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20
05
2005 Annual Report to Shareholders and Form 10-K

Table of contents

  • Page 1
    2005 Annual Report to Shareholders and Form 10-K 20 05

  • Page 2
    ... information about St. Paul Travelers and its products and services, visit the company's Web site, www.stpaultravelers.com. Financial Highlights (as of and for the year ended Dec. 31) (Dollar amounts in millions, except per share amounts) 2005 2004 1 Net Earned Premiums Total Revenues Operating...

  • Page 3
    ..., have a clear competitive advantage." Jay S. Fishman Chairman & Chief Executive Officer To Our Shareholders: For St. Paul Travelers, 2005 was a successful year. We produced solid financial results, notwithstanding losses from an unprecedented hurricane season, and we made real progress in...

  • Page 4
    ... by Commercial and Specialty. • Technological Advantages. Agents continually report that their primary consideration in choosing to work with an insurer is the ease of doing business. Our use of technology allows us to better meet this need. For example, our new Quantum Auto product uses state-of...

  • Page 5
    ... personal risk management program. St. Paul Travelers was the first company to offer an insurance product to address identity theft, and we are now a proven leader in providing this coverage. In this same time period, e-commerce exploded, and we responded with comprehensive policies to address...

  • Page 6
    ... to local United Way organizations and other nonprofits as part of the company's annual charitable fund drive. St. Paul Travelers employees have been involved in the communities we serve for decades. From service on nonprofit boards and committees to work on Habitat for Humanity homes, from school...

  • Page 7
    ...Senior Vice President & Chief Information Officer Kenneth F. Spence III Executive Vice President & General Counsel Wade T. Overgaard Senior Vice President & Chief Corporate Actuary Jay S. Benet Vice Chairman & Chief Financial Officer John P. Clifford Jr. Senior Vice President - Human Resources...

  • Page 8
    ...-sized businesses; and National Accounts, which markets insurance and risk management services to large companies and also provides claims administration for statemandated workers' compensation pools. In addition, specialized units are dedicated to underwriting large property schedules and coverages...

  • Page 9
    ..., technology, ocean marine and oil and gas, as well as the public sector market. International Specialty includes the company's operations in the U.K., Ireland, Canada and its syndicate at Lloyd's of London. 2005 Highlights • Domestic Specialty Global Technology unveiled a new policy for small-to...

  • Page 10
    ...Former Co-founding General Partner, Prism Venture Partners Director since 2004 *Members of the Executive Compensation Subcommittee **Prior to becoming directors of the Company upon the merger of The St. Paul Companies and Travelers Property Casualty Corp. on April 1, 2004, the following individuals...

  • Page 11
    ...Commission file number 001-10898 The St. Paul 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.) 385 Washington Street, St. Paul, MN 55102 (Address...

  • Page 12
    ... 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 and Executive Officers of the Registrant ...Executive Compensation ...Security...

  • Page 13
    ... casualty insurance products and services to businesses, government units, associations and individuals. The Company, known as The St. Paul Companies, Inc. (SPC) prior to its merger with Travelers Property Casualty Corp. (TPC) in 2004, is incorporated as a general business corporation under the laws...

  • Page 14
    ...• Select Accounts serves small businesses and offers commercial multi-peril, property, general liability, commercial auto and workers' compensation insurance. • National Accounts comprises three distinct business units. The largest provides casualty products and services to large companies, with...

  • Page 15
    ... fee income rather than net written premiums. The Commercial segment distributes its products through approximately 6,300 independent agencies and brokers located throughout the United States that are serviced by approximately 90 field offices and three customer service centers. In recent years, the...

  • Page 16
    ... take advantage of Select Accounts' service centers, which offer agencies a wide range of services, including coverage and billing inquiries, policy changes, the assistance of licensed service professionals and extended hours of operations. National Accounts sells a variety of casualty products and...

  • Page 17
    .... National Accounts also includes the Company's commercial residual market business. The Company's commercial residual market business sells claims and policy management services to workers' compensation and automobile assigned risk plans and to self-insurance pools throughout the United States. The...

  • Page 18
    ... management, and claim and benefit administration services to organizations under service agreements. The Company also participates in state assigned risk pools as a servicing carrier and pool participant. Commercial Automobile provides coverage for businesses against losses incurred from personal...

  • Page 19
    ... injury and property damage arising from products sold and general business operations. Specialized liability policies may also include coverage for directors' and officers' liability arising in their official capacities, employment practices liability insurance, fiduciary liability for trustees...

  • Page 20
    ..., medical technology and electronics manufacturing. These products include property, commercial auto, general liability, workers' compensation, umbrella, internet liability, technology errors and omissions coverages and global companion products. • Public Sector Services markets insurance products...

  • Page 21
    ... technology, public services, and financial and professional services industry sectors. The Company's international operations primarily underwrite employers' liability (similar to workers' compensation coverage in the United States), public and product liability (the equivalent of general liability...

  • Page 22
    ... fit with its operating and marketing plans. Once an agency or broker is appointed, its ongoing performance is monitored. Specialty also distributes property and casualty products through selected wholesalers using surplus lines contracts, both on a brokerage and managing general underwriting basis...

  • Page 23
    ...trustees in bankruptcy and probate and other performance bonds. This product line includes surety business written in the Company's following subsidiaries: St. Paul Guarantee (Canada), Afianzadora Insurgentes (Mexico) and St. Paul Travelers Casualty and Surety Company of Europe (United Kingdom). 11

  • Page 24
    ...and at Lloyd's. The coverage provided in those markets includes employers' liability (similar to workers' compensation coverage in the United States), public and product liability (the equivalent of general liability), professional indemnity (similar to directors and officers or errors and omissions...

  • Page 25
    ...to manage complex markets in Massachusetts and New Jersey and property catastrophe exposure in Florida. Each company has dedicated resources in underwriting, claim, finance, legal and service functions. Personal uses a consistent operating model with agents outside of the single state companies (see...

  • Page 26
    ...to underwrite homeowners business for their auto customers. This agreement has added profitable business and helped to geographically diversify the homeowners line of business. Pricing and Underwriting Pricing levels for Personal property and casualty insurance products are generally developed based...

  • Page 27
    ...-file" law requires an insurer to file rates within a period of time after the insurer begins using the new rate. Approximately one-half of the states require prior approval of most rate changes. Independent agents either submit applications to the Company's service centers for underwriting review...

  • Page 28
    ...for use as appropriate. Field claim management teams located in 32 claim centers and 89 satellite and specialty-only offices in 49 states are organized to maintain focus on the specific claim characteristics unique to the businesses within the Commercial, Specialty and Personal segments. Claim teams...

  • Page 29
    ... management information and data analysis, training, financial reporting and control, and human resources strategy. In addition to the field teams, claim staff is dedicated to each of Personal's single state companies in Florida, Massachusetts and New Jersey. This structure permits the Company...

  • Page 30
    ...Policy The descriptions below relate to the Company's reinsurance arrangements in effect at January 1, 2006. Most property and casualty reinsurance agreements have terrorism sublimits or exclusions. For third party liability, Commercial limits the net retention to a maximum of $8 million per insured...

