  repurchase

authorization . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock acquired—net employee  share-based
compensation . . . . . . . . . . . . . . . . . . . . . . . .

Excess  tax benefits  from share-based payment

arrangements . . . . . . . . . . . . . . . . . . . . . . . .
Dividends  paid to  parent company . . . . . . . . . . . .
Capital  contributions, loans and other transactions

(4)
—
—
—

—

—

(514)

519

1,966

1,424
148
10
280

(2,576)
(33)
(21)
(209)
392
(26)
(5)

1,350

—
—
—
—

—

—

—
(4,827)

—
(1,849)

between  subsidiaries

. . . . . . . . . . . . . . . . . . .

15

(35)

Net  cash used in  financing activities . . . . . . . . . .

(4,816)

(1,884)

(5,215)

Effect  of exchange rate changes  on cash . . . . . . . .

Net increase (decrease) in cash . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Cash  at  beginning of  year

Cash at  end of year . . . . . . . . . . . . . . . . . . . . .

Supplemental disclosure of cash flow  information
Income  taxes paid  (received) . . . . . . . . . . . . . . .
Interest  paid . . . . . . . . . . . . . . . . . . . . . . . . . .

—

(46)
132

86

579
73

$

$
$

3

(12)
122

$

110

$

—

3
1

4

$
321
$ —

$ (116)
324
$

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

253

10

—
24
—
99

(8)
(26)
—
—
(1,723)
—
—

(1,624)

(1,156)
1,234
(673)
408

(4,998)

(40)

8
—

2

(162)

3,054

5,896

3,713
201
10
717

(6,785)
(61)
(21)
(514)
(699)
(30)
(318)

2,109

(1,160)
1,234
(673)
408

(4,998)

(40)

8
—

—

(5,221)

3

(55)
255

200

784
397

$

$
$

—

—
—
—
—

—
—
—
—
—
—
—

—

—
—
—
—

—

—

—
6,676

18

6,694

—

—
—

$ —

$ —
$ —

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

19. SELECTED QUARTERLY FINANCIAL DATA  (Unaudited)

2012 (in millions, except per share amounts)

First

Fourth
Quarter Quarter Quarter Quarter

Second

Third

Total

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$6,392
5,315

$6,359
5,751

$6,512
5,342

$6,477
6,166

$25,740
22,574

Income before income taxes . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,077
271

608
109

1,170
306

311
7

3,166
693

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 806

$ 499

$ 864

$ 304

$ 2,473

Net income per share(1):

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2.04
2.02

$ 1.27
1.26

$ 2.23
2.21

$ 0.79
0.78

$

6.35
6.30

2011 (in millions, except per share amounts)

First

Fourth
Quarter Quarter Quarter Quarter

Second

Third

Total

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$6,278
5,309

$6,388
7,115

$6,407
6,075

$6,373
5,595

$25,446
24,094

Income (loss) before income taxes . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . .

969
130

(727)
(363)

332
(1)

778
160

1,352
(74)

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 839

$ (364) $ 333

$ 618

$ 1,426

Net income (loss) per share(1):

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1.94
1.92

$ (0.88) $ 0.80
0.79

(0.88)

$ 1.52
1.51

$

3.40
3.36

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

year.

254

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING  AND

FINANCIAL DISCLOSURE

Not Applicable.

Item 9A. CONTROLS AND PROCEDURES

The Company maintains disclosure controls  and procedures (as  that term is defined in

Rules 13a-15(e) and 15d-15(e) under the  Securities Exchange Act of  1934, as amended (Exchange
Act)) that are designed to ensure that information required to be disclosed in the Company’s  reports
under the Exchange Act is recorded,  processed, summarized and reported within  the time  periods
specified in the Securities and Exchange  Commission’s rules and forms,  and that such  information is
accumulated and communicated to the  Company’s  management,  including its Chief Executive  Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Any controls and procedures, no matter  how well designed and operated,  can provide only reasonable
assurance of achieving the desired control  objectives. The Company’s management, with the
participation of the Company’s Chief Executive Officer and Chief Financial Officer,  has evaluated the
effectiveness of the design and operation  of the Company’s disclosure controls  and procedures as of
December 31, 2012. Based upon that evaluation and subject to the foregoing,  the Company’s  Chief
Executive Officer and Chief Financial  Officer concluded that, as  of  December 31,  2012, the design and
operation of the Company’s disclosure controls  and procedures were  effective to accomplish their
objectives at the reasonable assurance level.

In addition, there was no change in the Company’s  internal control over financial  reporting (as
that term is defined in Rules 13a-15(f) and 15d-15(f)  under the Exchange  Act) that occurred  during the
quarter ended December 31, 2012 that  has materially affected, or is reasonably likely  to  materially
affect, the Company’s internal control  over financial reporting.

255

Management’s Report on Internal Control Over  Financial Reporting

Management of the Company is responsible for  establishing and maintaining adequate internal
control over financial reporting. The  Company’s  internal  control over financial  reporting is designed to
provide reasonable assurances regarding the reliability of financial reporting and the preparation of the
consolidated financial statements of the  Company in  accordance with U.S.  generally accepted
accounting principles. The Company’s accounting policies and internal  controls  over financial reporting,
established and maintained by management,  are under  the general oversight of the  Company’s Audit
Committee.

The Company’s internal control over  financial reporting  includes those policies and  procedures

that:

(cid:127) pertain to the maintenance of records that, in reasonable detail, accurately and fairly  reflect the

transactions and dispositions of the assets of the Company;

(cid:127) provide reasonable assurance that transactions are recorded  as necessary to permit preparation
of financial statements in accordance with  U.S. generally accepted accounting principles,  and
that receipts and expenditures are being made only in  accordance with authorizations of the
Company’s management and directors; and

(cid:127) provide reasonable assurance regarding  prevention or  timely detection of  unauthorized

acquisition, use or  disposition of assets that could have  a material effect on the  financial
statements.

Because of its inherent limitations, internal control over financial  reporting may not prevent or

detect misstatements. Also, projections  of any  evaluation of  effectiveness to future periods are  subject
to the risk that controls may become inadequate because  of changes in conditions, or  that  the degree
of compliance with the policies or procedures may deteriorate.

Management has assessed the Company’s  internal control over financial reporting as of

December 31, 2012. The standard measures adopted by management in making  its  evaluation are the
measures in the Internal Control—Integrated Framework published by the Committee of Sponsoring
Organizations of the Treadway Commission.

Based upon its assessment, management has concluded  that the Company’s internal  control over
financial reporting was effective at December 31, 2012, and that there were no  material  weaknesses in
the Company’s internal control over financial  reporting as  of  that date.

KPMG LLP, an independent registered public accounting firm,  which has audited  and reported  on

the consolidated financial statements contained  in this Form  10-K,  has issued its report  on the
effectiveness of the Company’s internal control over  financial reporting which follows this report.

256

Report of Independent Registered Public Accounting  Firm

The Board of Directors and Stockholders
The Travelers Companies, Inc.:

We  have audited The Travelers Companies,  Inc. and subsidiaries’ (the Company) internal control

over financial reporting as of December  31, 2012, based on  criteria established in Internal Control—
Integrated Framework issued by the Committee  of Sponsoring Organizations of  the Treadway
Commission (COSO). The Company’s  management  is responsible  for maintaining effective internal
control over financial reporting and for  its  assessment of the effectiveness of internal  control over
financial reporting, included in the accompanying  Management’s Report on Internal  Control Over
Financial Reporting. Our responsibility  is  to  express an  opinion on the Company’s internal  control  over
financial reporting based on our audit.

We  conducted our audit in accordance  with the  standards of  the Public Company Accounting
Oversight Board (United States). Those  standards require that we  plan and perform the audit to obtain
reasonable assurance about whether  effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an  understanding  of internal control  over
financial reporting, assessing the risk that a material weakness exists, and testing and  evaluating  the
design and operating effectiveness of internal control based on the assessed risk. Our  audit also
included performing such other procedures as we  considered  necessary in the circumstances.  We believe
that our audit provides a reasonable  basis  for our opinion.

