Travelers 2006 Annual Report Download - page 208

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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7. DEBT (Continued)
Zero Coupon Convertible Notes—The zero coupon convertible notes mature in 2009, but are
redeemable at the option of the Company for an amount equal to the original issue price plus accreted
original issue discount. Eachnote is convertible at the option of the holder at any time on or prior to
maturity, unless previously redeemed by the Company, into common stock of the Company at a conversion
rate of 16.6433 shares for each $1,000 principal amount of notes. If all notes outstanding at December 31,
2006 were converted, the Company would issue 2.4 million of its common shares.
Subordinated Debentures—The Company’s four subordinated debenture instruments are all similar in
nature. Four separate business trusts issued preferred securities to investors and used the proceeds to
purchase the Company’s subordinated debentures. Interest on each of the instruments is paid semi-
annually. In January 2007, the Company redeemed the$81 million, 8.47% subordinateddebentures due in
2027. The redemption was funded internally.
4.50% Convertible Junior Subordinated Notes—These notes will mature on April 15, 2032, unless
earlier redeemed,repurchased or converted. Interest is payable quarterly in arrears. The Company has the
option to defer interest payments on the notes for a period not exceeding 20 consecutive interest periods
nor beyond the maturity of the notes. During a deferral period, the amount of interest due to holders of
the notes will continue to accumulate, and such deferred interest payments will themselves accrue interest.
Deferral of any interest can create certain restrictions for the Company. Unlesspreviously redeemed or
repurchased, the notes are convertible into shares of common stock at the option of the holders at any time
after March27, 2003 andprior to April 15, 2032 if at any time (1) the average of the daily closing prices of
common stock for the 20 consecutive trading days immediately prior to the conversion date is at least 20%
above the then applicable conversion price on the conversion date, (2) the notes have been called for
redemption, (3) specified corporate transactions have occurred, or (4) specified credit rating events with
respect to the notes have occurred. The notes will be convertible into shares of common stock at a
conversion rate of0.4684 shares of common stock for each $25.00 principal amount of notes (equivalent to
an initial conversionprice of $53.37 per share of common stock), subject to adjustment in certain events.
On or after April 18, 2007, the notes may be redeemed at the Company’s option. The notes are general
unsecured obligations and are subordinated in right of payment to all existing and future Senior
Indebtedness. The notes are also effectively subordinated to all existing and future indebtedness and other
liabilities of any of the Company’s current or future subsidiaries. If all notes outstanding at December 31,
2006 were converted, the Company would issue 16.7 million of its common shares.
The Company’s consolidated balance sheet includes the debt instruments acquired in the merger,
which were recorded at fair value as of the acquisition date. The resulting fair value adjustment is being
amortized over the remaining life of the respective debt instruments using the effective-interest method.
The amortization of the fair value adjustment reduced interest expense by $34 million and $54 million for
the years ended December 31, 2006 and 2005, respectively.