  • Page 31
    ... Terrorism Risk Insurance Extension Act of 2005. This agreement covers all of the Company's business except that business written by St Paul Travelers Insurance Company Limited. For business underwritten in the United Kingdom, Republic of Ireland and in the Company's operations at Lloyd's, separate...

  • Page 32
    ... primarily funded by premiums from insurance companies that write residential property business in Florida and, if insufficient, assessments on all Florida property and casualty lines of business, excluding accident and health, the National Flood Insurance Program, workers' compensation, and medical...

  • Page 33
    ... value of estimated future payments. The liabilities for losses for some long-term disability payments under workers' compensation insurance and workers' compensation excess insurance, which totaled $1.92 billion and $1.99 billion at December 31, 2005 and 2004, respectively, were discounted using...

  • Page 34
    ...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...

  • Page 35
    ... million and net reserves were $11,608 million. Includes reserves of The Northland Company and its subsidiaries and Commercial Guaranty Lloyds Insurance Company which were acquired from Citigroup on October 1, 2001. Also includes reserves of Commercial Guaranty Casualty Insurance Company, which was...

  • Page 36
    ... from under review with developing implications. St. Paul Guarantee Insurance Company was assigned a rating outlook of stable. These actions followed the January 1, 2005 completion of the amalgamation of St. Paul Guarantee Insurance Company and Travelers Casualty and Surety Company of Canada. 24

  • Page 37
    .... Paul Travelers Companies, Inc. with a stable outlook. • On January 31, 2005, Fitch affirmed the "Aâˆ'" long-term issuer and senior debt ratings of The St. Paul Travelers Companies, Inc., Travelers Property Casualty Corp. and Travelers Insurance Group Holdings, Inc. The "AAâˆ'" insurer financial...

  • Page 38
    ... July 14, 2005, Moody's upgraded the insurance financial strength ratings of the legacy St. Paul, United States Fidelity and Guaranty (USF&G) and Gulf Insurance Group to "Aa3" following the completion of the pooling of the St. Paul and USF&G companies with the legacy Travelers Property Casualty Pool...

  • Page 39
    ...St. Paul Fire and Marine Insurance Company, St. Paul Surplus Lines Insurance Company, Athena Assurance Company, St. Paul Protective Insurance Company, St. Paul Medical Liability Insurance Company, Discover Property & Casualty Insurance Company, Discover Specialty Insurance Company, and United States...

  • Page 40
    ... 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, 2005...

  • Page 41
    ... use direct writing. Competitors in this market are primarily national property casualty insurance companies willing to write most classes of business using traditional products and pricing and, to a lesser extent, regional insurance companies and companies that have developed niche programs...

  • Page 42
    ... provide claims and policy management services. These contracts, which generally have three-year terms, are selected by state agencies through a bid process based on the quality of service and price. National Accounts services approximately 36% of the total workers' compensation assigned risk market...

  • Page 43
    ... on short-tail insurance primary lines. Specialty underwrites four major classes of business at Lloyd's: aviation, marine, global property, and accident and special risks. Personal. Personal lines insurance is written by hundreds of insurance companies of varying sizes. Although national companies...

  • Page 44
    ... insurers. Personal believes that its continued focus on expense management practices, underwriting and pricing segmentation, and claim settlement effectiveness strategies enable Personal to price its products competitively in all of its distribution channels. REGULATION State Regulation The Company...

  • Page 45
    ... 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 insurance subsidiaries are domiciled generally...

  • Page 46
    ... 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...

  • Page 47
    ... changes in business volume and business mix. Also in 2004, St. Paul Fire and Marine Insurance Company, United States Fidelity and Guaranty Company, Discover Reinsurance Company and most of the St. Paul Fire and Marine pool members had unusual values in the one-year and two-year reserve development...

  • Page 48
    ... 31, 2005, all of the Company's property and casualty insurance subsidiaries had total adjusted capital in excess of amounts requiring company or regulatory action at any prescribed RBC action level. OTHER INFORMATION General Business Factors In the opinion of the Company's management, no material...

  • Page 49
    ... 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. A company licensed to transact insurance business within a state. A contract that pays a periodic benefit...

  • Page 50
    ... 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...

  • Page 51
    ... by a single policy. Each policy reinsured is separately negotiated. Commercial lines...Commercial multi-peril policies ...Commutation agreement ... Deductible ...Deferred acquisition costs ... Direct written premiums ... Earned premiums or premiums earned ... Excess liability ...Excess of loss...

  • Page 52
    ... of funds by an employee. Surety is a three-party agreement in which the insurer agrees to pay a second party or make complete an obligation in response to the default, acts or omissions of an insured. An insurance policy where the premiums charged will not be adjusted for actual loss experience...

  • Page 53
    ...of regulatory practice and statutory accounting standards throughout the United States. Direct written premiums plus assumed reinsurance premiums less premiums ceded to reinsurers. Net income (loss) excluding the after-tax impact of net realized investment gains (losses), discontinued operations and...

  • Page 54
    ... 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. The amount of exposure a policyholder company retains on any one risk or group of risks...

  • Page 55
    ...or for life, typically in settlement of a claim under a liability policy, usually funded through the purchase of an annuity. Risk retention group...Run-off business ... Salvage ...Second-injury fund ... Self-insured retentions ...Servicing carrier... Specialty lines...Statutory accounting practices...

  • Page 56
    ..., 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. Third-party liability ... Treaty reinsurance ... Umbrella coverage ... Unassigned surplus ...Underwriter...

  • Page 57
    ... 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...

  • Page 58
    ... the property and casualty insurance industry has suffered from court decisions and other trends that have attempted to expand insurance coverage for asbestos claims far beyond the intent of insurers and policyholders. As a result, we continue to experience a significant number of asbestos claims...

  • Page 59
    ... us against losses. We use reinsurance to help manage our exposure to property and casualty risks. The availability and cost of reinsurance are subject to prevailing market conditions, both in terms of price and available capacity, which can affect our business volume and profitability. Although...

  • Page 60
    ... 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. We continually refine our loss reserve estimates in a regular ongoing...

  • Page 61
    ... and auto and home repair costs; • judicial expansion of policy coverage and the impact of new theories of liability; and • a growing trend of plaintiffs targeting property and casualty insurers, including us, in purported class action litigation relating to claim-handling and other practices...

  • Page 62
    ... of insurers, their shareholders and other investors. This regulation also relates to authorization for lines of business, capital and surplus requirements, investment limitations, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, premium rates...

  • Page 63
    ... captive insurance companies and risk retention groups. Continued growth in alternative forms of risk protection could reduce our premium volume. Following the terrorist attack on September 11, 2001 and again following the hurricane activity in 2004 and 2005, a number of new insurers and reinsurers...

  • Page 64
    ... investments, the nature of and limitations on dividends to policyholders and shareholders, the nature and extent of required participation in insurance guaranty funds and the involuntary assumption of hard-to-place or high-risk insurance business, primarily in workers' compensation insurance lines...