A company’s internal control over financial reporting is a  process designed to provide  reasonable

assurance regarding the reliability of  financial reporting and the preparation  of  financial  statements  for
external  purposes in accordance with  generally accepted  accounting  principles. A company’s internal
control over financial reporting includes those policies  and procedures that (1)  pertain to the
maintenance of records that, in reasonable detail,  accurately and fairly reflect the  transactions and
dispositions of the assets of the company; (2)  provide reasonable assurance that transactions  are
recorded  as necessary to permit preparation of  financial statements in  accordance with generally
accepted accounting principles, and that receipts  and  expenditures of the company are being made  only
in accordance with authorizations of management  and  directors of the company; and  (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that  could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial  reporting may not prevent or

detect misstatements. Also, projections  of any  evaluation of  effectiveness to future periods are  subject
to the risk that controls may become inadequate because  of changes in conditions, or  that  the degree
of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in  all material  respects, effective internal  control  over

financial reporting as of December 31, 2012,  based on criteria established  in Internal  Control—
Integrated Framework issued by the Committee  of Sponsoring Organizations of  the Treadway
Commission.

We  also have audited, in accordance  with the  standards of the Public Company Accounting

Oversight Board (United States), the  consolidated balance  sheet of The Travelers Companies, Inc.  and
subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements  of  income,
comprehensive income, changes in shareholders’ equity, and cash flows  for each of the  years  in the
three-year period ended December 31, 2012, and our report  dated February 19,  2013 expressed an
unqualified opinion on those consolidated  financial statements.

/s/ KPMG LLP

KPMG LLP

New York, New York
February  19,  2013

257

Item 9B. OTHER INFORMATION

Executive Ownership and Sales. All of the Company’s executive officers hold equity in the

Company in excess of the required level under  the Company’s executive stock ownership policy. For a
summary of this policy as currently in effect, see  ‘‘Compensation Discussion and Analysis—Stock
Ownership Guidelines’’ in the Company’s proxy statement filed with the Securities and Exchange
Commission (SEC) on April 10, 2012.  From time to time, some of the Company’s executives may
determine that it is advisable to diversify  their  investments for personal financial  planning reasons, or
may seek liquidity for other reasons,  and may  sell shares of  common  stock of the Company  in the open
market, in private transactions or to  the Company. To  effect such sales, some of  the Company’s
executives have entered into, and may in the  future enter  into, trading plans designed to comply with
the Company’s Securities Trading Policy and  the provisions of Rule 10b5-1 under the Securities
Exchange Act of 1934. The trading plans will not reduce any of the  executives’  ownership  of the
Company’s shares below the applicable  executive stock ownership  guidelines. The Company does  not
undertake any obligation to report Rule  10b5-1  plans that  may be adopted by any  employee or director
of the Company in the future, or to report any modifications or termination of any publicly announced
plan.

As  of  the  date  of  this  report,  Jay  S.  Fishman,  Chairman  and  Chief  Executive  Officer,  and  Jay  S.
Benet, Vice Chairman and Chief Financial Officer were the only ‘‘named executive  officers’’ (i.e., an
executive officer named in the compensation disclosures in the Company’s proxy statement) that have
entered into Rule 10b5-1 trading plans  that remain in  effect. The  trading plans extend  from
approximately five to ten months from  the date of this report. Under the Company’s  stock ownership
guidelines, Mr. Fishman has a target  ownership level established as the lesser of 150,000 shares or the
equivalent value of 500% of base salary, and Mr.  Benet has a  target ownership level established as the
lesser of 30,000 shares or the equivalent  value  of  300% of base salary (as such  amounts are calculated
for purposes of the stock ownership guidelines). See ‘‘Compensation Discussion and Analysis—Stock
Ownership Guidelines’’ in the Company’s proxy statement filed with the SEC  on April  10, 2012.

Annual Meeting and Record Date. The Board of Directors has set the date of the 2013  Annual

Meeting of Shareholders and the related  record date.  The Annual Meeting will be held in
Hartford, CT on May 22, 2013, and the  shareholders entitled to receive notice of and vote at  the
meeting  will be the shareholders of record at the close of business on March 25, 2013.

258

PART III

Item 10. DIRECTORS, EXECUTIVE  OFFICERS AND CORPORATE GOVERNANCE

Executive Officers of the Company

Set forth below is information concerning the Company’s executive officers  as of February 19,

2013.

Name

Age

Office

Jay S. Fishman . . . . . . . . . . . .

60 Chairman of the Board of Directors  and Chief Executive

Officer

Jay S. Benet . . . . . . . . . . . . . .
Brian W. MacLean . . . . . . . . .
Charles J. Clarke . . . . . . . . . . .
William H. Heyman . . . . . . . . .
Alan D. Schnitzer . . . . . . . . . .

60 Vice Chairman and Chief Financial Officer
59
President and Chief Operating Officer
77 Vice Chairman
64 Vice Chairman and Chief Investment Officer
47 Vice Chairman—Financial, Professional  & International

Insurance and Field Management; Chief  Legal Officer

Doreen Spadorcia . . . . . . . . . .

55 Vice Chairman—Claim Services, Personal Insurance,

Operations and Systems, and Risk Control

Andy F. Bessette . . . . . . . . . . .
Kenneth  F. Spence, III . . . . . . .
Maria Olivo . . . . . . . . . . . . . .

59 Executive Vice President and Chief Administrative Officer
57 Executive Vice President and General  Counsel
48 Executive Vice President—Strategic Development  and

William E. Cunningham, Jr.
John P. Clifford, Jr.

. .
. . . . . . . .

47 Executive Vice President—Business Insurance
57 Executive Vice President—Human Resources

Corporate Treasurer

Jay S. Fishman, 60, has been Chairman since September 2005 and Chief Executive Officer of the

Company since joining SPC in October 2001.  He held the additional title  of  President from October
2001 until June 2008 and Chairman of SPC from  October 2001  until the Merger. Mr. Fishman held
several key executive posts at Citigroup  Inc. from 1998  to  October 2001, including Chairman, Chief
Executive Officer and President of the Travelers insurance  businesses. Starting in 1989, Mr. Fishman
worked as an executive for Primerica,  which became part of Citigroup.

Jay S. Benet, 60, has been Vice Chairman  and  Chief  Financial Officer since  August 2005, and
before that, he was Executive Vice President and Chief Financial Officer  of  the Company since the
Merger, and from February 2002 until the Merger, he held  those same offices at  TPC. 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. Before that, Mr. Benet  spent  ten years in
various executive positions with Travelers Life & Annuity, including Chief Financial Officer of Travelers
Life & Annuity 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, Mr. Benet  was  a partner of Coopers & Lybrand (now
PricewaterhouseCoopers).

Brian W. MacLean, 59, has been Chief Operating Officer  since May 2005 and President since June
2008. Prior to that, he had been Executive Vice  President  and Chief Operating  Officer  since May  2005.
Prior to that, he had been Co-Chief Operating Officer of the Company  since February 2005.  Before
that, he was Executive Vice President,  Claim  Services for the Company, and  prior thereto, for  TPC.
Prior to that, Mr. MacLean served as President of Select Accounts for TIGHI  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 TIGHI in 1988.

259

Charles J. ‘‘Chuck’’ Clarke, 77, has been Vice Chairman of the Company  since the Merger at
which  time he was serving in the roles  of President, Vice Chairman  and Director of TPC. Mr. Clarke
joined Travelers in 1958 as an assistant underwriter. During his tenure at Travelers, Mr. Clarke
progressed through positions of increasing  responsibility. Of note, he was appointed Senior Vice
President for the National Accounts  Group’s property-casualty business in 1985 and  subsequently
assumed the responsibility of Chairman of  Commercial Lines in  1990.

William H. Heyman, 64, has been Chief Investment Officer of the Company since  the Merger  and

Vice Chairman since May 2005. Prior to May 2005,  he was Executive Vice President  and Chief
Investment Officer of the Company since the  Merger. Prior to the Merger,  he held  those same  offices
with SPC since he joined SPC in May 2002. Mr. Heyman held various executive positions with
Citigroup from 1995 through 2002, including  the position  of  chairman of  Citigroup  Investments from
2000 to 2002. Prior to joining Citigroup in 1995,  Mr. Heyman was, successively: a managing  director of
Salomon Brothers; Director of the Division  of Market  Regulation of the U.S.  Securities  and Exchange
Commission;  and a managing director  of  Smith Barney.

Alan D. Schnitzer, 47, has been Vice  Chairman—Financial,  Professional & International  Insurance
and Field Management; Chief Legal Officer  since May  2012. Prior to that, he was Vice  Chairman and
Chief Legal Officer since joining the Company in April 2007 and Executive Vice President—Financial,
Professional and International Insurance since May 2008. Prior to that time, he was a partner at  the
law firm of Simpson Thacher & Bartlett  LLP,  where he advised corporate clients  on a variety of
transactions and general corporate law  matters.  Mr. Schnitzer joined Simpson Thacher in 1991.

