Edgar Filing: TRAVELERS COMPANIES, INC.

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009

o 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

41-0518860

(State or other jurisdiction of

incorporation or organization)

(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)

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

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 o No o

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	x	Accelerated filer	o

Non-accelerated filer	o	Smaller reporting company	o
(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 Exchange Act).

Yeso No x

The number of shares of the Registrant’s Common Stock, without par value, outstanding at April 24, 2009 was 585,429,500.

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The Travelers Companies, Inc.

Quarterly Report on Form 10-Q

For Quarterly Period Ended March 31, 2009

TABLE OF CONTENTS

		Page
	Part I — Financial Information

Item 1.	Financial Statements:

	Consolidated Statement of Income (Unaudited) — Three Months Ended March 31, 2009 and 2008	3

	Consolidated Balance Sheet — March 31, 2009 (Unaudited) and December 31, 2008	4

	Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) —Three Months Ended March 31, 2009 and 2008	5

	Consolidated Statement of Cash Flows (Unaudited) — Three Months Ended March 31, 2009 and 2008	6

	Notes to Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	72

Item 4.	Controls and Procedures	72

	Part II — Other Information

Item 1.	Legal Proceedings	72

Item 1A.	Risk Factors	75

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	76

Item 3.	Defaults Upon Senior Securities	76

Item 4.	Submission of Matters to a Vote of Security Holders	76

Item 5.	Other Information	76

Item 6.	Exhibits	76

	SIGNATURES	77

	EXHIBIT INDEX	78

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Item 1. FINANCIAL STATEMENTS

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

(in millions, except per share amounts)

For the three months ended March 31,	2009			2008
Revenues
Premiums	$	5,301		$	5,340
Net investment income	542			815
Fee income	73			105
Net realized investment losses	(214		)	(62		)
Other revenues	33			34
Total revenues	5,735			6,232
Claims and expenses
Claims and claim adjustment expenses	3,190			3,021
Amortization of deferred acquisition costs	944			954
General and administrative expenses	782			853
Interest expense	92			90
Total claims and expenses	5,008			4,918
Income before income taxes	727			1,314
Income tax expense	65			347
Net income	$	662		$	967
Net income per share
Basic	$	1.12		$	1.56
Diluted	$	1.11		$	1.54
Weighted average number of common shares outstanding
Basic	584.6			615.4
Diluted	590.4			624.8

See notes to consolidated financial statements (unaudited).

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in millions)

	March 31, 2009			December 31, 2008
	(Unaudited)
Assets
Fixed maturities, available for sale at fair value (including $34 and $8 subject to securities lending) (amortized cost $61,771 and $61,569)	$	62,503		$	61,275
Equity securities, at fair value (cost $380 and $461)	322			379
Real estate	884			827
Short-term securities	5,673			5,222
Other investments	2,771			3,035
Total investments	72,153			70,738

Cash	245			350
Investment income accrued	780			823
Premiums receivable	6,032			5,954
Reinsurance recoverables	14,065			14,232
Ceded unearned premiums	1,103			941
Deferred acquisition costs	1,778			1,774
Deferred tax asset	1,598			1,965
Contractholder receivables	6,533			6,350
Goodwill	3,364			3,366
Other intangible assets	660			688
Other assets	2,156			2,570
Total assets	$	110,467		$	109,751

Liabilities
Claims and claim adjustment expense reserves	$	54,350		$	54,723
Unearned premium reserves	11,021			10,957
Contractholder payables	6,533			6,350
Payables for reinsurance premiums	714			528
Debt	6,039			6,181
Other liabilities	5,313			5,693
Total liabilities	83,970			84,432

Shareholders’ equity
Preferred Stock Savings Plan—convertible preferred stock (0.3 shares issued and outstanding at both dates)	87			89
Common stock (1,750.0 shares authorized; 585.3 and 585.1 shares issued and outstanding)	19,290			19,242
Retained earnings	13,805			13,314
Accumulated other changes in equity from nonowner sources	(232		)	(900		)
Treasury stock, at cost (129.5 and 128.8 shares)	(6,453		)	(6,426		)
Total shareholders’ equity	26,497			25,319
Total liabilities and shareholders’ equity	$	110,467		$	109,751

See notes to consolidated financial statements (unaudited).

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(in millions)

For the three months ended March 31,	2009			2008
Convertible preferred stock—savings plan
Balance, beginning of year	$	89		$	112
Redemptions during period	(2		)	(4		)
Balance, end of period	87			108

Common stock
Balance, beginning of year	19,242			18,990
Employee share-based compensation	11			20
Compensation amortization under share-based plans and other changes	37			42
Balance, end of period	19,290			19,052

Retained earnings
Balance, beginning of year	13,314			11,110
Net income	662			967
Dividends	(178		)	(180		)
Other	7			(1		)
Balance, end of period	13,805			11,896

Accumulated other changes in equity from nonowner sources, net of tax
Balance, beginning of year	(900		)	670
Change in net unrealized gain (loss) on investment securities	687			(43		)
Net change in unrealized foreign currency translation and other changes	(19		)	(1		)
Balance, end of period	(232		)	626

Treasury stock (at cost)
Balance, beginning of year	(6,426		)	(4,266		)
Treasury shares acquired — share repurchase authorization	—			(1,000		)
Net shares acquired related to employee share-based compensation plans	(27		)	(28		)
Balance, end of period	(6,453		)	(5,294		)
Total common shareholders’ equity	26,410			26,280
Total shareholders’ equity	$	26,497		$	26,388

Common shares outstanding
Balance, beginning of year	585.1			627.8
Shares acquired — share repurchase authorization	—			(20.8		)
Net shares issued (acquired) under employee share-based compensation plans	0.2			(0.1		)
Balance, end of period	585.3			606.9

Summary of changes in equity from nonowner sources
Net income	$	662		$	967
Other changes in equity from nonowner sources, net of tax	668			(44		)
Total changes in equity from nonowner sources	$	1,330		$	923

See notes to consolidated financial statements (unaudited).