  • Page 65
    ... owns other real property, which includes office buildings in Fall River, Massachusetts, and in Irving, Texas, and a data center located in Norcross, Georgia. In addition, the Company leases 220 field and claim offices totaling approximately 5.1 million square feet throughout the United States under...

  • Page 66
    ... 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 15% of the carrying value of the property...

  • Page 67
    ... in unfair trade practices by inappropriately handling and settling asbestos claims. The plaintiffs seek to reopen large numbers of settled asbestos claims and to impose liability for damages, including punitive damages, directly on insurers. Lawsuits similar to Wise were filed in Massachusetts and...

  • Page 68
    ... could result in income statement charges that could be material to the Company's results of operations and financial condition in future periods. Shareholder Litigation and Related Proceedings TPC and its board of directors were named as defendants in three putative class action lawsuits brought by...

  • Page 69
    ... savings plan commenced a putative class action against the Company and certain of its current and former officers and directors captioned Spiziri v. The St. Paul Travelers Companies, Inc., et al. (Dec. 28, 2004). The complaint alleges violations of the Employee Retirement Income Security Act based...

  • Page 70
    ...'s involvement with "non-traditional insurance and reinsurance products," branding requirements for salvage automobiles and the reporting of workers' compensation premiums. The Company or its affiliates have received subpoenas or written requests for information, in each case with respect to one or...

  • Page 71
    ...; (xxv) State of Washington Office of the Insurance Commissioner; (xxvi) State of West Virginia Office of Attorney General; (xxvii) the United States Attorney for the Southern District of New York; and (xxviii) the United States Securities and Exchange Commission. The Company and its affiliates may...

  • Page 72
    ... United States District Court for the District of Massachusetts. On February 13, 2006, the action was transferred to the District of New Jersey for coordination with In re Insurance Brokerage Antitrust Litigation. Office Depot, Inc. was brought in Florida state court and names several of the Company...

  • Page 73
    ... SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Company's common stock is traded on the New York Stock Exchange, where it is assigned the symbol "STA." Prior to the merger of SPC and TPC, SPC's common stock traded on the New York Stock Exchange under the symbol "SPC." The number...

  • Page 74
    ... by the Company of its common stock during the periods indicated. (d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs Period Beginning Period Ending (a) Total number of shares (or units) purchased (b) Average price paid per...

  • Page 75
    ....30 $ 32.07 On April 1, 2004, Travelers Property Casualty Corp. (TPC) merged with a subsidiary of The St. Paul Companies, Inc. (SPC), as a result of which TPC became a wholly-owned subsidiary of SPC and SPC changed its name to The St. Paul Travelers Companies, Inc. On October 1, 2001, TPC purchased...

  • Page 76
    ...August 2005, the Company completed its divestiture of Nuveen Investments, Inc., its asset management subsidiary acquired in the merger. Accordingly, the Company's share of Nuveen Investments' results prior to divestiture was classified as discontinued operations, along with the net after-tax loss on...

  • Page 77
    ..., the Company). On April 1, 2004, Travelers Property Casualty Corp. (TPC) merged with a subsidiary of The St. Paul Companies, Inc. (SPC), as a result of which TPC became a wholly-owned subsidiary of SPC, and SPC changed its name to The St. Paul Travelers, Inc. In connection with the merger, each...

  • Page 78
    ... of property and casualty insurance products and services to businesses, government units, associations and individuals, primarily in the United States and in selected international markets. Consolidated Results of Operations For the year ended December 31, 2005 2004 2003 Revenues Premiums ...Net...

  • Page 79
    ... and co-surety participations on a specific construction contractor claim. Net unfavorable reserve development in the Commercial and Specialty segments in 2004 more than offset additional income resulting from the merger and strong operating income generated by the Company's Personal segment. In...

  • Page 80
    ... and a new average yield is determined. It is this average yield that is used in the calculation of net investment income on investable funds. Fee Income Fee income in 2005 declined 6% when compared with 2004, as the National Accounts market, the primary source of the Company's fee-based business...

  • Page 81
    ... of reinstatement premiums primarily related to reserving actions in the Specialty segment. However, premium volume in the Personal segment increased over 2004, driven by continued renewal price increases and unit growth in the homeowners line of business. During 2005, the Company experienced strong...

  • Page 82
    ... commercial property, construction and surety risks as well as certain personal lines business in the Company's operations at Lloyd's also negatively impacted premium volume in 2004. Personal net written premiums increased 17% in 2004 over 2003, due to strong organic growth, new business resulting...

  • Page 83
    ... 2004 primarily reflected the impact of the merger. In addition, the 2005 total included $43 million of state assessments related to catastrophe losses, and also reflected investments made for process re-engineering and to support business growth and product development, primarily in the Personal...

  • Page 84
    ... with 2004 reflected the impact of reinstatement premiums, state assessments, earned premium declines in the Commercial segment, increased commission expenses in the Personal segment and investments made for process re-engineering and to support business growth and product development, primarily...

  • Page 85
    ...liabilities. Renewal Rights Purchases During the third quarter of 2003, TPC purchased from Royal & SunAlliance USA (RSA), an unaffiliated insurer, the renewal rights to RSA's commercial lines national accounts, middle market and marine businesses, and standard and preferred personal lines businesses...

  • Page 86
    ... net investment income in 2005 and 2004. 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, and claims and policy management...

  • Page 87
    ...of $166 million, primarily in the commercial automobile, commercial multi-peril, workers' compensation and property lines of business. Net unfavorable prior year reserve development totaled $1.34 billion in 2004, which included a $927 million charge to strengthen asbestos reserves and a $286 million...

  • Page 88
    ... high levels for the year. New business volume also grew over 2004. Renewal price changes in 2005 in Commercial Accounts declined from 2004 and were modestly negative for the year, reflecting the increased competitive market conditions. Commercial Accounts' net premium volume in 2004 grew...

  • Page 89
    ... single-digits in 2004. Retention and growth in 2004 reflected the Company's competitive advantage in agency automation, product offerings and service to agents in this high transaction volume business. In National Accounts, gross written premiums in 2005 grew 9% over 2004, and net written premiums...

  • Page 90
    ... losses in the Personal Catastrophe Risk operation. Net unfavorable prior year reserve development totaled $1.43 billion in 2004, which included charges to increase the estimate of the acquired net construction reserves by $500 million and the acquired net surety reserves in the Company's Bond...

  • Page 91
    ... practices that includes evaluating exposures by type of claim (e.g. construction defect, construction wrap-up, other), by type of coverage (e.g. guaranteed cost, loss responsive, other) and by detailed line of business (general liability, commercial auto, etc.), among others. For general liability...

  • Page 92
    ... these reviews and analyses, the Company increased its estimate of the acquired surety reserves by $300 million, net of $170 million of reinsurance, and recognized this change in estimate as an income statement charge in the second quarter. Other Reserving Actions. Prior to the merger and beginning...

  • Page 93
    ... in 2004 also reflected increased current year loss ratios on portions of the Bond and Construction books of business, and $150 million of unfavorable prior year reserve development recorded in TPC's Construction operation prior to the merger. General and administrative expenses in 2005 totaled...