Doreen Spadorcia, 55, has been Vice Chairman—Claim Services, Personal  Insurance,  Operations

and Systems,  and Risk Control since May  2012. Prior to that,  she was Chief Executive Officer—
Personal Insurance and Executive Vice President—Claim Services, from  July 2009  to  May 2012.  From
March 2005 to July 2009, she was Executive  Vice  President—Claim Services. Prior to that, she was
President and Chief Executive Officer of Bond operations for  the Company  since the Merger and,
before that, for TPC since June 2002.  From 1994 to May 2002,  she  managed the  TPC Bond claim
operation and served as General Counsel  of that  business unit. She  joined TIGHI in 1986 as a claim
attorney.

Andy F. Bessette, 59, has been Executive Vice President and Chief Administrative Officer of the
Company since the Merger, and prior  to  that, he held the same offices with  SPC since joining  SPC in
January 2002. Before that, he was Vice  President  of  Corporate Real  Estate and Services  for TPC. From
1980 to December 2001, Mr. Bessette  held  a number of management positions at  TIGHI.

Kenneth F. Spence, III, 57, has been Executive Vice President and General Counsel  of the
Company since January 2005. From August  2004 to January 2005, he was Senior  Vice President  and
General Counsel. Prior to that, Mr. Spence served in  several  leadership positions in the Company’s
Legal Services group, and from April 1998 until the  Merger, in SPC’s Legal  Services Group.
Mr. Spence joined SPC in April 1998,  upon SPC’s  merger with USF&G Corporation, where he  had
served as legal counsel.

Maria Olivo, 48, has been Executive Vice  President—Strategic  Development and Corporate
Treasurer since July 2010. Prior to that,  she  was Executive  Vice  President—Treasurer  since June 2009.
Prior to that, she was Executive Vice President—Market Development  since October  2007. Since
joining the company in 2002, Ms. Olivo  has held a  number of executive positions, including leading
Corporate Development, Investor Relations and Corporate Communications. Prior to joining Travelers
in 2002, Ms. Olivo was deputy head of Strategic Investments at Swiss Re Capital Partners from  April
2000 to June 2002. Prior to that, she was a director in  Salomon  Smith Barney’s Investment Bank.

260

William E. Cunningham, Jr., 47, has been Executive Vice President—Business Insurance since

March 2010. Prior to that, he served as  Senior  Vice  President—Business Insurance where he was
responsible for Commercial Accounts,  Construction,  Technology, Public Sector  Services, Global
Accounts, Excess Casualty and Oil &  Gas since September  2007. In July 2006, he was named President
and CEO of Commercial Accounts. He  had been promoted  to  President of National Accounts in 2005
and President of Travelers Construction  in April 2001. Prior to that, Mr. Cunningham served as
Regional Vice President for the Northeast Region of National Accounts  since July 1997, after  serving
as Managing Director of the Northeastern  territory for National  Accounts since 1996.  He began  his
career with Travelers in 1987 as an account executive in the Commercial Accounts marketing
department in Albany, New York.

John P. Clifford, Jr., 57, has been Executive Vice President—Human Resources since May  2007,
and before that he was Senior Vice President—Human  Resources of the  Company since  the Merger,
and from February 2002 until the Merger, he held that same office  at  SPC. From  January 1994 through
February 2002 he managed compensation  and benefits  for SPC and was named  Vice President in  1999.
He joined SPC in 1984 as a compensation  analyst.

Code of Ethics

The Company has adopted a Code of Business Conduct and Ethics (Code of Ethics) that applies
to all employees, including executive  officers, and to directors. The Code  of Ethics is  available  on the
Corporate Governance page of the Company’s  internet website  at  www.travelers.com.  If the Company
ever were to amend or waive any provision of its Code of Ethics that  applies to the Company’s
principal executive officer, principal financial  officer, principal  accounting officer or any person
performing similar functions, the Company intends  to  satisfy its disclosure obligations with respect to
any such waiver or amendment by posting  such  information on  its  internet website set forth  above
rather than by filing a Form 8-K.

The following sections of the Company’s Proxy Statement relating  to  its  Annual Meeting of

Shareholders to be held May 22, 2013  are incorporated  herein by reference: ‘‘Item 1—Election of
Directors—Nominees  for  Election  of  Directors,’’  ‘‘Section  16(a)  Beneficial  Ownership  Reporting
Compliance’’ and ‘‘Board of Directors Information.’’

Item 11. EXECUTIVE COMPENSATION

The following sections of the Company’s Proxy Statement relating  to  its  Annual Meeting of

Shareholders to be held May 22, 2013  are incorporated  herein by reference: ‘‘Compensation Discussion
and Analysis,’’ ‘‘Compensation Committee  Report,’’  ‘‘Tabular Executive Compensation Disclosure’’ and
‘‘Non-Employee Director Compensation.’’

Item 12. SECURITY OWNERSHIP OF  CERTAIN BENEFICIAL OWNERS  AND MANAGEMENT

AND RELATED SHAREHOLDER MATTERS

The ‘‘Share Ownership Information’’  section  of  the Company’s Proxy  Statement relating  to  its

Annual Meeting of Shareholders to be held May 22, 2013 is incorporated herein by reference.

261

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth information as of December 31, 2012  regarding the  Company’s

equity compensation plans. The only plan pursuant  to  which the  Company may currently make
additional equity grants is The Travelers  Companies, Inc. Amended and Restated 2004  Stock Incentive
Plan (the 2004 Incentive Plan) which replaced prior share-based incentive plans  (legacy plans). In
connection with the adoption of the 2004  Incentive Plan, legacy share-based compensation plans were
terminated. Outstanding grants were not affected by the  termination  of  these legacy plans, including
the reload method of option exercise  related  to  prior option grants under the  legacy plans. As  of
December 31, 2012, there were no longer any options eligible for reload.

Number of
securities to be
issued upon exercise
of outstanding
options, warrants
and rights
(a)

Weighted average
exercise price of
outstanding options,
warrants and rights
(b)

Number of securities
remaining available for
future issuance under
equity compensation
plans  (excluding
securities reflected in
column  (a))
(c)

Plan Category

Equity compensation plans approved by

security holders(1) . . . . . . . . . . . . . . . . .

15,628,511

$51.42 per share

57,119,391(2)

(1) In addition to the 2004 Incentive Plan, these numbers also include the St. Paul  Global Stock

Option Plan and certain plans for St. Paul’s employees  in the United  Kingdom and the Republic of
Ireland. Shares of deferred stock or phantom  stock units that may be settled in shares of common
stock are included in column (a) of the table, but are not included in  column  (b) for purposes of
the weighted average exercise price of  stock  options.

(2) These shares are available for grant  as  of  December  31, 2012 under the  2004 Incentive Plan

pursuant to which the Compensation Committee of the  board of directors may make various stock-
based awards including nonqualified stock options, incentive stock options, stock appreciation
rights, restricted stock, restricted stock units, deferred stock,  deferred stock units, performance
awards and other stock-based or stock-denominated awards with respect to the Company’s
common stock. The 2004 Incentive Plan had 35 million shares initially authorized for issuance. In
addition  to these 35 million shares, the following shares will become  available for  grant under  the
2004 Incentive Plan, and, to the extent such shares became  available as  of  December 31,  2012,
they are included in the table as available for grant: (i)  shares  covered  by  outstanding awards
under the 2004 Incentive Plan and legacy plans  that are forfeited  or otherwise  terminated or
settled in cash or other property rather than settled through the  issuance  of  shares;  (ii) shares that
are used to pay the exercise price of stock options  and  shares used to pay withholding taxes on
equity awards generally; and (iii) shares purchased  by  the Company  on  the open market using cash
from option exercises, as limited by the 2004  Incentive  Plan.

The provisions of the preceding paragraph that result in shares becoming  available for future
grants under the 2004 Incentive Plan  also  apply to any awards granted under  legacy share-based
incentive compensation plans that were outstanding on the  effective  date of  the 2004 Incentive
Plan except for certain shares delivered to or  retained  in legacy plans in connection  with the
withholding of taxes applicable to the exercise of outstanding options that had reload features.

262

Item 13. CERTAIN RELATIONSHIPS AND  RELATED TRANSACTIONS,  AND DIRECTOR

INDEPENDENCE

The ‘‘Item 1—Election of Directors—Nominees for Election of Directors,’’ ‘‘Director

Independence and Independence Determinations,’’ ‘‘Transactions with Related Persons and Certain
Control  Persons—Related Person Transaction Approval,’’  ‘‘Employment Relationships’’  and
‘‘Third-Party Transactions’’ sections of  the Company’s Proxy Statement relating to its Annual  Meeting
of Shareholders to be held May 22, 2013 are incorporated  herein by  reference.

