Travelers 2007 Annual Report Download

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Accelerating
Our Momentum
2007 Annual Report
and Form 10-K

Table of contents

  • Page 1
    Accelerating Our Momentum 2007 Annual Report and Form 10-K

  • Page 2
    ... professionals. Doreen Spadorcia, executive vice president of Claim Services, said the facility's handson training will help keep the company's claim professionals proficient on evolving vehicle technology and construction techniques and give them the skills they need for complex auto, property...

  • Page 3
    ... investors. As underwriters, our job is to help our customers manage the risks of potential financial disruptions in their lives and in their businesses and to earn an appropriate margin for doing so. Then, as we engage in the business of insurance, we generate funds that are invested. As investors...

  • Page 4
    ... Personal Insurance - We are a major force in the personal insurance market, and we continue to make significant investments in that marketplace. In 2007, we added 1,600 new personal lines agent locations and introduced new agency prospecting tools. We have continued the roll-out of our Quantum Auto...

  • Page 5
    ... presidents. These executives are charged with coordinating our delivery of products and services across product lines. As an important part of this initiative, we have developed new and more sophisticated management information reporting that guides our field team and allows us to measure progress...

  • Page 6
    ... Senior Vice President - Enterprise Human Resources First Party Business Group Andy F. Bessette*+ Executive Vice President & Chief Administrative Officer William A. Bloom*+ Executive Vice President - Insurance Operations and Systems Kathleen L. Bolduc*+ Executive Vice President & Chief Marketing Of...

  • Page 7
    ... - Bond & Financial Products Joseph P. Lacher*+ Executive Vice President - Personal Insurance & Select Accounts Samuel G. Liss*+ Executive Vice President - Strategic Development and Financial, Professional & International Insurance Brian W. MacLean*+ Executive Vice President & Chief Operating Of...

  • Page 8
    ... Galatea Underwriting Agencies Limited, which specializes in marine liability insurance policies for companies and individuals who service the shipping and transport industries; and recruited a new Power & Utilities underwriting team. In Shanghai, Travelers Syndicate 5000 joined Lloyd's operation...

  • Page 9
    ... new target markets are planned for release in 2008. • Public Sector expanded product lines to include workers' compensation as part of the business unit's total account approach for public entities. • National Property, which is one of the largest writers of commercial property insurance...

  • Page 10
    ... of Massachusetts, Inc. Director since 2007 Board committees Audit Dasburg (Chair) Beller Dolan Higgins Hodgson Thomsen Compensation Graev (Chair) Duberstein Killingsworth McGarvie Nelson Executive Fishman (Chair) Dasburg Graev Hodgson Lipp McGarvie Nelson Investment and Capital Markets McGarvie...

  • Page 11
    .... Paul, MN 55102 (Address of principal executive offices) (Zip Code) (651) 310-7911 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Common stock, without par value Name of each exchange on which registered New York...

  • Page 12
    ... Market Risk ...Financial Statements and Supplementary Data ...Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...Controls and Procedures ...Other Information ...Part III Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security...

  • Page 13
    ...commercial and personal property and 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...

  • Page 14
    ... six groups, which collectively comprise Business Insurance Core operations: • Select Accounts serves small businesses for property and casualty products, including commercial multi-peril, property, general liability, commercial auto and workers' compensation insurance. • Commercial Accounts...

  • Page 15
    ... Company work together in actively managing and controlling exposure and claims and they share risk through policy features such as deductibles or retrospective rating. Products offered include workers' compensation, general liability, umbrella, commercial auto, property and inland marine coverages...

  • Page 16
    ...liability and package policies for small, difficult to place specialty classes of commercial business on an admitted or excess and surplus lines basis. • National Programs offers tailored property and casualty programs on an admitted basis for customers with common risk characteristics or coverage...

  • Page 17
    ... agency's or broker's financial strength, staff experience and strategic fit with its operating and marketing plans. Once an agency or broker is appointed, Business Insurance carefully monitors its performance. Select Accounts is a leading provider of property casualty products to small businesses...

  • Page 18
    ... rated or a guaranteed cost insurance policy. Through a network of field offices, the Company's underwriting specialists work closely with national and regional brokers to tailor insurance programs to meet clients' needs. Workers' compensation accounted for approximately 77% of sales to National...