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

(in millions)

For the three months ended March 31,	2009			2008
Cash flows from operating activities
Net income	$	662		$	967
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment losses	214			62
Depreciation and amortization	206			213
Deferred federal income tax expense (benefit)	22			(8		)
Amortization of deferred acquisition costs	944			954
Equity in (income) loss from other investments	194			(17		)
Premiums receivable	(78		)	(28		)
Reinsurance recoverables	167			272
Deferred acquisition costs	(948		)	(968		)
Claims and claim adjustment expense reserves	(373		)	(386		)
Unearned premium reserves	64			15
Trading account activities	1			2
Excess tax benefits from share-based payment arrangements	(1		)	(4		)
Other	(261		)	(147		)
Net cash provided by operating activities	813			927

Cash flows from investing activities
Proceeds from maturities of fixed maturities	1,210			1,604
Proceeds from sales of investments:
Fixed maturities	630			1,044
Equity securities	16			12
Other investments	92			246
Purchases of investments:
Fixed maturities	(2,265		)	(2,350		)
Equity securities	(12		)	(21		)
Real estate	(5		)	(9		)
Other investments	(112		)	(123		)
Net (purchases) sales of short-term securities	(451		)	320
Securities transactions in course of settlement	398			43
Other	(84		)	(72		)
Net cash provided by (used in) investing activities	(583		)	694

Cash flows from financing activities
Payment of debt	(141		)	(400		)
Dividends paid to shareholders	(178		)	(179		)
Issuance of common stock — employee share options	10			15
Treasury stock acquired — share repurchase authorization	—			(1,000		)
Treasury stock acquired — net employee share-based compensation	(27		)	(26		)
Excess tax benefits from share-based payment arrangements	1			4
Net cash used in financing activities	(335		)	(1,586		)
Effect of exchange rate changes on cash	—			2
Net increase (decrease) in cash	(105		)	37
Cash at beginning of period	350			271
Cash at end of period	$	245		$	308

Supplemental disclosure of cash flow information
Income taxes paid	$	34		$	78
Interest paid	$	63		$	72

See notes to consolidated financial statements (unaudited).

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Basis of Presentation

The interim consolidated financial statements include the accounts of The Travelers Companies, Inc. (together with its subsidiaries, the Company). These financial statements are prepared in conformity with U.S. generally accepted accounting principles (GAAP) and are unaudited. In the opinion of the Company’s management, all adjustments necessary for a fair presentation have been reflected. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted. The accompanying interim consolidated financial statements and related notes should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s 2008 Annual Report on Form 10-K.

The preparation of the interim consolidated financial statements in conformity with 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. All material intercompany transactions and balances have been eliminated.

Adoption of New Accounting Standards

Fair Value Measurements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. It applies to other pronouncements that require or permit fair value but does not require any new fair value measurements. The statement defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

FAS 157 establishes a fair value hierarchy to increase consistency and comparability in fair value measurements and disclosures. The hierarchy is based on the inputs used in valuation and gives the highest priority to quoted prices in active markets. The highest possible level should be used to measure fair value. FAS 157 was effective for fiscal years beginning after November 15, 2007.

In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No. 157 (FSP FAS 157-2), which permits a one-year deferral of the application of FAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).

The Company adopted FAS 157 and FSP FAS 157-2 effective January 1, 2008 and elected to defer the application of FAS 157 to non-financial assets and non-financial liabilities for one year. The adoption of FAS 157 and FSP FAS 157-2 on January 1, 2008 did not have a material effect on the Company’s results of operations, financial position or liquidity. The adoption of FAS 157 on January 1, 2009 for non-financial assets and non-financial liabilities did not have a material effect on the Company’s results of operations, financial position or liquidity.

Derivative Instruments and Hedging Activities

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133 (FAS 161). FAS 161 changes the disclosure requirements for derivative instruments and hedging activities and specifically requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of, and gains and losses on, derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The provisions of FAS 161 were effective for financial statements issued for fiscal years beginning after November 15, 2008. The adoption of FAS 161 on January 1, 2009 did not result in a change in the Company’s disclosure since the amount of derivatives held is not material.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES, Continued

Determination of the Useful Life of Intangible Assets

In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors that an entity should consider in determining the useful life of a recognized intangible asset under FAS 142, Goodwill and Other Intangible Assets, to include the entity’s historical experience in renewing or extending similar arrangements, whether or not the arrangements have explicit renewal or extension provisions. Previously, an entity was precluded from using its own assumptions about renewal or extension of an arrangement where there was likely to be substantial cost or modifications. Entities without their own historical experience should consider the assumptions market participants would use about renewal or extension. The amendment may result in the useful life of an entity’s intangible asset differing from the period of expected cash flows that was used to measure the fair value of the underlying asset using the market participant’s perceived value. FSP FAS 142-3 also requires disclosure to provide information on an entity’s intent and/or ability to renew or extend the arrangement.

FSP FAS 142-3 was effective for financial statements issued for fiscal years beginning after December 15, 2008 and for interim periods within those fiscal years. The adoption of FSP FAS 142-3 on January 1, 2009 did not have a material effect on the Company’s results of operations, financial position or liquidity and did not require additional disclosures related to existing intangible assets.

Participating Securities Granted in Share-Based Payment Transactions

In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, should be included in the earnings allocation in computing earnings per share (EPS) under the two-class method described in FAS 128, Earnings per Share. FSP EITF 03-6-1 redefines participating securities to include unvested share-based payment awards that contain non-forfeitable dividends or dividend equivalents as participating securities to be included in the computation of EPS pursuant to the “two-class method.” Outstanding unvested restricted stock and deferred stock units issued under employee compensation programs containing such dividend participation features are considered participating securities subject to the “two-class method” in computing EPS rather than the “treasury stock method.”