Item 14. PRINCIPAL ACCOUNTANT  FEES AND SERVICES

The ‘‘Item 2—Ratification of Independent  Registered Public Accounting Firm—Audit  and
Non-Audit Fees’’ section of the Company’s  Proxy Statement relating to its  Annual  Meeting of
Shareholders to be held May 22, 2013  is incorporated  herein by reference.

PART IV

Item 15. EXHIBITS AND FINANCIAL  STATEMENT SCHEDULES

Documents filed as a part of the report:

(1) Financial Statements. See Index to Consolidated Financial Statements  on page 157 hereof.

(2) Financial Statement Schedules. See Index to Consolidated  Financial Statements and  Schedules

on page 266 hereof.

(3) Exhibits:

See Exhibit Index on pages 276-280 hereof.

263

Pursuant to the requirements of Section 13 or 15(d)  of  the Securities Exchange Act of 1934,  The

Travelers Companies, Inc. has duly caused this report  to  be  signed on its behalf by the undersigned,
thereunto duly authorized.

SIGNATURES

Date: February 19, 2013

By

/s/ MATTHEW S. FURMAN

THE TRAVELERS COMPANIES, INC.
(Registrant)

Matthew S. Furman
Senior Vice President
(Authorized Signatory)

Pursuant to the requirements of the Securities Exchange  Act of  1934, this  report has been signed

below by the following persons on behalf of The Travelers Companies,  Inc.  and in the capacities and on
the dates  indicated.

By

By

/s/ JAY S. FISHMAN

Jay S. Fishman

/s/ JAY S. BENET

Jay S. Benet

Director, Chairman and Chief
Executive Officer (Principal Executive
Officer)

Date

February 19,  2013

Vice Chairman and Chief Financial
Officer (Principal Financial Officer)

February 19, 2013

By

/s/ DOUGLAS K. RUSSELL

Douglas K. Russell

Senior Vice President and Corporate
Controller (Principal Accounting
Officer)

By

By

By

By

By

By

*

Alan L. Beller

*

John H. Dasburg

*

Janet M. Dolan

*

Kenneth M. Duberstein

*

Lawrence G. Graev

*

Patricia L. Higgins

Director

Director

Director

Director

Director

Director

264

February 19,  2013

February 19, 2013

February 19, 2013

February 19, 2013

February 19, 2013

February 19, 2013

February 19, 2013

By

By

By

By

By

*

Thomas R. Hodgson

*

William J. Kane

*

Cleve L. Killingsworth, Jr.

*

Donald J. Shepard

*

Laurie J. Thomsen

Director

Director

Director

Director

Director

*By

/s/ MATTHEW S. FURMAN

Matthew S. Furman,
Attorney-in-fact

Date

February 19, 2013

February 19, 2013

February 19, 2013

February 19, 2013

February 19, 2013

February 19, 2013

265

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Income for  the years ended  December 31,  2012, 2011 and 2010 . . . . .
Consolidated Statement of Comprehensive  Income for the  years  ended December  31, 2012, 2011
and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheet at December 31, 2012 and 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Changes in  Shareholders’ Equity  for  the years ended December 31,

2012, 2011 and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Cash Flows  for the years ended December 31, 2012, 2011 and  2010 . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedules:
Schedule II—Condensed Financial Information of Registrant (Parent Company Only) . . . . . . . . .
Schedule III—Supplementary Insurance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule V—Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule VI—Supplementary Information  Concerning Property-Casualty  Insurance  Operations . .

Page

158
159

160
161

162
163
164

268
273
274
275

266

Report of Independent Registered Public Accounting  Firm

The Board of Directors and Stockholders
The Travelers Companies, Inc.:

Under date of February 19, 2013, we  reported  on the consolidated balance sheet of The Travelers

Companies, Inc. and subsidiaries (the  Company)  as of December 31, 2012 and 2011, and the related
consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash
flows for each of the years in the three-year period ended December  31, 2012, which  are included in
this  Form 10-K. In connection with our audits of the aforementioned  consolidated financial statements,
we also audited the related financial statement schedules as  listed in  the accompanying  index. These
financial statement schedules are the  responsibility of the Company’s management. Our  responsibility is
to express an opinion on these financial statement schedules based on our audits.

In our opinion, such financial statement schedules, when  considered  in relation to the basic

consolidated financial statements taken  as a  whole,  present fairly, in all  material respects, the
information set forth therein.

/s/ KPMG LLP

KPMG LLP

New York, New York
February 19, 2013

267

THE TRAVELERS COMPANIES, INC.
(Parent Company Only)

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(in millions)

CONDENSED STATEMENT OF INCOME

SCHEDULE II

For the year  ended December 31,

2012

2011

2010

Revenues
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains (losses)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

Total  revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Expenses
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total  expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Loss before income taxes and net income of subsidiaries . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit

Loss before net income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

9
—
(1)

8

$

8
(5)
—

3

305
4

309

(301)
(119)

(182)
2,655

313
27

340

(337)
(199)

(138)
1,564

11
7
(60)

(42)

315
14

329

(371)
(90)

(281)
3,497

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,473

$1,426

$3,216

(1) The parent company had no other-than-temporary impairment gains or losses recognized in net
realized investment gains (losses) or in other comprehensive income  during  the years ended
December 31, 2012, 2011 and 2010.

The condensed financial statements should be read in conjunction  with the notes to the condensed

financial information of the registrant, as  well as the consolidated financial  statements  and notes
thereto.

See the accompanying Report of Independent Registered Public Accounting Firm.

268

THE TRAVELERS COMPANIES, INC.
(Parent Company Only)

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(in millions)

CONDENSED STATEMENT OF COMPREHENSIVE  INCOME

SCHEDULE II

For the year  ended December 31,

2012

2011

2010

Consolidated net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,473

$1,426

$3,216

Other comprehensive income—parent  company:
Changes in net unrealized gains on investment securities:

Having no credit losses recognized in  the consolidated statement of

income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Having credit losses recognized in the consolidated  statement of  income . .
Net changes in benefit plan assets and obligations . . . . . . . . . . . . . . . . . . . .
Net changes in unrealized foreign currency translation and other changes . . .

Other comprehensive income (loss) before income taxes and other

comprehensive income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other comprehensive income (loss),  net  of taxes before other

comprehensive income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income of subsidiaries . . . . . . . . . . . . . . . . . . . .

Consolidated other comprehensive income . . . . . . . . . . . . . . . . . . . . . .

10
—
(58)
—

(48)
(17)

(31)
262

231

(2)
—
(303)
—

(305)
(106)

(199)
949

750

1
—
33
—

34
11

23
13

36

Consolidated comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,704

$2,176

$3,252

The condensed financial statements should be read in conjunction  with the notes to the condensed

financial information of the registrant, as  well as the consolidated financial  statements  and notes
thereto.

See the accompanying Report of Independent Registered Public Accounting Firm.

269

THE TRAVELERS COMPANIES, INC.
(Parent Company Only)

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(in millions)

CONDENSED BALANCE SHEET

SCHEDULE II

At December 31,

Assets
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2012

2011

$

38
106
1,958
28,562
26

$

33
94
2,339
27,565
506

Total  assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 30,690

$ 30,537

Liabilities
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,159
136

$ 5,415
655

Total  liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,295

6,070

Shareholders’ equity
Common stock (1,750.0 shares authorized,  377.4 and 392.8 shares  issued and

outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost (372.3 and 349.0 shares) . . . . . . . . . . . . . . . . . . . . . . . . .

21,161
21,342
2,236
(19,344)

20,732
19,569
2,005
(17,839)

Total  shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25,395

24,467

Total  liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 30,690

$ 30,537

The condensed financial statements should be read in conjunction  with the notes to the condensed

financial information of the registrant, as  well as the consolidated financial  statements  and notes
thereto.

See the accompanying Report of Independent Registered Public Accounting Firm.