  • Page 19
    ... of these products. Specialized Distribution distributes admitted and excess and surplus lines property and casualty products predominantly through selected wholesale agents, both on a brokerage and managing general underwriting basis, and through selected program agents. Brokers, general agents and...

  • Page 20
    ... the injured employee's early return to work, cost-effective quality care and customer service in this market. The Company offers the following types of workers' compensation products: • guaranteed cost insurance products, in which policy premium charges are fixed for the period of coverage and do...

  • Page 21
    ... operations. Specialized liability policies may also include coverage for directors' and officers' liability arising in their official capacities, employment practices liability insurance, fiduciary liability for trustees and sponsors of pension, health and welfare, and other employee benefit plans...

  • Page 22
    ... and direct writers. Both national and regional property casualty insurance companies compete in the Select Accounts market which generally comprises lower hazard, ''main street'' business customers. Risks are underwritten and priced using standard industry practices and a combination of proprietary...

  • Page 23
    ..., Canada and Ireland, offers specialized insurance and risk management services to several customer groups, including those in the technology, public services, and financial and professional services industry sectors. These operations primarily underwrite employers' liability (similar to workers...

  • Page 24
    ... operating and marketing plans. Once an agency or broker is appointed, its ongoing performance is closely monitored. In addition, Bond & Financial Products sells its surety products through independent agents using subsidiaries in Canada and the United Kingdom. The International market distributes...

  • Page 25
    ...of the Company: Travelers Guarantee (Canada) and Travelers Casualty and Surety Company of Europe (United Kingdom). General Liability provides coverage for liability exposures including bodily injury and property damage arising from products sold and general business operations. Specialized liability...

  • Page 26
    ... of claim and risk management services provided. The Company has developed expertise in various markets in these countries similar to those served in the United States and provides both property and casualty coverage for these markets. Products are generally distributed through a relatively small...

  • Page 27
    ... state companies and six service centers. In selecting new independent agencies to distribute its products, Personal Insurance considers, among other matters, each agency's profitability, financial stability, staff experience and strategic fit with Personal Insurance's operating and marketing plans...

  • Page 28
    ...diversify the homeowners line of business. Pricing and Underwriting Pricing levels for Personal Insurance property and casualty insurance products are generally developed based upon an expectation of estimated losses, the expenses of producing, issuing and servicing business and managing claims, and...

  • Page 29
    ...order to manage the Company's exposure to catastrophe losses, Personal Insurance limits the writing of new homeowners business and selectively takes underwriting action on existing business in some markets. In addition, the Company has tightened underwriting standards, implemented price increases in...

  • Page 30
    ... the geographic distribution of Personal Insurance's direct written premiums for the states that accounted for the majority of premium volume for the year ended December 31, 2007: State % of Total New York ...Texas ...Pennsylvania . . New Jersey ...Massachusetts . Florida ...Connecticut ...Georgia...

  • Page 31
    ...advanced 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 Insurance's single state companies in Florida, Massachusetts and New Jersey. This structure permits...

  • Page 32
    ... to finish. By managing the claim in this way, the Company can help ensure prompt, quality results and create a differentiated, superior claim experience for customers. Another strategic advantage is TravCompSM, a workers' compensation claim resolution and medical management program that assists...

  • Page 33
    ... or more reinsurance agreements with Longpoint Re Ltd. (Longpoint Re), a newly formed independent Cayman Islands insurance company. Longpoint Re successfully completed an offering to unrelated investors under the program of $500 million aggregate principal amount of catastrophe bonds on May 8, 2007...

  • Page 34
    ... on all Florida property and casualty lines of business, excluding accident and health, the National Flood Insurance Program, workers' compensation and medical malpractice insurance. The FHCF's resources are limited to these contributions and to its borrowing capacity at the time of a significant...

  • Page 35
    ... insurance, medical malpractice insurance, health or life insurance, flood insurance, and reinsurance. The Terrorism Extension Act exempted from coverage certain additional types of insurance, including commercial automobile, professional liability (other than directors and officers'), surety...

  • Page 36
    ... claims and claim adjustment expense reserves in the consolidated balance sheet are certain reserves discounted to the present value of estimated future payments. The liabilities for losses for most long-term disability payments under workers' compensation insurance and workers' compensation excess...