FSP EITF 03-6-1 was effective for financial statements issued for fiscal years beginning after December 15, 2008 and for interim periods within those years. In accordance with provisions of FSP EITF 03-6-1, all prior-period basic and diluted EPS data presented were restated to reflect the retrospective application of FSP EITF 03-6-1 computational guidance. The adoption of FSP EITF 03-6-1 on January 1, 2009 did not have a material effect on the Company’s basic or diluted EPS. See note 8 herein.

Business Combinations

In December 2007, the FASB issued Revised Statement of Financial Accounting Standards No. 141R, Business Combinations (FAS 141R), a replacement of FAS 141, Business Combinations (FAS 141). FAS 141R provides revised guidance on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree. In addition, it provides revised guidance on the recognition and measurement of goodwill acquired in the business combination.

FAS 141R also provides guidance specific to the recognition, classification, and measurement of assets and liabilities related to insurance and reinsurance contracts acquired in a business combination.

FAS 141R applies to business combinations for acquisitions occurring on or after January 1, 2009. Accordingly, FAS 141R does not impact the Company’s previous transactions involving purchase accounting.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES, Continued

In April 2009, the FASB issued FSP FAS 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (FSP FAS 141R-1), which reinstates the requirements under FAS 141 for recognizing and measuring pre-acquisition contingencies in a business combination. FSP FAS 141R-1 requires that pre-acquisition contingencies are recognized at their acquisition-date fair value if a fair value can be determined during the measurement period. If the acquisition-date fair value cannot be determined during the measurement period, a contingency shall be recognized if it is probable that an asset existed or liability had been incurred at the acquisition date and the amount can be reasonably estimated. FSP FAS 141R-1 does not prescribe specific accounting for subsequent measurement and accounting for contingencies.

The adoption of FAS 141R and FSP FAS 141(R)-1 on January 1, 2009 had no effect on the Company’s results of operations, financial position or liquidity.

Noncontrolling Interests in Consolidated Financial Statements

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements — an Amendment of Accounting Research Bulletin No. 51 (FAS 160). FAS 160 amends Accounting Research Bulletin No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. In addition, it clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements.

FAS 160 is effective on a prospective basis beginning January 1, 2009, except for the presentation and disclosure requirements which are applied on a retrospective basis for all periods presented. The adoption of FAS 160 on January 1, 2009 did not have a material effect on the Company’s results of operations, financial position or liquidity.

Accounting Standards Not Yet Adopted

Employers’ Disclosures about Postretirement Benefit Plan Assets

In December 2008, the FASB issued FSP FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets. The FSP requires an employer to provide certain disclosures about plan assets of its defined benefit pension or other postretirement plans. The disclosures required include the investment policies and strategies of the plans, the fair value of the major categories of plan assets, the inputs and valuation techniques used to develop fair value measurements and a description of significant concentrations of risk in plan assets. The FSP is effective for fiscal years ending after December 15, 2009.

Disclosures about Fair Value of Financial Instruments

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1). FSP FAS 107-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require fair value of financial instrument disclosures whenever a publicly traded company issues financial information in interim reporting periods in addition to the annual disclosure at year-end. The provisions of FSP FAS 107-1 are effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.

Additional Fair Value Measurement Guidance

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS 157-4 provides guidance for determining when a transaction is not orderly and for estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements (FAS 157), when there has been a significant decrease in the volume and level of activity for an asset or liability. FSP FAS 157-4 does not change the measurement objective of FAS 157 which is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES, Continued

FSP FAS 157-4 requires the disclosure of the inputs and valuation techniques used, as well as any changes in valuation techniques and inputs used during the period, to measure fair value in interim and annual periods. In addition, FSP FAS 157-4 requires that the presentation of the fair value hierarchy be presented by major security type as described in FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities (as amended by FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments).

The provisions of FSP FAS 157-4 are effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company will adopt FSP FAS 157-4 on April 1, 2009 and does not expect the adoption will have a material effect on its results of operations, financial position or liquidity.

Other-Than-Temporary Impairments

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2). FSP FAS 115-2 modifies the existing other-than-temporary impairment guidance to require the recognition of an other-than-temporary impairment when an entity has the intent to sell a debt security or when it is more likely than not an entity will be required to sell the debt security before its anticipated recovery.

Additionally, FSP FAS 115-2 changes the presentation and amount of other-than-temporary losses recognized in the income statement for instances when the Company determines that there is a credit loss on a debt security but it is more likely than not that the entity will not be required to sell the security prior to the anticipated recovery of its remaining cost basis. For these debt securities, the amount representing the credit loss will be reported as an impairment loss in the Consolidated Statement of Income and the amount related to all other factors will be reported in accumulated other comprehensive income. FSP FAS 115-2 also requires the presentation of other-than-temporary impairments separately from realized gains and losses on the face of the income statement.

In addition to the changes in measurement and presentation, FSP FAS 115-2 is intended to enhance the existing disclosure requirements for other-than-temporary impairments and requires all disclosures related to other-than-temporary impairments in both interim and annual periods.

The provisions of FSP FAS 115-2 are effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company will adopt FSP FAS 115-2 on April 1, 2009. The Company has not yet determined the cumulative effect of adoption, but expects that it will result in an increase to retained earnings, offset by a decrease to accumulated other comprehensive income by the same amount.

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

Business Insurance also includes the Special Liability Group (which manages the Company’s asbestos and environmental liabilities) and the assumed reinsurance, healthcare and certain international and other runoff operations, which collectively are referred to as Business Insurance Other.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES, Continued

Financial, Professional & International Insurance

The Financial, Professional & International Insurance segment includes surety and financial liability coverages, which require a primarily credit-based underwriting process, as well as property and casualty products that are primarily marketed on a domestic basis in the United Kingdom, the Republic of Ireland and Canada, and on an international basis through Lloyd’s. The segment includes the Bond & Financial Products group as well as the International group.