270

THE TRAVELERS COMPANIES, INC.
(Parent Company Only)

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(in millions)

CONDENSED STATEMENT OF CASH  FLOWS

SCHEDULE II

For the year  ended December 31,

2012

2011

2010

Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income  to  net cash provided  by operating

activities:
Equity in net income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends received from consolidated  subsidiaries . . . . . . . . . . . . . . . .
Capital (contributed to) repaid from  subsidiaries . . . . . . . . . . . . . . . . .
Deferred federal income tax (benefit)  expense . . . . . . . . . . . . . . . . . . .
Change in income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,473

$ 1,426

$ 3,216

(2,655)
1,920
—
52
(1)
(16)

(1,564)
2,300
(10)
43
(162)
28

(3,497)
6,676
19
(46)
63
411

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . .

1,773

2,061

6,842

Cash flows from investing activities
Net sales (purchases) of short-term securities . . . . . . . . . . . . . . . . . . . . .
Other investments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . .

Cash flows from financing activities
Payment  of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid to shareholders
Issuance of common stock—employee  share options . . . . . . . . . . . . . . . .
Treasury stock acquired—share repurchase  authorization . . . . . . . . . . . . .
Treasury stock acquired—net employee  share-based compensation . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

381
(8)

373

1,276
(41)

(1,723)
99

1,235

(1,624)

(258)
—
(694)
295
(1,474)
(53)
38

— (1,156)
1,234
—
(673)
(665)
314
408
(4,998)
(2,919)
(40)
(46)
10
18

Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . .

(2,146)

(3,298)

(5,215)

Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Supplemental disclosure of cash flow  information
Cash received during the year for taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid during the year for interest . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
2

2

207
302

(2)
4

2

97
309

$

$
$

3
1

4

116
324

$

$
$

$

$
$

The condensed financial statements should be read  in conjunction  with the notes to the condensed

financial information of the registrant, as  well as the  consolidated financial  statements  and notes
thereto.

See the accompanying Report of Independent  Registered Public Accounting Firm.

271

THE TRAVELERS COMPANIES, INC.
(Parent Company Only)

NOTES TO THE CONDENSED FINANCIAL INFORMATION  OF REGISTRANT

1. OTHER REVENUES

In 2010, other revenues included $60 million of expenses  related to the  Company’s purchase and

retirement of $885 million of its $1.0 billion  6.25% fixed-to-floating rate junior  subordinated
debentures.

2. GUARANTEES

In the ordinary course of selling business entities to third parties, The Travelers  Companies, Inc.

(TRV) has agreed to indemnify purchasers for losses arising out of breaches of representations and
warranties with respect to the business entities  being sold, covenants  and  obligations of TRV and/or its
subsidiaries following the closing, and  in certain cases obligations arising from undisclosed liabilities,
adverse reserve development, imposition  of  additional taxes due to either  a change in the  tax law or an
adverse interpretation of the tax law, or  certain  named  litigation. Such indemnification provisions
generally  survive for periods ranging from eight years following the  applicable closing date to the
expiration of the relevant statutes of limitations,  although,  in some  cases, there may  be  other agreed
upon term limitations or no term limitations.  Certain of these contingent  obligations are subject  to
deductibles which have to be incurred by the obligee before TRV is obligated  to  make payments. The
maximum amount of TRV’s contingent obligation  for indemnifications related to the sale of business
entities that are quantifiable was $95 million at December 31, 2012, of  which $9 million was recognized
on the balance sheet at that date.

TRV also has contingent obligations for guarantees related  to  its subsidiary’s debt obligations and
various other indemnifications. TRV also provides standard indemnifications to service providers in  the
normal course of business. The indemnification clauses are often standard contractual terms. Certain of
these guarantees and indemnifications have  no stated  or  notional amounts or  limitation to the
maximum potential future payments,  and, accordingly, TRV  is unable to develop an  estimate of the
maximum potential payments for such arrangements.

TRV fully and unconditionally guarantees  the  payment  of  all principal, premiums,  if  any, and
interest on certain debt obligations of  its  subsidiaries TPC and Travelers Insurance Group  Holdings Inc.
(TIGHI). The guarantees pertain to the $500  million 5.00% notes  due 2013, the $200 million  7.75%
notes due 2026 and the $500 million 6.375% notes  due 2033.

272

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S

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
(in millions)

SCHEDULE V

Balance at
beginning of
period

Charged to
costs and
expenses

Charged to
other
accounts(1)

Deductions(2)

Balance
at end of
period

$345

$—

2012
Reinsurance recoverables . . . . . . . . . . . . . .
Allowance for uncollectible:

Premiums receivable from underwriting

activities . . . . . . . . . . . . . . . . . . . . . .
Deductibles . . . . . . . . . . . . . . . . . . . . . .

2011
Reinsurance recoverables . . . . . . . . . . . . . .
Allowance for uncollectible:

Premiums receivable from underwriting

activities . . . . . . . . . . . . . . . . . . . . . .
Deductibles . . . . . . . . . . . . . . . . . . . . . .

2010
Reinsurance recoverables . . . . . . . . . . . . . .
Allowance for uncollectible:

Premiums receivable from underwriting

activities . . . . . . . . . . . . . . . . . . . . . .
Deductibles . . . . . . . . . . . . . . . . . . . . . .

$ 83
$ 40

$363

$116
$ 37

$523

$130
$ 49

$—

$—
$—

$—

$—
$—

$—

$ 87

$258

$ 51
3
$

$ 76
$ 41

$ 18

$345

$ 56
3
$

$ 83
$ 40

$160

$363

$44
$ 4

$—

$23
$ 6

$—

$45
$ (8)

$(1)
$—

$ 58
4
$

$116
$ 37

(1) Charged to claims and claim adjustment expenses in the consolidated statement of income.

(2) Credited to the related asset account.

See the accompanying Report of Independent Registered Public Accounting Firm.

274

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(

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit
Number

EXHIBIT INDEX

Description of Exhibit

3.1 Amended and Restated Articles  of Incorporation of The Travelers Companies, Inc. (the
‘‘Company’’), effective as of August 4, 2011,  were filed as  Exhibit 3.1 to the Company’s
current report on Form 8-K filed on August  8, 2011, and  are incorporated  herein  by
reference.

3.2 Amended and Restated Bylaws of the  Company, effective as of  February 18, 2009,  were filed
as Exhibit 3.2 to the Company’s annual report on  Form 10-K for the  fiscal  year  ended
December 31, 2008, and are incorporated herein by  reference.

10.1 Revolving Credit Agreement,  dated June 10, 2010, between  the Company and a syndicate of
financial institutions, was filed as Exhibit 10.2  to  the Company’s quarterly report  on
Form 10-Q for the fiscal quarter ended June 30, 2010,  and  is incorporated herein by
reference.

10.2* The Travelers Companies, Inc. Policy  Regarding Executive Incentive  Recoupment was filed as
Exhibit 10.42 to the Company’s annual report on Form  10-K for the fiscal year ended
December 31, 2009, and is incorporated herein by  reference.

10.3* Amended and Restated Employment Agreement between the Company and  Jay S.  Fishman,

dated as of December 19, 2008, was filed as  Exhibit 10.27  to  the Company’s annual report on
Form 10-K for the fiscal year ended December  31, 2008, and is  incorporated herein by
reference.

10.4* Amended and Restated Time  Sharing Agreement,  effective August 3, 2010,  by  and between

the Company and Jay S. Fishman, was filed as Exhibit 10.1 to the Company’s  quarterly report
on Form 10-Q for the fiscal quarter ended  September 30, 2010,  and is incorporated herein by
reference.

10.5* Letter Agreement between Alan D. Schnitzer and the Company,  dated April 15, 2007,  was
filed as Exhibit 10.1 to the Company’s quarterly report  on Form 10-Q  for  the fiscal quarter
ended June 30, 2007, and is incorporated herein by  reference.

10.6* The Travelers Companies, Inc. Amended and Restated 2004 Stock Incentive Plan was filed as
Exhibit 10.28 to the Company’s annual report on Form  10-K for the fiscal year ended
December 31, 2008, and is incorporated herein by  reference.

10.7†* Amendment to The Travelers Companies, Inc.  Amended and  Restated 2004 Stock  Incentive

Plan is filed herewith.

10.8* TPC 2002 Stock Incentive Plan, as amended effective January 23,  2003,  was filed  as

Exhibit 10.22 to TPC’s annual report on  Form 10-K for the fiscal year ended December 31,
2002, and is incorporated herein by reference.

10.9†* Amendment to the TPC 2002  Stock Incentive  Plan, as amended effective January 23,  2003, is

filed herewith.

10.10* The St. Paul Companies, Inc. (‘‘SPC’’)  Amended  and  Restated 1994  Stock Incentive Plan was
filed as Exhibit 10(f) to the Company’s annual report on  Form 10-K for the fiscal year ended
December 31, 2001, and is incorporated herein by  reference.