  • Page 37
    ...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 38
    ...$ 889 $ (a) 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 contributed to TPC by Citigroup on...

  • Page 39
    ... rating agencies: A.M. Best Company (A.M. Best), Fitch Ratings (Fitch), Moody's Investors Service (Moody's) and Standard & Poor's Corp. (S&P). Rating agencies typically issue two types of ratings: claims-paying (or financial strength) ratings which assess an insurer's ability to meet its financial...

  • Page 40
    ... Guarantee Company of Canada and St. Paul Travelers Insurance Company Limited as of February 21, 2008. The table also presents S&P's Lloyd's Syndicate Assessment rating for St. Paul Travelers Syndicate Management-Syndicate 5000. The table presents the position of each rating in the applicable agency...

  • Page 41
    ...paper ratings of the Company and its subsidiaries as of February 21, 2008. The table also presents the position of each rating in the applicable agency's rating scale. A.M. Best Moody's S&P Fitch Senior debt ...Subordinated debt ...Junior subordinated debt Trust preferred securities Preferred stock...

  • Page 42
    ... 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 to sell illiquid assets or access credit facilities...

  • Page 43
    ... of policy forms and the regulation of market conduct, including the use of credit information in underwriting as well as other underwriting and claims practices. In addition, many states have enacted variations of competitive ratemaking laws, which allow insurers to set certain premium rates for...

  • Page 44
    ... market. Insurance Regulatory Information System. The National Association of Insurance Commissioners (NAIC) developed the Insurance Regulatory Information System (IRIS) to help state regulators identify companies that may require special attention. Financial examiners review annual statements...

  • Page 45
    ..., Travelers Casualty and Surety Company, established a representative office in China. The representative office's operations are regulated by the China Insurance Regulatory Commission. In addition, in 2007, TRV's Lloyd's managing agency established a service company in Singapore, the underwriting...

  • Page 46
    ...Accounting Policy group and many others. A senior executive oversees the ERM process. The mission of this executive is to facilitate risk assessment and to collaborate in implementing risk management strategies. Another strategic objective includes working across the Company to enhance risk modeling...

  • Page 47
    ...of SEC Filings The Company's Internet website is www.travelers.com. Information on the Company's website is not a part of this Form 10-K. The Company makes available free of charge on its website or provides a link on its website to the Company's Annual Report on Form 10-K, Quarterly Reports on Form...

  • Page 48
    ... 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 over the remaining life of a person (the annuitant), the lives...

  • Page 49
    ... party, receiving a commission from the insurer or reinsurer for placement and other services rendered. The percentage of surplus, or the dollar amount of exposure, that an insurer or reinsurer is willing or able to place at risk. Capacity may apply to a single risk, a program, a line of business...

  • Page 50
    ... designed to cover property insurance losses but can be written to cover casualty insurance losses such as from workers' compensation policies. When an insurer reinsures its liability with another insurer or a ''cession,'' it ''cedes'' business and is referred to as the ''ceding company.'' Insurance...

  • Page 51
    ... only those risks in that state. For more information, see ''residual market.'' Commercial multi-peril policies . Commutation agreement ... Deductible ...Deferred acquisition costs ... Deficiency ... Direct written premiums ... Earned premiums or premiums earned ... Excess liability ...Excess of...

  • Page 52
    ... programs ... Fidelity insurance coverage protects an insured for loss due to embezzlement or misappropriation of funds by an employee. Surety is a three-party agreement in which the insurer agrees to pay a second party or make complete an obligation in response to the default, acts or omissions...

  • Page 53
    ... organization of the insurance commissioners or directors of all 50 states, the District of Columbia and the five U.S. territories organized to promote consistency of regulatory practice and statutory accounting standards throughout the United States. Direct written premiums plus assumed reinsurance...

  • Page 54
    ... on policies and contracts issued, renewed or reinsured by an insurance company. Contractual entity which directs insureds to the insurer for coverage. This term includes agents and brokers. Insurance that provides coverage to a person or business with an insurable interest in tangible property for...

  • Page 55
    ... will grow in a stable, predictable pattern from year-to-year, based on the age of the cohort. Reinstatement premiums ... Reinsurance ... Reinsurance agreement ...Reported claim development method ... Residual market (involuntary business) ... Insurance market which provides coverage for risks for...