  • Page 94
    ... the Financial and Professional Services and several other Domestic Specialty businesses. In addition, the elimination of a reporting lag at the Company's operations at Lloyd's resulted in $35 million and $28 million of additional gross and net written premium volume in 2005, respectively. Bond net...

  • Page 95
    ...-merger levels in 2003. In 2004, the Company continued its focus on retaining its profitable book of existing International Specialty business. At Lloyd's, premium volume in 2004 was negatively impacted by the non-renewal of certain credit-related personal lines insurance coverages. Personal Results...

  • Page 96
    ... of the "Consolidated Results of Operations" discussion herein for a description of the factors contributing to the increase in the Company's net investment income in 2005 and 2004. Claims and Expenses Claims and claim adjustment expenses in 2005 included catastrophe losses of $547 million, compared...

  • Page 97
    ... positive, but declined when compared with 2004. However, new business premiums in 2005 in the Automobile line increased over 2004, primarily due to the introduction of the Company's new multivariate pricing product in selected states. Net written premiums in 2005 were reduced by $21 million of...

  • Page 98
    ... the property and casualty insurance industry has suffered from court decisions and other trends that have attempted to expand insurance coverage for asbestos claims far beyond the intent of insurers and policyholders. As a result, the Company continues to experience a significant number of asbestos...

  • Page 99
    ... 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 nonasbestos claims or potential non-asbestos claims in any resolution process; and applicable coverage defenses or...

  • Page 100
    The Company categorizes its asbestos reserves as follows: Number of Policyholders 2005 2004 Total Net Paid 2005 2004 Net Asbestos Reserves 2005 2004 (at and for the year ended December 31, $ in millions) Policyholders with settlement agreements ...Home office, field office and other ...Assumed ...

  • Page 101
    ... policies are identified only when the Company is advised by the retrocedant. The following table displays activity for asbestos losses and loss expenses and reserves: (at and for the year ended December 31, in millions) 2005 2004 2003 Beginning reserves: Direct ...Ceded ...Net ...Reserves acquired...

  • Page 102
    .... This form of settlement is commonly referred to as a "buy-back" of policies for future environmental liability. In addition, many of the agreements have also extinguished any insurance obligation which the Company may have for other claims, including but not limited to asbestos and other...

  • Page 103
    In its review of environmental reserves, the Company considers: the adequacy of reserves for past settlements; changing judicial and legislative trends; the potential for policyholders with smaller exposures to be named in new clean-up action for both on- and off-site waste disposal activities; the ...

  • Page 104
    ... umbrella or excess policies the Company has issued, the resolution or adjudication of some 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...

  • Page 105
    ...with 4.1 years as of December 31, 2004 (4.4 years excluding short-term investments). The following table sets forth the Company's combined fixed maturity investment portfolio classified by Moody's Investors Service ratings: (at December 31, 2005, in millions) Carrying Value Percent of Total Carrying...

  • Page 106
    ... securities classified as available for sale at December 31, 2005 and 2004, respectively. Virtually all of these securities are rated Aaa. The Company's real estate investments include warehouses and office buildings and other commercial land and properties that are directly owned. The Company...

  • Page 107
    ... due to the impending sale, liquidation or shutdown of the entity. The Company continually evaluates current developments in the market that have the potential to affect the valuation of the Company's investments. • $10 million in its real estate and other holdings. The losses recorded were the...

  • Page 108
    ... and litigation costs. The Company expects property casualty market conditions to continue to be competitive throughout 2006. Relative to 2005, within the Commercial and Specialty segments, the Company expects renewal price changes to increase and terms, conditions and insured values to improve for...

  • Page 109
    ... Act exempted from coverage certain additional types of insurance, including 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...

  • Page 110
    ...-funded "backstop" for commercial property casualty insurers, they also require that insurers offer coverage for insured losses caused by acts of terrorism. The majority of the Company's Commercial and Specialty policies already included such coverage, although exclusions were added to higher-risk...

  • Page 111
    ... the market value of the fixed income portfolio exceeds the present value of the net insurance liabilities, plus the positive cash flow from newly sold policies and the large amount of high quality liquid bonds provides assurance of the Company's ability to fund the payment of claims without having...

  • Page 112
    ....20 per share price of common stock at the time of the offering. On the August 16, 2005 settlement date, the Company issued 15.2 million common shares and received total proceeds of $442 million. Net maturities and retirements of debt, including the repurchase of Commercial Insurance Resources, Inc...

  • Page 113
    ... by its Board of Directors out of funds legally available, subject to any other restrictions that may be applicable to the Company. In 2005 and 2004, the Company acquired 0.8 million and 0.4 million shares, respectively, of common stock from employees as treasury stock primarily to cover payroll...

  • Page 114
    ...a period not exceeding 20 consecutive quarterly interest periods. If the Company elects to defer interest payments on the notes, it will not be permitted, with limited exceptions, to pay dividends on its common stock during a deferral period. In November 2005, the Company issued $400 million of 5.50...

  • Page 115
    ... as of December 31, 2005. Shelf Registration. In December 2005, the Company filed with the Securities and Exchange Commission a shelf registration statement for the potential offering and sale of securities. The Company may offer these securities from time to time at prices and on other terms to be...

  • Page 116
    ...into in the ordinary course of business for goods and services including office supplies, archival services, etc. (6) Represents estimated timing for fulfilling unfunded commitments for investments in real estate partnerships, private equities and hedge funds. The Company is not required to make any...

  • Page 117
    ... of claims and claim adjustment expenses by the insurer, the analysis above presents the estimated cash outflows for reported and unreported claims incurred and related claim adjustment expense, net of reinsurance. Reinsurance agreements that do not transfer both amount and timing risk are accounted...

  • Page 118
    ... the liability for claims and claim adjustment expenses has been discounted in the balance sheet. (See note 1 of the financial statements.) (2) Workers' compensation large deductible policies provide third party coverage in which the Company typically is responsible for paying the entire loss under...

  • Page 119
    ...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...

  • Page 120
    ... the Company's future operating results and financial condition. See the preceding discussion of "Asbestos Claims and Litigation" and "Environmental Claims and Litigation." The Company acquired SPC's runoff health care reserves in the merger, which are included in the General Liability product line...

  • Page 121
    ...2004 IBNR Total General liability ...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...

  • Page 122
    ... lines make the aggregation of individual ranges a highly judgmental and inexact process. Property casualty insurance policies are either written on a claims made or on an occurrence basis. Policies written on a claims made basis require that claims be reported during the policy period. Policies...

  • Page 123
    ... 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...

  • Page 124
    ... liability that is different from that being estimated currently. Some risk factors will affect more than one product line. Examples include changes in claim department practices, changes in settlement patterns, regulatory and legislative actions, court actions, timeliness of claim reporting, state...

  • Page 125
    ... that the change should be reflected in the Company's estimated claim liabilities. The final estimate selected by management in a reporting period is a function of these detailed analyses of past data, adjusted to reflect any new actionable information. Discussion of Product Lines The following...

  • Page 126
    ... settlement patterns (e.g., medical malpractice) General liability book of business risk factors Changes in policy provisions (e.g., deductibles, policy limits, endorsements) Changes in underwriting standards Product mix (e.g., size of account, industries insured, jurisdiction mix) Property Property...