Personal Insurance

The Personal Insurance segment writes virtually all types of property and casualty insurance covering personal risks. The primary coverages in Personal Insurance are automobile and homeowners insurance sold to individuals.

2. SEGMENT INFORMATION

The following tables summarize the components of the Company’s revenues, operating income and total assets by reportable business segments:

(for the three months ended March 31, in millions)	Business Insurance		Financial, Professional & International Insurance		Personal Insurance		Total Reportable Segments
2009
Premiums	$	2,757	$	801	$	1,743	$	5,301
Net investment income	355		104		83		542
Fee income	73		—		—		73
Other revenues	6		6		21		33
Total operating revenues (1)	$	3,191	$	911	$	1,847	$	5,949
Operating income (1)	$	547	$	148	$	154	$	849

2008
Premiums	$	2,786	$	847	$	1,707	$	5,340
Net investment income	573		122		120		815
Fee income	105		—		—		105
Other revenues	6		5		21		32
Total operating revenues (1)	$	3,470	$	974	$	1,848	$	6,292
Operating income (1)	$	683	$	208	$	181	$	1,072

(1) Operating revenues for reportable business segments exclude net realized investment losses. Operating income for reportable business segments equals net income excluding the after-tax impact of net realized investment losses.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

2. SEGMENT INFORMATION, Continued

Business Segment Reconciliations

	Three Months Ended March 31,
(in millions)	2009			2008
Revenue reconciliation
Earned premiums
Business Insurance:
Commercial multi-peril	$	718		$	755
Workers’ compensation	633			580
Commercial automobile	479			499
Property	446			470
General liability	482			480
Other	(1		)	2
Total Business Insurance	2,757			2,786

Financial, Professional & International Insurance:
Fidelity and surety	266			280
General liability	228			225
International	274			310
Other	33			32
Total Financial, Professional & International Insurance	801			847

Personal Insurance:
Automobile	918			911
Homeowners and other	825			796
Total Personal Insurance	1,743			1,707
Total earned premiums	5,301			5,340
Net investment income	542			815
Fee income	73			105
Other revenues	33			32
Total operating revenues for reportable segments	5,949			6,292
Other revenues	—			2
Net realized investment losses	(214		)	(62		)
Total consolidated revenues	$	5,735		$	6,232

Income reconciliation, net of tax
Total operating income for reportable segments	$	849		$	1,072
Interest Expense and Other (1)	(50		)	(64		)
Total operating income	799			1,008
Net realized investment losses	(137		)	(41		)
Total consolidated net income	$	662		$	967

(1) The primary component of Interest Expense and Other is after-tax interest expense of $60 million and $59 million for the three months ended March 31, 2009 and 2008, respectively. The 2009 total included a benefit of $14 million from the favorable resolution of various prior year federal tax matters.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

2. SEGMENT INFORMATION, Continued

(in millions)	March 31, 2009		December 31, 2008
Asset reconciliation:
Business Insurance	$	83,201	$	82,622
Financial, Professional & International Insurance	13,489		13,356
Personal Insurance	13,152		13,151
Total assets for reportable segments	109,842		109,129
Other assets (1)	625		622
Total consolidated assets	$	110,467	$	109,751

(1) The primary components of other assets at both dates were other intangible assets, property and equipment and deferred taxes.

3. INVESTMENTS

Fixed Maturities

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

Amortized

Gross Unrealized

Fair

(at March 31, 2009, in millions)

Cost

Gains

Losses

Value

U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities

1,624

143

—

1,767

Obligations of states, municipalities and political subdivisions

38,955

1,412

164

40,203

Debt securities issued by foreign governments

1,527

1,590

Mortgage-backed securities, collateralized mortgage obligations and pass-through securities

5,979

197

296

5,880

All other corporate bonds

13,637

189

800

13,026

Redeemable preferred stock

—

Total

61,771

2,009

1,277

62,503

	Amortized		Gross Unrealized				Fair
(at December 31, 2008, in millions)	Cost		Gains		Losses		Value
U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities	$	1,681	$	160	$	—	$	1,841
Obligations of states, municipalities and political subdivisions	38,598		920		456		39,062
Debt securities issued by foreign governments	1,453		67		1		1,519
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	6,266		157		364		6,059
All other corporate bonds	13,498		121		882		12,737
Redeemable preferred stock	73		1		17		57
Total	$	61,569	$	1,426	$	1,720	$	61,275

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

3. INVESTMENTS, Continued

Equity Securities

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

			Gross Unrealized				Fair
(at March 31, 2009, in millions)	Cost		Gains		Losses		Value
Common stock	$	171	$	4	$	29	$	146
Non-redeemable preferred stock	209		2		35		176
Total	$	380	$	6	$	64	$	322

			Gross Unrealized				Fair
(at December 31, 2008, in millions)	Cost		Gains		Losses		Value
Common stock	$	189	$	2	$	31	$	160
Non-redeemable preferred stock	272		7		60		219
Total	$	461	$	9	$	91	$	379

Variable Interest Entities (VIEs)

The following entities are consolidated:

· Municipal Trusts—The Company owns interests in various municipal trusts that were formed for the purpose of allowing more flexibility to generate investment income in a manner consistent with the Company’s investment objectives and tax position. At March 31, 2009 and December 31, 2008, there were 21 and 24 such trusts, respectively, which held a combined total of $234 million and $277 million, respectively, in municipal securities, of which $20 million and $32 million, respectively, were owned by outside investors. The net carrying value of the trusts owned by the Company at March 31, 2009 and December 31, 2008 was $214 million and $245 million, respectively.