  • Page 56
    ... and preparing financial statements. Statutory accounting practices generally reflect a modified going concern basis of accounting. Retrospective premiums ...Retrospective rating ... Return on equity ...Risk-based capital (RBC) ... Risk retention group ...Run-off business ... Salvage ...S-curve...

  • Page 57
    ... premiums written that is allocable to the unexpired portion of the policy term. The market in which a person seeking insurance obtains coverage without the assistance of residual market mechanisms. Structured settlements ... Subrogation ... Third-party liability ... Treaty reinsurance ... Umbrella...

  • Page 58
    ...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. A system (established under state and federal laws) under which employers provide insurance for benefit payments...

  • Page 59
    ... affect our results of operations, our financial position and/or liquidity, and could adversely impact our ratings, our ability to raise capital and the availability and cost of reinsurance. Our property and casualty insurance operations expose us to claims arising out of catastrophes. Catastrophes...

  • Page 60
    ...the Terrorism Risk Insurance Program Reauthorization Act of 2007 provides benefits in the event of certain acts of terrorism, those benefits are subject to a deductible and other limitations. Under this law, once our losses exceed 20% of our commercial property and casualty insurance premium for the...

  • Page 61
    ... number of claims, bankruptcy proceedings may increase the volatility of asbestos-related losses by initially delaying the reporting of claims and later by significantly accelerating and increasing loss payments by insurers, including us. Bankruptcy proceedings have also caused increased settlement...

  • Page 62
    ...and may require liable parties to undertake their own remedial action. Liability under CERCLA may be joint and several with other responsible parties. We have been, and continue to be, involved in litigation involving insurance coverage issues pertaining to environmental claims. We believe that some...

  • Page 63
    ... in medical costs and auto and home repair costs; • judicial expansion of policy coverage and the impact of new theories of liability; • plaintiffs targeting property and casualty insurers, including us, in purported class action litigation relating to claims-handling and other practices; 51

  • Page 64
    ... financial resources than we do. In addition, several property and casualty insurers writing commercial lines of business now offer products for alternative forms of risk protection, including large deductible programs and various forms of self-insurance that utilize captive insurance companies...

  • Page 65
    ...; • speed of claims payment; • premiums charged, contract terms and conditions, products and services offered (including the ability to design customized programs); • our perceived overall financial strength and corresponding ratings assigned by independent rating agencies; • reputation...

  • Page 66
    ..., capital and surplus requirements, limitations on the types and amounts of certain investments, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, premium rates and a variety of other financial and non-financial components of an insurer's business. In...

  • Page 67
    ...or in the fixed income, real estate, equity or alternative investment markets could materially and adversely affect our results of operations. Changes in the general interest rate environment affect our returns on, and the market value of, our fixed income and short-term investments, which comprised...

  • Page 68
    ... funds and the involuntary assumption of hard-to-place or high-risk insurance business, primarily in workers' compensation insurance lines. The inability of our insurance subsidiaries to pay dividends to our holding company in an amount sufficient to meet our debt service obligations and other cash...

  • Page 69
    ... of operations, technology initiatives present certain risks. Our business is highly dependent upon our employees' ability to perform, in an efficient and uninterrupted fashion, necessary business functions, such as Internet support and 24-hour call centers processing new and renewal business, and...

  • Page 70
    ... 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 10% of the carrying value of the property...

  • Page 71
    ... engaged 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. Similar lawsuits were filed in West Virginia...

  • Page 72
    ... Law Claims, as well as future similar direct action litigation, against TPC. Final approval of the order was a predicate to TPC's financial obligations under the settlement agreements. One or more of the parties may seek further appellate review of the Second Circuit's opinion, and the Company...

  • Page 73
    ... certain shareholders of the Company against the Company and certain of its current and former officers and directors. These two actions were consolidated as In re St. Paul Travelers Securities Litigation II. An amended consolidated complaint was filed alleging violations of federal securities laws...

  • Page 74
    ... 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. The...

  • Page 75
    ... 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...

  • Page 76
    ... to transfer funds to the Company in the form of cash dividends or otherwise, see ''Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.'' Dividends will be paid by the Company only if declared by its Board of Directors out of...