  • Page 127
    ... of limitations Property book of business risk factors Policy provisions mix (e.g., deductibles, policy limits, endorsements) Changes in underwriting standards Commercial Multi-Peril Commercial multi-peril provides a combination of property and liability coverage typically for small businesses and...

  • Page 128
    ...lifetime coverage for medical expense arising from a worker's injury. 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...

  • Page 129
    ... benefits and medical treatment Degree of cost shifting between workers' compensation and health insurance Workers' compensation book of business risk factors Product mix Injury type mix Changes in underwriting standards Fidelity and Surety Fidelity is generally considered a short tail coverage...

  • Page 130
    ... an insured. Examples of common risk factors that can change and, thus, affect the required fidelity and surety reserves (beyond those included in the general discussion section) include: Fidelity risk factors Type of business of insured Policy limit and attachment points Third-party claims Coverage...

  • Page 131
    ... performed by the insurer). 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...

  • Page 132
    ... and reporting requirements in the U.S. statutory reporting framework. 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...

  • Page 133
    ...single issues Changes in tort law Changes in claim adjuster office structure (causing distortions in the data) International and other book of business risk factors Changes in policy provisions (e.g., deductibles, policy limits, endorsements, "claims made" language) Changes in underwriting standards...

  • Page 134
    ... expected holding period. Public equity investments (i.e., common stocks) trading at a price that is less than 80% of cost for more than one quarter are reviewed for impairment. Investments accounted for using the equity method of accounting are evaluated for impairment any time the investment has...

  • Page 135
    ..., which are generally non-publicly traded instruments, consisting of early-stage companies and, historically, having a holding period of four to seven years. These investments have primarily been made in the health care, software and computer services, and networking and information technologies...

  • Page 136
    ...growth, and other business and market sector fundamental statistics in estimating fair values of specific investments. Other non-publicly traded securities are valued based on factors such as management judgment, recent financial information and other market data. An impairment loss is recognized if...

  • Page 137
    ..., the Company may make forward-looking statements about the Company's results of operations (including, among others, premium volume, income from continuing operations, net and operating income and return on equity), financial condition and liquidity; the sufficiency of the Company's asbestos and...

  • Page 138
    ... Resources section of Management's Discussion and Analysis. The Company's foreign exchange market risk exposure is concentrated in the Company's invested assets and insurance reserves denominated in foreign currencies. Cash flows from the Company's foreign operations are the primary source of funds...

  • Page 139
    ... rates. 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...

  • Page 140
    ... FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm...Consolidated Statement of Income for the years ended December 31, 2005, 2004 and 2003 ...Consolidated Balance Sheet at December 31, 2005 and 2004 ...Consolidated Statement of Changes in Shareholders' Equity...

  • Page 141
    ... have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of The St. Paul Travelers Companies, Inc. and subsidiaries internal control over financial reporting as of December 31, 2005, based on criteria established in Internal...

  • Page 142
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (in millions, except per share data) For the year ended December 31, 2005 2004 2003 Revenues Premiums ...Net investment income...Fee income ...Net realized investment gains (losses)...Other revenues ......

  • Page 143
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (in millions) At December 31, 2005 2004 Assets Fixed maturities, available for sale at fair value (including $2,667 and $2,603 subject to securities lending and repurchase agreements) (amortized cost $58,616 and $...

  • Page 144
    ...loss) on investment securities ...Change in minimum pension liability adjustment ...Net change in unrealized foreign currency translation and other changes...Balance, end of year ...Treasury stock (at cost) Balance, beginning of year ...Net shares issued under employee stock-based compensation plans...

  • Page 145
    ...Real estate ...Short-term securities, (purchases) sales, net ...Other investments, net ...Securities transactions in course of settlement ...Net proceeds from the sale of discontinued operations ...Net cash acquired in merger ...Other ...Net cash used in investing activities of continuing operations...

  • Page 146
    ... ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of The St. Paul Travelers Companies, Inc. (together with its subsidiaries, the Company). On April 1, 2004, Travelers Property Casualty Corp. (TPC) merged with a subsidiary of The St. Paul Companies...

  • Page 147
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Adoption of New Accounting Standards American Jobs Creation Act-Repatriation of Foreign Earnings On October 22, 2004, Congress ...

  • Page 148
    ... unrealized investment gains and losses, net of income taxes, credited or charged directly to other comprehensive income. Equity securities, which include common and nonredeemable preferred stocks, are classified as available for sale and carried at fair value based on quoted market prices. Changes...

  • Page 149
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Company's real estate investments include warehouses and office buildings and other commercial land and properties that are ...

  • Page 150
    ... ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Reinsurance Recoverables Amounts recoverable from reinsurers are estimated in a manner consistent with the associated claim liability...

  • Page 151
    ... ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.5% to 5% at December 31, 2004. Reserves related to certain fixed and determinable asbestos-related settlements, where all payment...

  • Page 152
    ...ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) amounts to be paid. The liability accrued for policyholder dividends totaled $30 million and $28 million at December 31, 2005 and 2004...

  • Page 153
    ... ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Foreign Currency Translation The Company assigns functional currencies to its foreign operations, which are generally the currencies...

  • Page 154
    ... 31, 2005 and 2004. Nature of Operations The Company is organized into three reportable business segments: Commercial, Specialty and Personal. These segments reflect the manner by which the Company manages its property and casualty insurance products and insurance-related services and represent...

  • Page 155
    ...• Select Accounts serves small businesses and offers commercial multi-peril, property, general liability, commercial auto and workers' compensation insurance. • National Accounts comprises three distinct business units. The largest provides casualty products and services to large companies, with...

  • Page 156
    ... Financial and Professional Services, Bond, Construction, Technology, Ocean Marine, Oil and Gas, Public Sector, Underwriting Facilities and Umbrella/Excess & Surplus Group. • International Specialty includes coverages marketed and underwritten to several specialty customer groups within the United...

  • Page 157
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Net written premiums by market were as follows: (for the year ended December 31, in millions) 2005 2004 2003 Bond ...Construction...

  • Page 158
    ... Act exempted from coverage certain additional types of insurance, including 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...

  • Page 159
    ...CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. MERGER On April 1, 2004, TPC merged with a subsidiary of SPC, as a result of which TPC became a whollyowned subsidiary of The St. Paul Travelers Companies, Inc. For accounting purposes, this transaction was accounted for as a reverse acquisition with...

  • Page 160
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. MERGER (Continued) Allocation of the Purchase Price The purchase price was allocated based on an estimate of the fair value of the assets acquired and liabilities assumed as of April 1,...

  • Page 161
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. MERGER (Continued) assumed cost-of-capital on the capital supporting the loss reserves. The fair value adjustment is reported as an intangible asset on the consolidated balance sheet, ...

  • Page 162
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. MERGER (Continued) Supplemental Schedule of Noncash Investing and Financing Activities The allocated purchase price calculated above results in an estimate of the fair value of assets ...

  • Page 163
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. DISCONTINUED OPERATIONS (Continued) In 2005, the Company has separately disclosed the operating, investing and financing cash flows attributable to its discontinued operations (Nuveen ...