· Real Estate Joint Venture—The Company has a 50% equity interest in a real estate joint venture that was formed to develop and maintain a shopping center for the purpose of generating rental income. In March 2009, the Company provided additional financial support to the joint venture in the form of a mortgage loan. The combined loan and equity interest resulted in the Company being the primary beneficiary subject to consolidation. The carrying value of the consolidated joint venture investments was $62 million at March 31, 2009.

The Company has a significant interest in the following VIE, which is not consolidated because the Company is not considered to be the primary beneficiary:

· Camperdown UK Limited, which the Company sold in December 2003—The Company’s variable interest resulted from an agreement to indemnify the purchaser in the event a specified reserve deficiency develops, a reserve-related foreign exchange impact occurs or a foreign tax adjustment is imposed on a pre-sale reporting period. The maximum amount of this indemnification obligation is $120 million. The carrying value of this obligation at March 31, 2009 and December 31, 2008 was $24 million and $23 million, respectively.

The Company has other significant interests in VIEs, including private equity funds and real estate entities. Neither the carrying amounts nor the unfunded commitments related to these entities are material.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

3. INVESTMENTS, Continued

The following securities are not consolidated:

· Mandatorily redeemable preferred securities of trusts holding solely the subordinated debentures of the Company — These securities were issued by three separate trusts that were established for the sole purpose of issuing the securities to investors and are fully guaranteed by the Company. The subordinated debt that the Company issued to these trusts is included in the “Debt” section of liabilities on the Company’s consolidated balance sheet. That debt had a carrying value of $309 million at March 31, 2009 and December 31, 2008.

Unrealized Investment Losses

The following tables summarize, for all investments in an unrealized loss position at March 31, 2009 and December 31, 2008, the aggregate fair value and gross unrealized losses by length of time those securities have been continuously in an unrealized loss position.

	Less than 12 months				12 months or longer				Total
(at March 31, 2009, in millions)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Fixed maturities
U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities	$	1	$	—	$	—	$	—	$	1	$	—
Obligations of states, municipalities and political subdivisions	2,893		63		3,316		101		6,209		164
Debt securities issued by foreign governments	56		5		—		—		56		5
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	246		31		1,368		265		1,614		296
All other corporate bonds	3,930		371		2,547		429		6,477		800
Redeemable preferred stock	19		11		3		1		22		12
Total fixed maturities	7,145		481		7,234		796		14,379		1,277

Equity securities
Common stock	74		23		15		6		89		29
Non-redeemable preferred stock	71		19		50		16		121		35
Total equity securities	145		42		65		22		210		64
Total	$	7,290	$	523	$	7,299	$	818	$	14,589	$	1,341

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

3. INVESTMENTS, Continued

	Less than 12 months				12 months or longer				Total
(at December 31, 2008, in millions)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Fixed maturities
U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities	$	—	$	—	$	—	$	—	$	—	$	—
Obligations of states, municipalities and political subdivisions	11,508		340		1,812		116		13,320		456
Debt securities issued by foreign governments	7		1		—		—		7		1
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	1,660		310		551		54		2,211		364
All other corporate bonds	5,734		510		2,112		372		7,846		882
Redeemable preferred stock	24		11		19		6		43		17
Total fixed maturities	18,933		1,172		4,494		548		23,427		1,720

Equity securities
Common stock	93		25		12		6		105		31
Non-redeemable preferred stock	83		28		69		32		152		60
Total equity securities	176		53		81		38		257		91
Total	$	19,109	$	1,225	$	4,575	$	586	$	23,684	$	1,811

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

	Three Months Ended March 31,
	2009		2008
Fixed maturities	$	107	$	26
Equity securities	74		2
Other investments	3		10
Total	$	184	$	38

4. FAIR VALUE MEASUREMENTS

The Company’s estimates of fair value for assets and liabilities are based on the framework established in FAS 157. The framework is based on the inputs used in valuation and 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 FAS 157 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 three levels of the hierarchy are as follows:

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

4. FAIR VALUE MEASUREMENTS, Continued

· Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.

· 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.

· 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 fixed maturity 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 (i.e., the carrying amount) 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 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 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 99% 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 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.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

4. FAIR VALUE MEASUREMENTS, Continued

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 holds privately placed corporate bonds and estimates the fair value of these bonds 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 Merrill Lynch U.S. Corporate Index and the 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. As many of these securities are issued by public companies, the Company compares the estimates of fair value to the fair values of these companies’ publicly traded debt to test the validity of the internal pricing matrix.

While the vast majority of the Company’s municipal bonds are included in Level 2, the Company holds a small number of municipal 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. Additionally, the Company holds a small amount of fixed maturities that have characteristics that make them unsuitable for matrix pricing. For these fixed maturities, the Company obtains a quote from a broker (typically a market maker). 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.

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 estimate in the amount disclosed in Level 2.

Other Investments

Public Common and Other Securities

The Company holds investments in various publicly-traded securities which are reported in other investments. The $44 million fair value of these investments is disclosed in Level 1. These investments include securities in the Company’s trading portfolio ($18 million), mutual funds ($11 million) and various other small holdings ($15 million).