  • Page 77
    ...500 PROPERTY & CASUALTY INSURANCE (2) 15FEB200808140113 (1) Assumes $100 invested in common shares of The St. Paul Companies, Inc. on December 31, 2002. The performance reflected is that of The St. Paul Companies, Inc. only until the date of the merger (April 1, 2004), and is that of The Travelers...

  • Page 78
    ISSUER PURCHASES OF EQUITY SECURITIES The table below sets forth information regarding repurchases by the Company of its common stock during the periods indicated. Total number of shares purchased as part of publicly announced plans or programs Maximum dollar value of shares that may yet be ...

  • Page 79
    ... subsidiary of SPC, and SPC changed its name to The St. Paul Travelers Companies, Inc. On February 26, 2007, the name of the Company was changed to The Travelers Companies, Inc. All financial information presented herein for the year ended December 31, 2004 reflects the accounts of TPC for the three...

  • Page 80
    ... • Holding company liquidity of $1.62 billion CONSOLIDATED OVERVIEW The Company provides a wide range 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. 68

  • Page 81
    ... of the Company's significant common share repurchases since its repurchase program began in the second quarter of 2006. The increase in income from continuing operations in 2007 reflected growth in net investment income, a higher level of net favorable prior year reserve development, an increase...

  • Page 82
    ...the Financial, Professional & International Insurance segment, earned premium growth of 2% in 2007 over 2006 was driven by the favorable impact of foreign currency rates of exchange, growth in business volume and a benefit from adjustments to prior year premium estimates for the Company's operations...

  • Page 83
    runoff and the sale of the Personal Catastrophe Risk operation in November 2005. Earned premiums in the Financial, Professional & International Insurance segment in 2006 increased 4% over 2005, primarily reflecting growth in Bond & Financial Products and the absence of catastrophe-related ...

  • Page 84
    ... to each segment in proportion to the respective segment's notional investment income to total notional investment income. Fee Income The National Accounts market in the Business Insurance segment is the primary source of the Company's fee-based business. The declines in fee income in 2007 and 2006...

  • Page 85
    ...premium growth over 2006 in Business Insurance. In Financial, Professional & International Insurance, the increase reflected the favorable impact of foreign currency rates of exchange, strong business volume in construction surety, in Canada and at Lloyd's, partially offset by the impact of the sale...

  • Page 86
    ...-related reinstatement premiums. Net written premium growth in the Personal Insurance segment in 2006 reflected growth in new business volume, renewal price increases and continued strong business retention rates, partially offset by the estimated impact of transitioning to six-month policy terms in...

  • Page 87
    ... the first quarter of 2007, the Company discontinued the use of contingent commissions and implemented a new fixed agent compensation program for all of its personal insurance business. The Company also offered the majority of its agents conducting commercial insurance business the option to switch...

  • Page 88
    ... the Company's Asset Management segment and was acquired as part of the merger on April 1, 2004. The divestiture was completed through a series of transactions in the second and third quarters of 2005, resulting in net pretax cash proceeds of $2.40 billion. The Company recorded a net operating loss...

  • Page 89
    ... growth in net written premium volume over the prior twelve months in the majority of the markets comprising this segment, driven by strong business retention rates and increases in new business volume, partially offset by minor decreases in renewal price changes. In 2006, earned premiums of $10.88...

  • Page 90
    ... 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 services to workers' compensation residual market...

  • Page 91
    ...both casualty and property-related lines of business, which were driven by increasingly favorable legal and judicial environments, coupled with better than expected results from changes in policy provisions as well as underwriting and pricing criteria. Company initiatives relating to claims handling...

  • Page 92
    ... Written Premiums The Business Insurance segment's gross and net written premiums by market were as follows: (for the year ended December 31, in millions) Gross Written Premiums 2007 2006 2005 Select Accounts ...Commercial Accounts ...National Accounts ...Industry-Focused Underwriting . Target Risk...

  • Page 93
    ... improvement in new business volume over 2005. Renewal price changes for the Select Accounts market in 2006 were consistent with 2005, as modest pricing pressures in non-coastal coverages were largely offset by price increases for coastal coverages. Commercial Accounts. Net written premiums of $2.52...

  • Page 94
    ... in this market-Technology, Agribusiness and Public Sector-all achieved lesser degrees of net written premium growth over 2005. Target Risk Underwriting. Net written premiums of $1.67 billion in 2007 grew 2% over 2006, driven by increases in the Inland Marine and National Property business units...