  • Page 164
    ...INFORMATION The company is organized into three reportable business segments: Commercial, Specialty and Personal. The accounting policies used to generate the following segment data are the same as those described in the Summary of Significant Accounting Policies in note 1. The amount of investments...

  • Page 165
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. SEGMENT INFORMATION (Continued) The following tables summarize the components of the Company's revenues, operating income (loss) and total assets by reportable business segments: (at ...

  • Page 166
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. SEGMENT INFORMATION (Continued) Business Segment Reconciliations (at and for the year ended December 31, in millions) 2005 2004 2003 Revenue reconciliation Earned premiums Commercial: ...

  • Page 167
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. SEGMENT INFORMATION (Continued) (at December 31, in millions) 2005 2004 2003 Asset reconciliation Total assets for reportable segments ...Net assets of discontinued operations ...Other...

  • Page 168
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. INVESTMENTS (Continued) (at December 31, 2004, in millions) Amortized Cost Gross Unrealized Gains Losses Fair Value Mortgage-backed securities, collateralized mortgage obligations and ...

  • Page 169
    ...Company's subsidiaries, Unionamerica and St. Paul Re-U.K., and the Company's operations at Lloyd's are required, as accredited U.S. reinsurers, to hold certain investments in trust in the United States. These trust funds had a fair value of $374 million and $359 million at December 31, 2005 and 2004...

  • Page 170
    ... ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. INVESTMENTS (Continued) Proceeds from the sale of real estate investments totaled $37 million in 2005. Gross gains of $15 million and no gross losses were realized on those sales in 2005...

  • Page 171
    ..., limited liability companies, funds or pools that may invest and trade in many different markets, strategies and instruments (including securities, non-securities and derivatives). As of December 31, 2005, one hedge fund was determined to be a significant VIE. The value for all investors combined...

  • Page 172
    ... ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. INVESTMENTS (Continued) The following securities are not consolidated: • Mandatorily redeemable preferred securities of trusts holding solely the subordinated debentures of the Company...

  • Page 173
    ... investments, which are generally non-publicly traded instruments in early-stage companies and, historically, having a holding period of four to seven years. These investments have primarily been made in the health care, software and computer services, and networking and information technologies...

  • Page 174
    ...growth, and other business and market sector fundamental statistics in estimating fair values of specific investments. Other non-publicly traded securities are valued based on factors such as management judgment, recent financial information and other market data. An impairment loss is recognized if...

  • Page 175
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. INVESTMENTS (Continued) Less than 12 months Gross Unrealized Fair Value Losses 12 months or longer Gross Unrealized Fair Value Losses Total Fair Value Gross Unrealized Losses (at ...

  • Page 176
    ... by using controls that include credit approvals, limits and other monitoring procedures. Net Investment Income (for the year ended December 31, in millions) 2005 2004 2003 Gross investment income Fixed maturities ...Equity securities ...Short-term securities ...Mortgage loans and real estate...

  • Page 177
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. INVESTMENTS (Continued) Changes in net unrealized gains (losses) on investment securities that are included as a separate component of accumulated other changes in equity from nonowner ...

  • Page 178
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. 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: (for the year ended December...

  • Page 179
    ...million and $751 million at December 31, 2005 and December 31, 2004, respectively. The Company assumed 100% of the workers' compensation premiums previously written by the Accident Department of its former affiliate, The Travelers Insurance Company (TIC). Certain of the assumed reinsurance contracts...

  • Page 180
    .... Under the terms of these agreements, the Company received net cash of approximately $867 million in 2004. 9. INSURANCE CLAIMS RESERVES Claims and claim adjustment expense reserves were as follows: (at December 31, in millions) 2005 2004 Property-casualty ...Accident and health ...Total ... $ 61...

  • Page 181
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. INSURANCE CLAIMS RESERVES (Continued) The table below is a reconciliation of beginning and ending property casualty reserve balances for claims and claim adjustment expenses. (at and ...

  • Page 182
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. INSURANCE CLAIMS RESERVES (Continued) Prior Year Reserve Development In 2005, estimated claims and claim adjustment expenses for claims arising in prior years totaled a net $260 million...

  • Page 183
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. INSURANCE CLAIMS RESERVES (Continued) In the Personal segment, net favorable prior year reserve development in 2004 was $378 million, driven by lower than expected frequency of non-...

  • Page 184
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. INSURANCE CLAIMS RESERVES (Continued) asbestos claim is a products/completed operation claim subject to an aggregate limit and the available coverage, if any, for that claim. When an ...

  • Page 185
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. INSURANCE CLAIMS RESERVES (Continued) applicable law in each jurisdiction. Conventional actuarial techniques are not used to estimate these reserves. In 2005, the Company recorded a ...

  • Page 186
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. DEBT Debt and convertible notes payable outstanding were as follows: (at December 31, in millions) 2005 2004 Short-term: Commercial paper...6.75% Senior notes due November 15, 2006 ...

  • Page 187
    ...due 2033. 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...

  • Page 188
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. DEBT (Continued) Company (maturing in 2007). Total annual distributions on the equity units were at the rate of 9.00%, consisting of interest on the note at a rate of 5.25% and fee ...

  • Page 189
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. DEBT (Continued) These senior notes were sold to qualified institutional buyers as defined under Rule 144A under the Securities Act of 1933 (the Securities Act) and outside the United ...

  • Page 190
    ...ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. DEBT (Continued) not less than $10 billion at all times. The Company must also maintain a ratio of total consolidated debt to the sum of total consolidated debt plus consolidated net worth...

  • Page 191
    ...ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. INCOME TAXES (for the year ended December 31, in millions) 2005 2004 2003 Composition of income tax expense (benefit) included in consolidated statement of income Current expense (benefit...

  • Page 192
    ... ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. INCOME TAXES (Continued) The net deferred tax asset comprises the tax effects of temporary differences related to the following assets and liabilities: (at December 31, in millions) 2005...

  • Page 193
    ... used these funds to redeem the $900 million liquidation value of the Trust Securities. Preferred Stock The Company's preferred shareholders' equity represents the par value of preferred shares outstanding that the Company assumed in the merger related to The St. Paul Companies, Inc. Stock Ownership...

  • Page 194
    ... Savings Plan. On February 6, 2006, the Company, under the St. Paul Travelers Companies, Inc. 2004 Incentive Plan, issued 2,401,032 common stock awards in the form of restricted stock, deferred stock and performance share awards to participating officers and other key employees. The restricted stock...

  • Page 195
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. SHAREHOLDERS' EQUITY AND DIVIDEND AVAILABILITY (Continued) Statutory Net Income and Surplus Statutory net income of the Company's insurance subsidiaries was $2.92 billion, $1.58 ...

  • Page 196
    ...or co-chair fees paid in the form of cash, common stock or deferred stock. Deferred stock for the annual retainer, and committee chair and co-chair fees, is elected pursuant to the St. Paul Travelers Deferred Compensation Plan for Non-Employee Directors that the Board adopted after the merger and is...