Venture Capital Investments and Non-Public Common and Preferred Equity Securities

The Company holds investments in venture capital investments and non-public common and preferred equity securities, with a fair value estimate of $231 million at March 31, 2009, 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. Included in the $231 million fair value estimate is one private common stock with a fair value estimate of $168 million at March 31, 2009, for which the estimate of fair value is provided by a third party appraiser on behalf of the investee and adjusted for a liquidity discount which takes into consideration the restriction on the common stock. Due to the significant unobservable inputs in these valuations, the Company includes the total fair value estimate for all of these investments at March 31, 2009 in the amount disclosed in Level 3.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

4. FAIR VALUE MEASUREMENTS, Continued

Derivatives

The Company uses derivatives generally to hedge its net investment in a foreign subsidiary. The Company also holds non-public warrants in a public company and has convertible bonds containing embedded conversion options that are reported separately from the host bond contract. For the derivatives used to hedge the net investment of a foreign subsidiary, the Company uses quoted market prices to estimate fair value and includes the fair value estimate, which was in an asset position of approximately $1 million at March 31, 2009, in Level 1. The Company estimates fair value for the warrants using an option pricing model with observable market inputs. Because the warrants are not market traded and information concerning market participants is not available, the Company includes the fair value estimate of $54 million at March 31, 2009 in the amount disclosed in Level 3 - other investments. The Company separately values the embedded conversion options based on observable market inputs and includes the estimate of fair value in Level 2.

Fair Value Hierarchy

The following table presents the level within the fair value hierarchy at which the Company’s financial assets and financial liabilities are measured on a recurring basis at March 31, 2009.

(in millions)	Total		Level 1		Level 2		Level 3

Invested assets:
Fixed maturities	$	62,503	$	1,758	$	60,605	$	140
Equity securities	322		293		29		—
Other investments (1)	329		44		—		285
Total	$	63,154	$	2,095	$	60,634	$	425

Other assets (2)	$	1	$	1	$	—	$	—

(1) The amount in Level 3 includes $54 million of non-public stock purchase warrants of a publicly-held company.

(2) Other assets represent the fair value of a derivative used to hedge the net investment in a foreign subsidiary.

The following table presents the changes in the Level 3 fair value category during the period indicated.

(in millions)	Three Months Ended March 31, 2009

Balance at January 1, 2009	$	465
Total realized and unrealized gains or (losses):
Included in realized investment gains and (losses)	(40		)
Included in increases or (decreases) in accumulated other changes in equity from nonowner sources	9
Purchases, (sales), issuances and settlements	(11		)
Gross transfers into Level 3	2
Gross transfers out of Level 3	—
Balance at March 31, 2009	$	425

Amount of total losses for the period included in earnings attributable to changes in the fair value of assets still held at the reporting date	$	(33	)

The Company had no financial assets or financial liabilities that were measured at fair value on a non-recurring basis during the three months ended March 31, 2009.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

5. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The following table presents the carrying amount of the Company’s goodwill by segment at March 31, 2009 and December 31, 2008:

(in millions)	March 31, 2009		December 31, 2008
Business Insurance	$	2,168	$	2,168
Financial, Professional & International Insurance	556		556
Personal Insurance	613		613
Other	27		29
Total	$	3,364	$	3,366

Other Intangible Assets

The following presents a summary of the Company’s other intangible assets by major asset class at March 31, 2009 and December 31, 2008:

(at March 31, 2009, in millions)	Gross Carrying Amount		Accumulated Amortization		Net
Intangibles subject to amortization
Customer-related	$	1,036	$	772	$	264
Fair value adjustment on claims and claim adjustment expense reserves and reinsurance recoverables (1)	191		11		180
Total intangible assets subject to amortization	1,227		783		444
Intangible assets not subject to amortization	216		—		216
Total other intangible assets	$	1,443	$	783	$	660

(at December 31, 2008, in millions)	Gross Carrying Amount		Accumulated Amortization		Net
Intangibles subject to amortization
Customer-related	$	1,036	$	751	$	285
Fair value adjustment on claims and claim adjustment expense reserves and reinsurance recoverables (1)	191		4		187
Total intangible assets subject to amortization	1,227		755		472
Intangible assets not subject to amortization	216		—		216
Total other intangible assets	$	1,443	$	755	$	688

(1) The time value of money and the risk margin (cost of capital) components of the intangible asset run off at different rates, and, as such, the amount recognized in income may be a net benefit in some periods and a net expense in other periods.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

5. 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 three months ended March 31, in millions)	2009		2008
Customer-related	$	21	$	28
Fair value adjustment on claims and claim adjustment expense reserves and reinsurance recoverables	7		8
Total amortization expense	$	28	$	36

Intangible asset amortization expense is estimated to be $72 million for the remainder of 2009, $86 million in 2010, $69 million in 2011, $52 million in 2012 and $45 million in 2013.

6. DEBT

On March 3, 2009, the Company’s zero coupon convertible notes with an effective yield of 4.17% and a remaining principal balance of $141 million matured and were fully paid.

7. CHANGES IN EQUITY FROM NONOWNER SOURCES

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

	Three Months Ended March 31,
(in millions, after-tax)	2009			2008
Net income	$	662		$	967
Change in net unrealized gain (loss) on investment securities	687			(43		)
Other changes	(19		)	(1		)
Total changes in equity from nonowner sources	$	1,330		$	923

8. 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.

On January 1, 2009, the Company adopted the provisions of FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities as described in Note 1. The impact of adoption of this FSP for the three months ended March 31, 2008 reduced previously reported basic earnings per share by $0.01 per share and had no impact on the previously reported diluted earnings per share for that period.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

8. EARNINGS PER SHARE, Continued

The following is a reconciliation of the income and share data used in the basic and diluted earnings per share computations:

	Three Months Ended March 31,
(in millions, except per share amounts)	2009			2008

Basic
Net income, as reported	$	662		$	967
Preferred stock dividends	(1		)	(1		)
Participating share-based awards — allocated income	(5		)	(6		)
Net income available to common shareholders — basic	$	656		$	960

Diluted
Net income available to common shareholders	$	656		$	960
Effect of dilutive securities:
Convertible preferred stock	1			1
Zero coupon convertible notes (1)	1			1
Net income available to common shareholders — diluted	$	658		$	962

Common Shares
Basic
Weighted average shares outstanding	584.6			615.4

Diluted
Weighted average shares outstanding	584.6			615.4
Weighted average effects of dilutive securities:
Stock options and performance shares	2.0			4.4
Convertible preferred stock	2.2			2.6
Zero coupon convertible notes (1)	1.6			2.4
Total	590.4			624.8

Net Income per Common Share
Basic	$	1.12		$	1.56
Diluted	$	1.11		$	1.54

(1) Matured on March 3, 2009.