10.11†* Amendment to The St. Paul Companies, Inc. Amended  and  Restated 1994  Stock Incentive

Plan is filed herewith.

276

Exhibit
Number

Description of Exhibit

10.12* Current Director Compensation Program, effective as of  May 23, 2012, was filed as

Exhibit 10.1 to the Company’s quarterly report on Form 10-Q  for the  fiscal quarter ended
June 30, 2012, and is incorporated herein by reference.

10.13* The Company’s Amended and Restated Deferred Compensation Plan for Non-Employee

Directors was filed as Exhibit 10.29 to the Company’s annual report on  Form 10-K for the
fiscal year ended December 31, 2008, and  is incorporated herein by reference.

10.14* TPC Compensation Plan for  Non-Employee Directors, as amended on  January 22, 2004,  was
filed as Exhibit 10.16 to TPC’s annual report  on Form 10-K  for  the fiscal year ended
December 31, 2003, and is incorporated herein by  reference.

10.15* The SPC Directors’ Deferred  Compensation Plan was filed as Exhibit 10(b) to the Company’s
annual report on Form 10-K for the fiscal year ended December 31,  1997, and is  incorporated
herein by reference.

10.16* The SPC Deferred Stock Plan  for Non-Employee Directors was filed as Exhibit 10(a) to the
Company’s annual report on Form 10-K for  the fiscal year ended  December 31, 2000, and is
incorporated herein by reference.

10.17* The SPC Directors’ Charitable Award Program,  as amended, was filed as Exhibit 10(d)  to  the

Company’s annual report on Form 10-K for  the fiscal year ended  December 31, 2000, and is
incorporated herein by reference.

10.18* The Travelers Severance Plan (as amended through May 10, 2007) was filed as Exhibit 10.2 to
the Company’s quarterly report on Form 10-Q for the fiscal  quarter ended June  30, 2007, and
is incorporated herein by reference.

10.19* Fifth Amendment to the Travelers Severance Plan was filed  as Exhibit 10.35 to the Company’s
annual report on Form 10-K for the fiscal year ended December 31,  2008, and is  incorporated
herein by reference.

10.20* Sixth Amendment to The Travelers Severance Plan was filed as Exhibit  10.39 to the

Company’s annual report on Form 10-K for  the fiscal year ended  December 31, 2009, and is
incorporated herein by reference.

10.21* Seventh Amendment to The  Travelers Severance Plan  was  filed as Exhibit 10.41 to the

Company’s annual report on Form 10-K for  the fiscal year ended  December 31, 2009, and is
incorporated herein by reference.

10.22* Eighth Amendment to The Travelers Severance Plan was filed as Exhibit 10.43  to  the

Company’s annual report on Form 10-K for  the fiscal year ended  December 31, 2010, and
incorporated herein by reference.

10.23* The Company’s Senior Executive Performance  Plan was  filed as Exhibit  10.1 to the Company’s

quarterly report on Form 10-Q for the fiscal  quarter ended March 31, 2005,  and is
incorporated herein by reference.

10.24* First Amendment to the Company’s  Senior Executive  Performance Plan was filed as

Exhibit 10.40 to the Company’s annual report on Form  10-K for the fiscal year ended
December 31, 2009, and is incorporated herein by  reference.

10.25* The Travelers Deferred Compensation Plan, as  Amended and Restated,  effective January 1,
2009, was filed as Exhibit 99.1 to the  Company’s  Registration  Statement on  Form  S-8
(Registration No. 333-157091) dated February 4, 2009,  and  is incorporated herein by
reference.

277

Exhibit
Number

Description of Exhibit

10.26* First Amendment to The Travelers Deferred  Compensation Plan was filed as  Exhibit  10.37 to
the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2009,  and
is incorporated herein by reference.

10.27* TPC Deferred Compensation Plan was filed as  Exhibit 10.23  to  TPC’s annual report on
Form 10-K for the fiscal year ended December  31, 2002, and is  incorporated herein by
reference.

10.28* The Travelers Benefit Equalization  Plan,  as Amended and Restated effective as of January 1,
2009, was filed as Exhibit 10.36 to the  Company’s  annual report  on Form 10-K for the fiscal
year  ended December 31, 2008, and is incorporated herein by reference.

10.29* First Amendment to The Travelers Benefit Equalization Plan was filed as Exhibit 10.38  to  the

Company’s annual report on Form 10-K for  the fiscal year ended  December 31, 2009, and is
incorporated herein by reference.

10.30* Second Amendment to The Travelers Benefit Equalization  Plan  was filed  as Exhibit 10.28 to

the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2011,  and
is incorporated herein by reference.

10.31* TPC Benefit Equalization Plan was filed  as Exhibit  10.24 to TPC’s annual  report on

Form 10-K for the fiscal year ended December  31, 2002, and is  incorporated herein by
reference.

10.32* The SPC Benefit Equalization  Plan—2001 Revision and the first and second amendments
thereto were filed as Exhibit 10.27 to the Company’s annual report on  Form 10-K  for the
fiscal year ended December 31, 2004, and  are  incorporated herein by reference.

10.33* The SPC Annual Incentive Plan  was filed as  an exhibit to the SPC Proxy  Statement relating  to
the SPC 1999 Annual Meeting of Shareholders that was held on May 4,  1999 and  is
incorporated herein by reference.

10.34* The SPC Deferred Management  Incentive Awards  Plan  was  filed  as Exhibit 10(a)  to  the

Company’s annual report on Form 10-K for  the fiscal year ended  December 31, 1997, and is
incorporated herein by reference.

10.35* Form of Non-Competition Agreement was filed  as Exhibit  10.43 to the Company’s annual

report on Form 10-K for the fiscal year  ended  December 31, 2009, and  is incorporated herein
by reference.

10.36* Form of Non-Solicitation and  Non-Disclosure Agreement for Executive Officers, amending

The St. Paul Travelers Companies, Inc. Severance Plan, was filed as Exhibit  99 to the
Company’s Form 8-K filed on February 16,  2006, and is incorporated herein  by  reference.

10.37* Form of Restricted Stock Unit  Award Notification and  Agreement (For  Management

Committee Member Executing Non-Compete) was filed  as Exhibit 10.44 to the  Company’s
annual report on Form 10-K for the fiscal year ended December 31,  2009, and is  incorporated
herein by reference.

10.38†* Form of Stock Option Grant Notification and Agreement  is filed herewith.

10.39†* Form of Restricted Stock Unit  Award Notification and  Agreement is filed  herewith.

10.40* Form of Performance Share  Award Notification  and  Agreement (2010) was filed as

Exhibit 10.31 to the Company’s annual report on Form  10-K for the fiscal year ended
December 31, 2009, and is incorporated herein by  reference.

278

Exhibit
Number

Description of Exhibit

10.41* Form of Performance Share  Award Notification  and  Agreement for Jay S. Fishman (2010) was
filed as Exhibit 10.33 to the Company’s annual  report  on Form 10-K for the fiscal year ended
December 31, 2009, and is incorporated herein by  reference.

10.42* Form of Performance Share  Award Notification  and  Agreement (2011) was filed as

Exhibit 10.27 to the Company’s annual report on Form  10-K for the fiscal year ended
December 31, 2010, and is incorporated herein by  reference.

10.43* Form of Performance Share  Award Notification  and  Agreement for Jay S. Fishman (2011) was
filed as Exhibit 10.29 to the Company’s annual  report  on Form 10-K for the fiscal year ended
December 31, 2010, and is incorporated herein by  reference.

10.44* Form of Performance Shares  Award Notification  and  Agreement (2012) was filed as

Exhibit 10.45 to the Company’s annual report on Form  10-K for the fiscal year ended
December 31, 2011, and is incorporated herein by  reference.

10.45* Form of Performance Shares  Award Notification  and  Agreement for Jay S. Fishman (2012)
was filed as Exhibit 10.46 to the Company’s annual report on Form 10-K for the fiscal year
ended December 31, 2011, and is incorporated  herein by reference.

10.46†* Form of Performance Shares  Award Notification  and  Agreement (2013) is  filed herewith.

10.47†* Form of Performance Shares  Award Notification  and  Agreement for Jay S. Fishman (2013) is

filed herewith.

10.48†* Form of Non-Employee Director Notification and Agreement  of  Annual  Deferred Stock

Award is filed herewith.