  • Page 197
    ... eligible officers and key employees. Under the Equity Awards program, stock option awards are granted having a ten-year term with an exercise price equal to the fair market value of the Company's common stock on the date of grant. The stock options granted under this program through 2005 generally...

  • Page 198
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. INCENTIVE PLANS (Continued) compensation plans. These stock options retained the same terms and conditions that were applicable prior to the merger. Under the SPC stock option programs...

  • Page 199
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. INCENTIVE PLANS (Continued) The following table summarizes the information about stock options outstanding under the Company's stock option plans at December 31, 2005: Options ...

  • Page 200
    ... announcement date market price per share of SPC common stock, using an optionpricing model. The unvested stock option awards require the holder to render service during the vesting period and are therefore considered unearned compensation. At April 1, 2004, the estimated fair values of the unvested...

  • Page 201
    ... ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. INCENTIVE PLANS (Continued) Restricted Stock, Deferred Stock and Performance Share Award Programs 2004 Incentive Plan The Company may issue awards of restricted stock and deferred stock...

  • Page 202
    ...except that employees satisfying certain age and service requirements remain covered by a prior final pay formula. Prior to December 31, 2004, both TPC and SPC sponsored qualified noncontributory defined benefit pension plans. These plans were merged to form one Company plan on December 31, 2004. In...

  • Page 203
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS (Continued) Obligations and Funded Status The following tables summarize the funded status, obligations and amounts recognized in ...

  • Page 204
    ... ST. PAUL 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) Postretirement Benefit Plans 2005 2004 Change in projected benefit...

  • Page 205
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS (Continued) respectively. The fair value of plan assets for the above plans was $88 million and $23 million at December 31, 2005 ...

  • Page 206
    ... consideration of plan liabilities, plan funded status, and corporate financial condition. 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...

  • Page 207
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS (Continued) equity and fixed-income investments. Equity investments are diversified across U.S. and non-U.S. stocks. Other assets ...

  • Page 208
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS (Continued) Legacy TPC 401(k) Savings Plan Prior to the September 2005 plan merger, the Company had a 401(k) savings plan under ...

  • Page 209
    ... are carried at fair value with changes in value reflected in net realized investment gains (losses). The Company has certain U.S. treasury futures contracts and foreign currency forward contracts, which are not designated as hedges at December 31, 2005 and 2004. The Company engaged in U.S. Treasury...

  • Page 210
    ... for continued hedge accounting following the merger and, as such, the mark-to-market changes in fair value were reflected in net realized investment gains and losses prior to the termination of these agreements. Fair Value of Financial Instruments The Company uses various financial instruments...

  • Page 211
    ... reorganization, ACandS sought to establish a trust to pay asbestos bodily injury claims against it and sought to assign to the trust its rights under the insurance policies issued by TPC. The proposed plan and disclosure statement filed by ACandS claimed that ACandS had settled the vast majority of...

  • Page 212
    ... in unfair trade practices by inappropriately handling and settling asbestos claims. The plaintiffs seek to reopen large numbers of settled asbestos claims and to impose liability for damages, including punitive damages, directly on insurers. Lawsuits similar to Wise were filed in Massachusetts and...

  • Page 213
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 17. CONTINGENCIES, COMMITMENTS AND GUARANTEES (Continued) and similar future Common Law Claims against TPC had also been reached. This settlement requires a payment of up to $90 million by...

  • Page 214
    ... of these actions, an alleged beneficiary of the Company's 401(k) savings plan commenced a putative class action against the Company and certain of its current and former officers and directors captioned Spiziri v. The St. Paul Travelers Companies, Inc., et al. (Dec. 28, 2004). The complaint 202

  • Page 215
    ... TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 17. CONTINGENCIES, COMMITMENTS AND GUARANTEES (Continued) alleges violations of the Employee Retirement Income Security Act based on allegations similar to those in In re St. Paul Travelers Securities Litigation I. On June 1, 2005, the Company and...

  • Page 216
    ...'s involvement with "non-traditional insurance and reinsurance products," branding requirements for salvage automobiles and the reporting of workers' compensation premiums. The Company or its affiliates have received subpoenas or written requests for information, in each case with respect to one or...

  • Page 217
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 17. CONTINGENCIES, COMMITMENTS AND GUARANTEES (Continued) To date, the Company has found only a few instances of conduct that were inconsistent with the Company's employee code of conduct....

  • Page 218
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 17. CONTINGENCIES, COMMITMENTS AND GUARANTEES (Continued) Companies, Inc., et al. (Mass. Super. Ct. May 16, 2005), and one other individual action, Office Depot, Inc. v. Marsh & McLennan ...

  • Page 219
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 17. CONTINGENCIES, COMMITMENTS AND GUARANTEES (Continued) Other Commitments and Guarantees Commitments Investment Commitments-The Company has long-term commitments to fund venture capital ...

  • Page 220
    ... ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 17. CONTINGENCIES, COMMITMENTS AND GUARANTEES (Continued) reporting period. The fair value of this obligation as of December 31, 2005 was $66 million, which was included in "Other Liabilities...

  • Page 221
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 19. RESTRUCTURING ACTIVITIES During the second quarter of 2004, the Company's management approved and committed to plans to terminate and relocate certain employees and to exit certain ...

  • Page 222
    ... in the following consolidating financial statements are not directly comparable between 2005 and 2004. During 2005, the Company combined the previously separate St. Paul Insurance Group and Travelers Property Casualty reinsurance pools, forming the new St. Paul Travelers Reinsurance Pool effective...

  • Page 223
    ... FINANCIAL STATEMENTS OF THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES (Continued) CONSOLIDATING STATEMENT OF INCOME (Unaudited) For the year ended December 31, 2005 (in millions) TPC Other Subsidiaries St. Paul Travelers(1) Eliminations Consolidated Revenues Premiums ...Net investment...

  • Page 224
    ... FINANCIAL STATEMENTS OF THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES (Continued) CONSOLIDATING STATEMENT OF INCOME (Unaudited) For the year ended December 31, 2004 (in millions) TPC Other Subsidiaries St. Paul Travelers (1) Eliminations Consolidated Revenues Premiums ...Net investment...

  • Page 225
    ... FINANCIAL STATEMENTS OF THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES (Continued) CONSOLIDATING BALANCE SHEET (Unaudited) At December 31, 2005 (in millions) TPC Other St. Paul Subsidiaries Travelers(1) Eliminations Consolidated Assets Fixed maturities, available for sale at fair value...

  • Page 226
    ... FINANCIAL STATEMENTS OF THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES (Continued) CONSOLIDATING BALANCE SHEET (Unaudited) At December 31, 2004 (in millions) TPC Other St. Paul Subsidiaries Travelers(1) Eliminations Consolidated Assets Fixed maturities, available for sale at fair value...

  • Page 227
    ... COMPANIES, INC. AND SUBSIDIARIES (Continued) CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited) For the year ended December 31, 2005(1) (in millions) TPC Other St. Paul Subsidiaries Travelers(2) Eliminations Consolidated Cash flows from operating activities Net income (loss) ...Net adjustments...