  • Page 95
    ... growth in 2007 also benefited from adjustments to prior year premium estimates for the Company's operations at Lloyd's. Earned premiums in 2006 increased $124 million, or 4%, over 2005, primarily driven by growth in Bond & Financial Products. In addition, earned premiums in 2005 were reduced by...

  • Page 96
    ... expected loss development in international property, employers' liability, professional indemnity and motor lines of business for recent accident years, which was attributable to several factors, including enhanced pricing and underwriting strategies throughout the International operations, and the...

  • Page 97
    ...2005. Growth in net written premium volume in 2006 resulted from strong construction surety volume in Bond & Financial Products, strong price increases for Southeastern U.S. catastrophe-prone exposures in the Company's operations at Lloyd's, strong business retention rates and new business volume in...

  • Page 98
    ... to the Company's operations at Lloyd's. Personal Insurance Results of the Company's Personal Insurance segment were as follows: (for the year ended December 31, in millions) 2007 2006 2005 Revenues: Earned premiums ...Net investment income ...Other revenues ...Total revenues ...Total claims and...

  • Page 99
    ...settlement process, thereby changing historical loss development patterns. In addition, industry and Company initiatives to fight fraud in several states led to a decrease in the total number of claims and a change in historical loss development patterns. In the Homeowners and Other line of business...

  • Page 100
    ... in the claim settlement process, thereby changing historical loss development patterns. In addition, industry and Company initiatives to fight fraud in several states led to a decrease in the total number of claims in 2005 and a change in historical loss development patterns. In the Homeowners and...

  • Page 101
    ... to six-month policy terms in the second half of the year for the Company's multivariate pricing product that resulted in a lower amount of reported net written premiums in 2006. Business retention rates in 2006 remained strong and consistent with prior year rates. Renewal price changes in 2006...

  • Page 102
    ... from 2005. Net written premium volume in this line of business in 2006 also benefited from cross-selling initiatives involving the Company's automobile multivariate pricing product. The Personal Insurance segment had approximately 7.2 million and 7.0 million policies in force at December 31, 2007...

  • Page 103
    ...be able to sustain these actions against insurers based on novel legal theories of liability. The Company believes it has meritorious defenses to these claims and has received favorable rulings in certain jurisdictions. Additionally, Travelers Property Casualty Corp. (TPC), a wholly-owned subsidiary...

  • Page 104
    ... trends in its quarterly reserve estimates. The Company's asbestos reserve review includes an analysis of exposure and claim payment patterns by policyholder category, as well as recent settlements, policyholder bankruptcies, judicial rulings and legislative actions. Developing payment trends among...

  • Page 105
    ... the applicable agreement. Structured settlements are arrangements under which policyholders and/or plaintiffs agree to fixed financial amounts to be paid at scheduled times. Included in this category are TPC's settlements of the Statutory and Hawaii Actions and the Common Law Claims (collectively...

  • Page 106
    ...reported claims, products/completed operations and potential ''non-product'' exposures, size of policyholder and geographic distribution of products or services sold by the policyholder. In addition to IBNR amounts contained in the reserves for home office and field office policyholders, the Company...

  • Page 107
    ... to undertake their own remedial action. Liability under CERCLA may be joint and several with other responsible parties. The Company has been, and continues to be, involved in litigation involving insurance coverage issues pertaining to environmental claims. The Company believes that some court...

  • Page 108
    .... 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 109
    ...past and pending bodily injury claims. In 2006, the Company made the final payment related to this settlement and billed a substantial portion of the total settlement to its reinsurers. In addition, TPC and this policyholder entered into a coverage-in-place agreement which addressed the handling and...

  • Page 110
    ... was invested in fixed maturity and short-term investments, 1% in equity securities, 1% in real estate and 4% in other investments. Because the primary purpose of the investment portfolio is to fund future claims payments, the Company employs a conservative investment philosophy. The Company's fixed...

  • Page 111
    ... rates move dramatically, the investment process generally favors securities that control this risk within expected interest rate ranges. The Company does not purchase residual interests in CMOs. At December 31, 2007 and 2006, the Company held CMOs classified as available for sale with a fair value...