12.1† Statement regarding the computation  of the ratio of earnings to fixed charges and the ratio  of

earnings to combined fixed charges and preferred stock dividends is  filed  herewith.

21.1† A list of the subsidiaries of the  Company  is filed  herewith.

23.1† Consent of KPMG LLP, Independent  Registered  Public  Accounting Firm, with respect  to  the

incorporation by reference of KPMG  LLP’s audit report into Registration Statements on
Forms S-8 of the Company (SEC File  No. 33-56987, No. 333-50943, No. 333-63114,
No. 333-63118, No. 333-65726, No. 333-107698, No. 333-107699, No. 333-114135,
No. 333-117726, No. 333-120998, No. 333-128026, No. 333-157091, No. 333-157092,
No. 333-164972 and No. 333-176002) and Form  S-3 (SEC File No. 333-178507) is filed
herewith.

24.1† Power of Attorney is filed herewith.

31.1† Certification of Jay S. Fishman,  Chairman and  Chief Executive Officer  of the Company,  as

required by Section 302 of the Sarbanes-Oxley Act of 2002 is filed herewith.

31.2† Certification of Jay S. Benet,  Vice  Chairman and Chief Financial Officer of the  Company, as

required by Section 302 of the Sarbanes-Oxley Act of 2002 is filed herewith.

32.1† Certification of Jay S. Fishman,  Chairman and  Chief Executive Officer  of the Company,  as

required by Section 906 of the Sarbanes-Oxley Act of 2002 is filed herewith.

32.2† Certification of Jay S. Benet,  Vice  Chairman and Chief Financial Officer of the  Company, as

required by Section 906 of the Sarbanes-Oxley Act of 2002 is filed herewith.

279

Exhibit
Number

Description of Exhibit

101.1† The following financial information from The  Travelers Companies, Inc.’s Annual Report on

Form 10-K for the year ended December 31, 2012  formatted in  XBRL: (i) Consolidated
Statement of Income for the years ended December 31, 2012, 2011 and  2010;
(ii) Consolidated Statement of Comprehensive Income  for the years ended  December 31,
2012, 2011 and 2010; (iii) Consolidated  Balance Sheet at December 31, 2012 and 2011;
(iv) Consolidated Statement of Changes in Shareholders’ Equity for the years ended
December 31, 2012, 2011 and 2010; (v) Consolidated Statement of Cash Flows for the years
ended December 31, 2012, 2011 and 2010; (vi) Notes to Consolidated Financial Statements;
and  (vii) Financial Statement  Schedules.

†

Filed herewith.

* Management contract or compensatory  plan in  which  directors and/or executive officers are  eligible

to participate.

The total amount of securities authorized pursuant to any instrument defining rights  of  holders of

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

Copies of any of the exhibits referred to above will be furnished  to  security holders  who make

written request therefor to The Travelers  Companies, Inc., 385 Washington Street, Saint Paul,
MN, 55102, Attention: Corporate Secretary.

The agreements and other documents filed as exhibits to this report  are not intended to provide

factual information or other disclosure other than the terms of the  agreements or other documents
themselves, and you should not rely  on  them for  that purpose. In  particular, any  representations and
warranties made by the Company in  these agreements or  other  documents were  made solely within the
specific  context of the relevant agreement or document  and  may not describe the actual  state of affairs
at the date they were made or at any  other time.

280

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED  CHARGES

Exhibit 12.1

(for the year ended December 31, in millions, except ratios)

2012

2011

2010

2009

2008

Income before income taxes . . . . . . . . . . . . . . . . . . . . . .
Interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portion of rentals deemed to be interest . . . . . . . . . . . . . .

$3,166
378
64

$1,352
386
63

$4,306
388
68

$4,711
382
70

$3,716
370
80

Income available for fixed charges . . . . . . . . . . . . . . . . . .

$3,608

$1,801

$4,762

$5,163

$4,166

Fixed charges:

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portion of rentals deemed to be interest . . . . . . . . . . . .

$ 378
64

$ 386
63

$ 388
68

$ 382
70

$ 370
80

Total  fixed charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock dividend requirements . . . . . . . . . . . . . . .

442
—

449
1

456
4

452
4

450
5

Total  fixed charges and preferred stock dividend

requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 442

$ 450

$ 460

$ 456

$ 455

Ratio of earnings to fixed charges . . . . . . . . . . . . . . . . . .

8.17

4.01

10.44

11.43

9.26

Ratio of earnings to combined fixed  charges  and preferred
stock dividend requirements . . . . . . . . . . . . . . . . . . . . .

8.17

4.00

10.35

11.31

9.15

The ratio of earnings to fixed charges  is computed by dividing income available for fixed charges

by the fixed charges. For purposes of  this ratio,  fixed  charges consist  of that portion of rentals deemed
representative of the appropriate interest factor.

Exhibit 31.1

I, Jay S. Fishman, certify that:

CERTIFICATION

1.

I have reviewed this Annual Report on  Form 10-K for the year  ended  December 31, 2012 of The
Travelers Companies, Inc. (the Company);

2. Based on my knowledge, this report does not contain any untrue statement  of  a material fact or

omit to state a material fact necessary  to  make the statements made,  in light  of the circumstances
under which such statements were made, not misleading  with respect to the period  covered by this
report;

3. Based on my knowledge, the financial statements, and  other financial  information included in  this
report, fairly present in all material respects  the financial condition, results of operations and  cash
flows of the Company as of, and for,  the periods presented in this report;

4. The Company’s other certifying  officer and I  are responsible for establishing and maintaining

disclosure controls and procedures (as defined  in Exchange  Act Rules 13a-15(e) and  15d-15(e))
and internal control over financial reporting (as defined in  Exchange Act Rules 13a-15(f) and
15d-15(f)) for the Company and have:

a)

designed such disclosure controls and  procedures,  or caused such disclosure controls and
procedures to be designed under our  supervision, to ensure that material  information relating
to the Company, including its consolidated subsidiaries, is made known to us by others  within
those entities, particularly during the period in  which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over

financial reporting to be designed under our supervision,  to  provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external  purposes in accordance with  generally accepted accounting  principles;

c)

evaluated the effectiveness of the Company’s disclosure controls and procedures and
presented in this report our conclusions  about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered  by this  report based on such evaluation; and

d) disclosed in this report any change  in the Company’s internal control over financial reporting

that occurred during the Company’s most recent fiscal  quarter (the  Company’s fourth fiscal
quarter in the case of an annual report) that has materially  affected, or is reasonably likely to
materially affect, the Company’s internal control  over financial reporting;  and

5. The Company’s other certifying  officer and I  have disclosed,  based on  our  most recent evaluation
of internal control over financial reporting,  to  the Company’s auditors and the audit committee  of
the Company’s board of directors (or  persons performing  the equivalent  functions):

a)

b)

all significant deficiencies and material weaknesses  in the design  or  operation  of internal
control over financial reporting which are  reasonably likely  to  adversely affect  the Company’s
ability to record, process, summarize and report  financial information; and

any fraud, whether or not material,  that involves management  or other employees who have a
significant role in the Company’s internal control over  financial  reporting.

Date: February 19, 2013

By:

/s/ JAY S. FISHMAN

Jay S. Fishman
Chairman and Chief Executive Officer

Exhibit 31.2

I, Jay S. Benet, certify that:

CERTIFICATION

1.

I have reviewed this Annual Report on  Form 10-K for the year  ended  December 31, 2012 of The
Travelers Companies, Inc. (the Company);

2. Based on my knowledge, this report does not contain any untrue statement  of  a material fact or

omit to state a material fact necessary  to  make the statements made,  in light  of the circumstances
under which such statements were made, not misleading  with respect to the period  covered by this
report;

3. Based on my knowledge, the financial statements, and  other financial  information included in  this
report, fairly present in all material respects  the financial condition, results of operations and  cash
flows of the Company as of, and for,  the periods presented in this report;

4. The Company’s other certifying  officer and I  are responsible for establishing and maintaining

disclosure controls and procedures (as defined  in Exchange  Act Rules 13a-15(e) and  15d-15(e))
and internal control over financial reporting (as defined in  Exchange Act Rules 13a-15(f) and
15d-15(f)) for the Company and have:

a)

designed such disclosure controls and  procedures,  or caused such disclosure controls and
procedures to be designed under our  supervision, to ensure that material  information relating
to the Company, including its consolidated subsidiaries, is made known to us by others  within
those entities, particularly during the period in  which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over

financial reporting to be designed under our supervision,  to  provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external  purposes in accordance with  generally accepted accounting  principles;

c)

evaluated the effectiveness of the Company’s disclosure controls and procedures and
presented in this report our conclusions  about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered  by this  report based on such evaluation; and

d) disclosed in this report any change  in the Company’s internal control over financial reporting

that occurred during the Company’s most recent fiscal  quarter (the  Company’s fourth fiscal
quarter in the case of an annual report) that has materially  affected, or is reasonably likely to
materially affect, the Company’s internal control  over financial reporting;  and

5. The Company’s other certifying  officer and I  have disclosed,  based on  our  most recent evaluation
of internal control over financial reporting,  to  the Company’s auditors and the audit committee  of
the Company’s board of directors (or  persons performing  the equivalent  functions):

a)

b)

all significant deficiencies and material weaknesses  in the design  or  operation  of internal
control over financial reporting which are  reasonably likely  to  adversely affect  the Company’s
ability to record, process, summarize and report  financial information; and

any fraud, whether or not material,  that involves management  or other employees who have a
significant role in the Company’s internal control over  financial  reporting.