9. SHARE-BASED INCENTIVE COMPENSATION

The following presents information for fully vested stock option awards at March 31, 2009:

Stock Options	Number	Weighted Average Exercise Price		Weighted Average Contractual Life Remaining	Aggregate Intrinsic Value ($ in millions)
Vested at end of period (1)	29,836,707	$	44.68	3.8 years	$	35
Exercisable at end of period	27,263,249	$	44.58	3.3 years	$	33

(1) Represents awards for which the requisite service has been rendered, including those that are retirement eligible.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

9. SHARE-BASED INCENTIVE COMPENSATION, Continued

The total compensation cost recognized in earnings for all share-based incentive compensation awards was $37 million and $38 million for the three months ended March 31, 2009 and 2008, respectively. The related tax benefit recognized in earnings was $13 million for each of the three months ended March 31, 2009 and 2008.

The total unrecognized compensation cost related to all nonvested share-based incentive compensation awards at March 31, 2009 was $186 million, which is expected to be recognized over a weighted-average period of 2.2 years. The total unrecognized compensation cost related to all nonvested share-based incentive compensation awards at December 31, 2008 was $112 million, which was expected to be recognized over a weighted-average period of 1.7 years.

10. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS

The following table summarizes the components of net periodic benefit cost for the Company’s pension and postretirement benefit plans recognized in the consolidated statement of income.

	Pension Plans						Postretirement Benefit Plans
(for the three months ended March 31, in millions)	2009			2008			2009		2008

Net Periodic Benefit Cost:
Service cost	$	20		$	19		$	—	$	—
Interest cost on benefit obligation	31			29			4		4
Expected return on plan assets	(43		)	(38		)	—		—
Amortization of unrecognized:
Prior service benefit	(1		)	(1		)	—		—
Net actuarial loss (gain)	5			2			—		(1		)
Net benefit expense	$	12		$	11		$	4	$	3

11. CONTINGENCIES, COMMITMENTS AND GUARANTEES

Contingencies

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

Asbestos- and Environmental-Related Proceedings

In the ordinary course of its insurance business, the Company receives claims for insurance arising under policies issued by the Company asserting alleged injuries and damages from asbestos- and environmental-related exposures that are the subject of related coverage litigation, including, among others, the litigation described below. The Company continues to be subject to aggressive asbestos-related litigation. The conditions surrounding the final resolution of these claims and the related litigation continue to change. The Company is defending its 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. For a discussion of other information regarding the Company’s asbestos and environmental exposure, see “Part I — Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Asbestos Claims and Litigation,” “— Environmental Claims and Litigation” and “— Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves.”

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

11. CONTINGENCIES, COMMITMENTS AND GUARANTEES, Continued

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 TPC and other insurers (not including 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.

The federal bankruptcy court that had presided over the bankruptcy of TPC’s former policyholder Johns-Manville Corporation issued a temporary injunction prohibiting the prosecution of the Statutory Actions (but not the Hawaii Actions), the Common Law Claims and an additional set of cases filed in various state courts in Texas and Ohio, and enjoining certain attorneys from filing any further lawsuits against TPC based on similar allegations. Notwithstanding the injunction, additional common law claims were filed against TPC.

In November 2003, the parties reached a settlement of the Statutory and Hawaii Actions. This settlement includes 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. This settlement requires a payment of up to $90 million by TPC, subject to a number of significant contingencies. Each of these settlements is contingent upon, among other things, a final order of the bankruptcy court clarifying that all of these claims, and similar future asbestos-related claims against TPC, are barred by prior orders entered by the bankruptcy court.

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

On March 29, 2006, the U.S. District Court for the Southern District of New York substantially affirmed the bankruptcy court’s orders while vacating that portion of the bankruptcy court’s orders that required all future direct actions against TPC to first be approved by the bankruptcy court before proceeding in state or federal court.

Various parties appealed the district court’s March 29, 2006 ruling to the U.S. Court of Appeals for the Second Circuit. On February 15, 2008, the Second Circuit issued an opinion vacating on jurisdictional grounds the District Court’s approval of an order issued by the bankruptcy court prohibiting the prosecution of the Statutory and Hawaii Actions and the Common Law Claims, as well as future similar direct action litigation, against TPC. On February 29, 2008, TPC and certain other parties to the appeals filed petitions for rehearing and/or rehearing en banc, requesting reinstatement of the district court’s judgment, which were denied. TPC and certain other parties filed Petitions for Writ of Certiorari in the United States Supreme Court seeking review of the Second Circuit’s decision, and on December 12, 2008, the Petitions were granted. On March 30, 2009, oral argument took place before the Supreme Court. The parties await a ruling from the Supreme Court. Unless the Supreme Court reverses the Second Circuit’s decision, and the bankruptcy court’s order is reinstated and becomes final, the settlements will be voided, and TPC will have no obligation to pay the amounts due under the settlement agreements (other than certain administrative expenses). In that case, the Company intends to litigate the direct action cases vigorously.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

11. CONTINGENCIES, COMMITMENTS AND GUARANTEES, Continued

SPC, which is not covered by the Manville bankruptcy court rulings or the settlements described above, is a party to pending 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 Ohio State court. Those actions have all been dismissed following favorable rulings by Ohio trial and appellate courts.