  • Page 228
    ... loans ...Real estate ...Short-term securities, (purchases) sales, net ...Other investments, net ...Securities transactions in course of settlement ...Net cash acquired in merger ...Other ...Net cash used in investing activities of continuing operations . . Net cash used in investing activities of...

  • Page 229
    THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 22. SELECTED QUARTERLY FINANCIAL DATA (Unaudited) 2005 (in millions, except per share data) First Quarter Second Quarter Third Quarter Fourth Quarter Total Total revenues ...Total ...

  • Page 230
    ... the second quarter of 2004 and continuing through 2005. The changes involved combining the financial reporting process and the attendant personnel and system changes. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated...

  • Page 231
    ...of the Company's management and directors; and • 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...

  • Page 232
    ... of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that The St. Paul Travelers Companies, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2005, is...

  • Page 233
    ...for Citigroup's Global Consumer Europe, Middle East and Africa unit between April 2000 and March 2001. Before that, Mr. Benet spent 10 years in various executive positions with Travelers Life & Annuity, including Chief Financial Officer of Travelers Life & Annuity and Executive Vice President, Group...

  • Page 234
    ...-Claim, since March 2, 2005. 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...

  • Page 235
    ... 2004 Incentive Plan, these numbers also include the 1994 St. Paul Plan, the St. Paul Global Stock Option Plan, certain plans for St. Paul's United Kingdom and Ireland employees, the Travelers Stock Plan, and any other plan approved by the respective shareholders of SPC and TPC prior to the merger...

  • Page 236
    ...Paul Holdings 1996 Stock Option Plan were established to grant options to certain eligible employees of SPC's United Kingdom operations. The options granted under these plans were priced at the market price of the Company's common stock on the date of grant and were eligible for exercise at any time...

  • Page 237
    ... persons on behalf of The St. Paul Travelers Companies, Inc. and in the capacities and on the dates indicated. Date By /S/ JAY S. FISHMAN Jay S. Fishman Director, Chairman, Chief Executive Officer and President (Principal Executive Officer) Vice Chairman and Chief Financial Officer (Principal...

  • Page 238
    ..., M.D. * Clarence Otis, Jr. * Laurie J. Thomsen /S/ BRUCE A. BACKBERG Bruce A. Backberg, Attorney-in-fact Director February 27, 2006 By Director February 27, 2006 By Director February 27, 2006 By Director February 27, 2006 By Director February 27, 2006 *By February 27, 2006 226

  • Page 239
    ... 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 240
    ... of The St. Paul Travelers Companies, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2005, which are included in this Form 10...

  • Page 241
    SCHEDULE II THE ST. PAUL TRAVELERS COMPANIES, INC. (Parent Company Only) CONDENSED FINANCIAL INFORMATION OF REGISTRANT (in millions) CONDENSED STATEMENT OF INCOME (LOSS) For the period ended December 31,* 2005 2004 2003 Revenues Net investment income...Net realized investment gains (losses)...Other...

  • Page 242
    SCHEDULE II THE ST. PAUL TRAVELERS COMPANIES, INC. (Parent Company Only) CONDENSED FINANCIAL INFORMATION OF REGISTRANT (in millions) CONDENSED BALANCE SHEET At December 31, 2005 2004 Assets Fixed maturities...Equity securities ...Short-term securities ...Net assets of discontinued operations ......

  • Page 243
    SCHEDULE II THE ST. PAUL TRAVELERS COMPANIES, INC. (Parent Company Only) CONDENSED FINANCIAL INFORMATION OF REGISTRANT (in millions) CONDENSED STATEMENT OF CASH FLOWS For the period ended December 31,* 2005 2004 2003 Cash flows from operating activities Net income ...Adjustments to reconcile net ...

  • Page 244
    SCHEDULE III THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES Supplementary Insurance Information 2003-2005 (in millions) Deferred Policy Acquisition Costs Unearned Premiums $ 4,612 3,335 2,980 10,927 - $ 10,927 $ 5,026 3,528 2,756 11,310 - $ 11,310 $ 3,958 714 2,439 7,111 - $ 7,111 $ 6,552 ...

  • Page 245
    ...35 $ 3 $ 80 $ 28 (1) Includes balances acquired in the merger and accounting conformity adjustments. (2) Charged to claims and claim adjustment expenses in the consolidated statement of income (loss). (3) Credited to the related asset account. Amount in 2004 includes a $62 million addition related...

  • Page 246
    SCHEDULE VI THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES Supplementary Information Concerning Property-Casualty Insurance Operations(1) 2003 - 2005 (in millions) Affiliation with Registrant(2) $ 1,527 $1,559 $ 965 $ 61,007 $ 58,984 $ 34,474 $ 1,070 $1,037 $ 967 $ 10,927 $ 11,310 $ 7,111 ...

  • Page 247
    ... INDEX Exhibit Number Description of Exhibit 2.1 Agreement and Plan of Merger, dated as of November 16, 2003, as amended, among The St. Paul Companies, Inc. ("SPC"), Travelers Property Casualty Corp. ("TPC") and Adams Acquisition Corp. ("Adams"), along with the related articles of incorporation...

  • Page 248
    ... The St. Paul Travelers Companies, Inc. 2004 Stock Incentive Plan was filed as Exhibit 10.2 to the Company's quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2005, and is incorporated herein by reference. The St. Paul Travelers Companies, Inc. Senior Executive Performance Plan was...

  • Page 249
    ...of Executive Officer Capital Accumulation Program Restricted Stock Award Notification and Agreement was filed as Exhibit 10.2 to the Company's quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2005, and is incorporated herein by reference. Non-Employee Director Annual Equity Grant...

  • Page 250
    .... 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. The St. Paul Travelers Companies, Inc. Deferred Compensation Plan effective December 1, 2004 was filed as Exhibit...

  • Page 251
    ... to security holders who make written request therefor to The St. Paul Travelers Companies, Inc., 385 Washington Street, Saint Paul, MN, 55102, Attention: Corporate Secretary. †* Filed herewith Management contract or compensatory plan in which directors and/or executive officers are eligible...

  • Page 252
    Exhibit 12.1 THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (for the year ended December 31, in millions, except ratios) 2005 2004 2003 2002 2001 Income (loss) from continuing operations before income taxes (benefit), minority interest and ...

  • Page 253
    ...Fishman, Chairman and Chief Executive Officer, certify that: 1. 2. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2005 of The St. Paul Travelers Companies, Inc. (the Company); Based on my knowledge, this report does not contain any untrue statement of a material fact...

  • Page 254
    ... Benet, Vice Chairman and Chief Financial Officer, certify that: 1. 2. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2005 of The St. Paul Travelers Companies, Inc. (the Company); Based on my knowledge, this report does not contain any untrue statement of a material...

  • Page 255
    ... officer of The St. Paul Travelers Companies, Inc. (the "Company"), hereby certifies that the Company's Annual Report on Form 10-K for the year ended December 31, 2005 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and that the information...

  • Page 256
    ... officer of The St. Paul Travelers Companies, Inc. (the "Company"), hereby certifies that the Company's Annual Report on Form 10-K for the year ended December 31, 2005 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and that the information...

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