  • Page 112
    The Company's real estate investments include warehouses and office buildings and other commercial land and properties that are directly owned. The Company's other investments primarily comprise venture capital, through direct ownership and limited partnerships, private equity limited partnerships, ...

  • Page 113
    ... period; • $10 million in the real estate portfolio, related to the fundamental decline in the financial condition of one real estate development property; and • $16 million in the venture capital portfolio on 14 holdings. Three of the holdings were public securities whose cost basis was not...

  • Page 114
    ... periodically. Reinsurers are selected based on their financial condition, business practices and the price of their product offerings. After reinsurance is purchased, the Company has limited ability to manage the credit risk to a reinsurer. In addition, in a number of jurisdictions, particularly...

  • Page 115
    ...Competition. The Company expects property casualty market conditions to continue to become modestly more competitive in 2008, particularly for new business. The pricing environment for new business generally has less of an impact on underwriting profitability than renewal price changes, particularly...

  • Page 116
    ... market value of existing investments and therefore, shareholders' equity. In 2007, short-term and long-term interest rates declined. A downward trend in interest rates may continue into 2008. At December 31, 2007, approximately 6% of the Company's invested assets were comprised of equity securities...

  • Page 117
    ... AND CAPITAL RESOURCES Liquidity is a measure of a company's ability to generate sufficient cash flows to meet the shortand long-term cash requirements of its business operations. The liquidity requirements of the Company's business have been met primarily by funds generated from operations, asset...

  • Page 118
    ... value of the net insurance liabilities, as well as the positive cash flow from newly sold policies and the large amount of high quality liquid bonds, provide assurance of the Company's ability to fund the payment of claims without having to sell illiquid assets or access credit facilities. Sale...

  • Page 119
    ... less than ten business days prior to the scheduled maturity date, the Company is required to use commercially reasonable efforts to sell enough qualifying capital securities, or at its option, common stock, qualifying warrants, mandatorily convertible preferred stock, debt exchangeable for common...

  • Page 120
    ...to applying these proceeds, the Company invested them in investment grade, marketable securities. In August 2007, the Company's $442 million, 5.01% senior notes matured and were fully paid. In 2007, medium-term notes with a cumulative par value of $72 million and interest rates ranging from 6.85% to...

  • Page 121
    ... Company's financial position, earnings, capital requirements of the Company's operating subsidiaries, legal requirements, regulatory constraints and other factors as the board of directors deems relevant. Dividends would be paid by the Company only if declared by its board of directors out of funds...

  • Page 122
    ... be made from time to time in the open market, pursuant to preset trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, in private transactions or otherwise. The authorizations do not have a stated expiration date. The timing and actual number of shares to...

  • Page 123
    ... financial strength of the Company and its ability to borrow funds at competitive rates and raise new capital to meet its needs. The following table summarizes the components of the Company's capital structure at December 31, 2007 and 2006. (at December 31, in millions) 2007 2006 Debt: Short-term...

  • Page 124
    ...amount and timing of future cash flows related to claims and claim related payments is generally reliable only in the aggregate with some unavoidable estimation uncertainty. The contractual obligations related to debt, operating leases, purchase obligations, long-term unfunded investment commitments...

  • Page 125
    ...course of business to lease office space, equipment and furniture. (3) Includes agreements with vendors to purchase system software administration and maintenance services. (4) In connection with the sale of its insurance brokerage operations, the Company committed to acquire brokerage services from...

  • Page 126
    ...that the liability for claims and claim adjustment expenses and the related reinsurance receivables have been discounted in the balance sheet. (See note 1 of notes to the Company's consolidated financial statements.) (8) Workers' compensation large deductible policies provide third party coverage in...

  • Page 127
    ... annuity. The Company is not reasonably likely to incur material future payment obligations under such agreements. In addition, the Company was not required to make any contributions to its qualified pension plan in 2007 or 2006 and does not have a best estimate of contributions expected to be paid...

  • Page 128
    ... for guarantees related to agency loans and letters of credit, issuance of debt securities, third party loans related to venture capital investments and various indemnifications related to the sale of business entities to third parties. See note 15 of notes to the Company's consolidated financial...

  • Page 129
    ...reserves are reviewed regularly by qualified actuaries employed by the Company. The process of estimating loss reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as changes in claims handling...