Date: February 19, 2013

By:

/s/ JAY S. BENET

Jay S. Benet
Vice Chairman and Chief Financial Officer

Exhibit 32.1

THE TRAVELERS COMPANIES, INC.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY  ACT  OF 2002

Pursuant to Rule 13a-14(b) of the Securities Exchange Act  of 1934 (the ‘‘Exchange Act’’) and
18 U.S.C. Section 1350, the undersigned officer of The Travelers Companies, Inc.  (the  ‘‘Company’’)
hereby certifies that the Company’s Annual Report on Form 10-K for the year ended December 31,
2012 (the ‘‘Report’’) fully complies with the requirements of Section 13(a) or 15(d) of the  Exchange
Act and that the information contained in  the Report fairly presents, in  all  material  respects, the
financial condition and results of operations of  the Company.

Date: February 19, 2013

By:

/s/ JAY S. FISHMAN

Name: Jay S. Fishman
Title: Chairman and Chief Executive Officer

Exhibit 32.2

THE TRAVELERS COMPANIES, INC.
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY  ACT  OF 2002

Pursuant to Rule 13a-14(b) of the Securities Exchange Act  of 1934 (the ‘‘Exchange Act’’) and
18 U.S.C. Section 1350, the undersigned officer of The Travelers Companies, Inc.  (the  ‘‘Company’’)
hereby certifies that the Company’s Annual Report on Form 10-K for the year ended December 31,
2012 (the ‘‘Report’’) fully complies with the requirements of Section 13(a) or 15(d) of the  Exchange
Act and that the information contained in  the Report fairly presents, in  all  material  respects, the
financial condition and results of operations of  the Company.

Date: February 19, 2013

By:

/s/ JAY S. BENET

Name: Jay S. Benet
Title: Vice Chairman and Chief Financial
Officer

SHAREHOLDERS’ INFORMATION

Requests for additional information may be directed to:

The Travelers Companies, Inc. 

Investor Relations, 2MS

Your Dividends
The Travelers Companies, Inc. has paid cash dividends without interruption 

for 141 years. Our most recent quarterly dividend of $0.46 per share was 

declared on January 22, 2013, payable March 29, 2013, to shareholders of 

record as of March 8, 2013.

Automatic Dividend Reinvestment Program
This program provides a convenient opportunity for our shareholders 

One Tower Square 

Hartford, CT 06183 

Attn: Marc Parr

860.277.0779

mparr@travelers.com

Annual Meeting of Shareholders
The Annual Meeting of Shareholders will be held on May 22, 2013, at 

The Hartford Marriott Downtown, 200 Columbus Boulevard, Hartford, 

CT 06103. In April, we plan to send proxy materials, or a notice of internet 

availability of proxy materials, to shareholders of record as of the close of 

to increase their holding of Travelers common stock. An explanatory 

business on March 25, 2013. The notice provides instructions on where to 

brochure and enrollment card may be obtained by calling our stock 

access our Proxy Statement and Annual Report as well as how to vote your 

transfer agent, Wells Fargo Bank, N.A. at 888.326.5102, or mailing 

shares electronically. The notice also includes instructions on how to request 

a request to the address below.

a printed copy of our proxy materials.  

Stock Transfer Agent and Registrar
For address changes, dividend checks, direct deposits of dividends, 

Stock Price and Dividend Rate
The Travelers Companies, Inc. common stock is listed on the New York 

account consolidations, registration changes, lost stock certiﬁ cates 

Stock Exchange (NYSE) and is publicly traded under the ticker symbol “TRV”.  

and general stock holding questions, please contact:

Wells Fargo Bank, N.A.

Shareowner Services 

P.O. Box 64854

Saint Paul, MN 55164-0854

Toll Free: 888.326.5102

Outside U.S. and Canada: 651.450.4064

wellsfargo.com/shareownerservices

Financial Information Available
Travelers makes available, free of charge on its website, all of its ﬁ lings that 

are made electronically with the SEC, including Forms 10-K, 10-Q and 8-K. 

To access these ﬁ lings, go to travelers.com > For Investors > SEC Filings. 

The following tables set forth the quarterly high and low closing sales prices 

of The Travelers Companies, Inc. common stock as well as the amount of 

quarterly cash dividends declared per share for years 2012 and 2011.   

2012

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

2011

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

High

$61.59

64.77

68.61

74.33

$60.92

64.05

59.11

59.68

Low

$56.87

57.75

60.89

68.07

$53.33

56.68

47.12

46.80

Cash Dividend 
Declared

$0.41

0.46

0.46

0.46

$0.36

0.41

0.41

0.41

Additional Information
We have included the tables below to provide a reconciliation of the following items used in this Annual Report: (i) operating income less preferred 

dividends to net income and (ii) adjusted shareholders’ equity to shareholders’ equity, which are components of the operating return on equity and 

return on equity ratios for the six-year period ending December 31, 2012.  

(Dollars in millions, after-tax)

2012

2011

2010

2009

2008

(Dollars in millions)

2012

2011

2010

2009

2008

2007

Twelve months ended December 31,

As of December 31,

Reconciliation of operating income less preferred 

dividends to net income 

Operating income, less 
preferred dividends

$2,441

$1,389

$3,040

$3,597

$3,191 

Preferred dividends

–

1

3

3

4

Operating income

2,441

1,390

3,043

3,600

3,195

Net realized investment 
gains (losses)

32

36

173

22

(271) 

Preferred stock 

Reconciliation of adjusted shareholders’ equity to shareholders’ equity
Adjusted shareholders’ 
equity

$23,375  $25,458   $25,647 

$22,270 $21,570

 $25,783 

Net unrealized investment 
gains (losses), net of tax

Net realized investment 
gains (losses), net of tax

3,103

2,871

1,859

 1,856 

 (146)

 620 

32 

–

36 

–

173 

68

 22 

 79 

 (271)

 89 

 101 

 112 

Net income

$2,473

$1,426

$3,216

$3,622  $2,924

Shareholders’ equity 

$25,405 $24,477

$25,475  $27,415   $25,319 

 $26,616 

Return on equity is the ratio of net income (loss) less preferred dividends 
to average shareholders’ equity for the periods presented. Average shareholders’ 
equity is (a) the sum of total shareholders’ equity excluding preferred stock at the 
beginning and end of each of the quarters for the period presented divided by 
(b) the number of quarters in the period presented times two.

Operating return on equity is the ratio of operating income (loss) less 
preferred dividends to adjusted average shareholders’ equity for the periods 
presented. Adjusted shareholders’ equity is shareholders’ equity excluding net 
unrealized investment gains (losses), net of tax, net realized investment gains 
(losses), net of tax, for the period presented and preferred stock. Adjusted 
average shareholders’ equity is average shareholders’ equity excluding net 
unrealized investment gains (losses), net of tax, and that period’s net realized 
investment gains (losses), net of tax.

Calculation of operating return on equity
Operating income, 
less preferred dividends

 $2,441

 $1,389

 $3,040

 $3,597 

 $3,191 

 $4,496 

Adjusted average 
shareholders’ equity

 22,158 

 22,806 

 24,285 

 25,777 

 25,668 

 25,350 

Operating return on equity

11.0%

6.1%

12.5%

14.0% 12.4%

17.7%

 © 2013 The Travelers Indemnity Company. All rights reserved. 56164

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 The Travelers Companies, Inc.
485 Lexington Avenue
New York, NY 10017-2630
800.328.2189

 NYSE: TRV

travelers.com

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2012 Community Giving Report

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