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

Other Proceedings

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

The Company’s Gulf operation brought an action on May 22, 2003 in the Supreme Court of New York, County of New York (Gulf Insurance Company v. Transatlantic Reinsurance Company, et al.), against Transatlantic Reinsurance Company (Transatlantic), XL Reinsurance America, Inc. (XL), Odyssey America Reinsurance Corporation (Odyssey), Employers Reinsurance Company (Employers) and Gerling Global Reinsurance Corporation of America (Gerling), to recover amounts due under reinsurance contracts issued to Gulf and related to Gulf’s February 2003 settlement of a coverage dispute under a vehicle residual value protection insurance policy. The reinsurers asserted counterclaims seeking rescission of the vehicle residual value reinsurance contracts issued to Gulf and unspecified damages for breach of contract. Gerling commenced a separate action asserting the same claims, which has been consolidated with the original Gulf action for pre-trial purposes.

Gulf has entered into final settlement agreements with Employers, XL, Transatlantic and Odyssey which resolve all claims between Gulf and these defendants under the reinsurance agreements at issue in the litigation.

In November 2007, the court issued rulings denying Gulf’s motion for partial summary judgment against Gerling, the sole remaining defendant, but granting Gerling’s motion for partial summary judgment on certain claims and counterclaims asserted by Gulf and Gerling. Gulf has appealed the court’s decision to the Supreme Court of New York Appellate Division, First Department, and has been granted a stay of trial on the remaining claims pending that appeal. Briefing of the appeal was completed on April 11, 2008, and oral argument was held on May 20, 2008. The parties await a ruling from the Appellate Division. Gulf denies Gerling’s allegations, believes that it has a strong legal basis to collect the amounts due under the reinsurance contracts and intends to vigorously pursue the action.

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

Industry-Wide Investigations — As previously disclosed, as part of industry-wide investigations that commenced in October 2004, the Company and its affiliates received subpoenas and written requests for information from a number of government agencies and authorities, including, among others, state attorneys general, state insurance departments, the U.S. Attorney for the Southern District of New York and the U.S. Securities and Exchange Commission (SEC). The areas of pending inquiry addressed to the Company include its relationship with brokers and agents and the Company’s involvement with “non-traditional insurance and reinsurance products.” The Company and its affiliates may receive additional subpoenas and requests for information with respect to these matters.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

11. CONTINGENCIES, COMMITMENTS AND GUARANTEES, Continued

The Company cooperated with these subpoenas and requests for information. In addition, outside counsel, with the oversight of the Company’s board of directors, conducted an internal review of these matters. This review was commenced after the announcement of litigation brought in October 2004 by the New York Attorney General’s office against a major broker. In particular, upon completion of its review with respect to non-traditional insurance and reinsurance products, the Company concluded that no adjustment to previously issued financial statements was required. Any authority with open inquiries or investigations could ask that additional work be performed or reach conclusions different from the Company’s.

Broker Anti-Trust Litigation — In 2005, four putative class action lawsuits were brought against a number of insurance brokers and insurers, including the Company and/or certain of its affiliates, 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 and/or certain of its affiliates, 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 and certain of its affiliates, 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. Oral argument before the Third Circuit took place on April 21, 2009. The parties await a ruling from the Third Circuit. Additional individual actions have been brought in state and federal courts against the Company involving allegations similar to those in In re Insurance Brokerage Antitrust Litigation, and further actions may be brought. The Company believes that all of these lawsuits have no merit and intends to defend vigorously.

Other — In addition to those described above, the Company is involved in numerous lawsuits, not involving asbestos and environmental claims, arising mostly in the ordinary course of business operations, either as a liability insurer defending third-party claims brought against policyholders or as an insurer defending claims brought against it relating to coverage or the Company’s business practices. While the ultimate resolution of these legal proceedings could be material to the Company’s results of operations in a future period, in the opinion of the Company’s management, none would likely have a material adverse effect on the Company’s financial position or liquidity.

The Company previously reported that it sought guidance from the Division of Corporation Finance of the SEC with respect to the appropriate purchase accounting treatment for certain second quarter 2004 adjustments totaling $1.63 billion. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Other Matters.” After discussion with the staff of the Division of Corporate Finance and the Company’s independent auditors, the Company continues to believe that its accounting treatment for these adjustments is appropriate. On May 3, 2006, the Company received a letter from the Division of Enforcement of the SEC advising the Company that it is conducting an inquiry relating to the second quarter 2004 adjustments and the April 1, 2004 merger of SPC and TPC. The Company cooperated with the requests for information.

Other Commitments and Guarantees

Commitments

Investment Commitments — The Company has unfunded commitments to partnerships, limited liability companies, joint ventures and certain private equity investments in which it invests. These commitments were $1.47 billion and $1.56 billion at March 31, 2009 and December 31, 2008, respectively.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

11. CONTINGENCIES, COMMITMENTS AND GUARANTEES, Continued

Guarantees

The Company has contingent obligations for guarantees related to letters of credit, issuance of debt securities, certain investments and various indemnifications, including those related to the sale of business entities. 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.

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 12 months following the applicable closing date to the expiration of the relevant statutes of limitations, or in some cases agreed upon 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. At March 31, 2009, the maximum amount of the Company’s contingent obligation for those indemnifications that are quantifiable related to sales of business entities was $2.10 billion, of which $58 million was recognized on the balance sheet at March 31, 2009.

12. 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 $1.19 billion at March 31, 2009.

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

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

12. CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

CONSOLIDATING STATEMENT OF INCOME (Unaudited)

For the three months ended March 31, 2009

(in millions)	TPC			Other Subsidiaries			Travelers (1)			Eliminations		Consolidated
Revenues
Premiums	$	3,587		$	1,714		$	—		$	—	$	5,301
Net investment income	331			205			6			—		542
Fee income	73			—			—			—		73
Net realized investment losses	(106		)	(75		)	(33		)	—		(214		)
Other revenues	29			4			—			—		33
Total revenues	3,914			1,848			(27		)	—		5,735
Claims and expenses
Claims and claim adjustment expenses	2,136			1,054			—			—		3,190