  • Page 130
    ... reserves by product line were as follows: (at December 31, in millions) Case 2007 IBNR Total Case 2006 IBNR Total General liability ...Property ...Commercial multi-peril ...Commercial automobile ...Workers' compensation ...Fidelity and surety ...Personal automobile ...Homeowners and personal-other...

  • Page 131
    ... 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 132
    ... claim 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...

  • Page 133
    .... The principal estimation and analysis methods utilized by the Company's actuaries are the paid development method, the case incurred development method, the Bornhuetter-Ferguson (BF) method, and average value analysis combined with the reported claim development method. The BF method is usually...

  • Page 134
    ... that the change should be reflected in the Company's estimated claim liabilities. The final estimate selected by management in a reporting period is based on these various detailed analyses of past data, adjusted to reflect any new actionable information. Discussion of Product Lines The following...

  • Page 135
    ... are written on an ''occurrence basis,'' certain general liability coverages (such as those covering directors and officers or professional liability) are typically insured on a ''claims-made'' basis. General liability reserves are generally analyzed as two components: primary and excess/umbrella...

  • Page 136
    ... in claim adjuster office structure (causing distortions in the data) Changes in 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...

  • Page 137
    ... properties. The claim reporting and settlement process for property coverage claim reserves is generally restricted to the insured and the insurer. Overall, the claim liabilities for this line create a low estimation risk, except possibly for catastrophes and business interruption claims. Property...

  • Page 138
    ...2005. Commercial Multi-Peril Commercial multi-peril provides a combination of property and liability coverage typically for small businesses and, therefore, includes both short and long tail coverages. For property coverage, it generally takes a relatively short period of time to close claims, while...

  • Page 139
    ... than expected results from changes in policy provisions as well as underwriting and pricing criteria. Commercial Automobile The commercial automobile product line is a mix of property and liability coverages and, therefore, includes both short and long tail coverages. The payments that are made...

  • Page 140
    .... In addition, some payments can run as long as the injured worker's life, such as permanent disability benefits and on-going medical care. Despite the possibility of long payment tails, the reporting lags are generally short, settlements are generally not complex, and most of the liability can be...

  • Page 141
    ... on claims previously closed Mortality trends of injured workers with lifetime 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...

  • Page 142
    ...fidelity claims. The volatility of fidelity reserves is generally related to the type of business of the insured, the size and complexity of the insured's business operations, amount of policy limit and attachment point of coverage. The uncertainty surrounding reserves for small, commercial insureds...

  • Page 143
    ...auto physical damage (property) claims and property damage (liability) claims. The payments that take longer to finalize and are more difficult to estimate relate to bodily injury claims. Reporting lags are relatively short and the claim settlement process for personal automobile liability generally...

  • Page 144
    ...from changes in claim handling practices as well as initiatives to fight fraud. Homeowners and Personal Lines Other Homeowners is generally considered a short tail coverage. Most payments are related to the property portion of the policy, where the claim reporting and settlement process is generally...

  • Page 145
    ... in building material and labor costs due to a sharp increase in demand for those materials and services Homeowners book of business risk factors Policy provisions mix (e.g., deductibles, policy limits, endorsements, etc.) Degree of concentration of policyholders Changes in underwriting standards...

  • Page 146
    ... to rely on data characterizations 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...

  • Page 147
    ...and other book of business risk factors Changes in policy provisions (e.g., deductibles, policy limits, endorsements, ''claims made'' language) Changes in underwriting standards Product mix (e.g., size of account, industries insured, jurisdiction mix) Unanticipated changes in risk factors can affect...

  • Page 148
    ... 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...

  • Page 149
    ...external fund manager reviews such factors as recent filings, operating results, balance sheet stability, growth, and other business and market sector fundamental statistics in estimating fair values of specific investments. With respect to the Company's valuation of such non-publicly traded venture...

  • Page 150
    ... unforeseen changes in the Company's liquidity needs, or changes in tax laws or the regulatory environment. Fixed Maturities and Equity Securities An investment in a fixed maturity or equity security which is available for sale is impaired if its fair value falls below its cost or new cost...

  • Page 151
    ... are partnership investments and investments in limited liability companies (together ''partnerships'') that generally report investments on their balance sheet at fair value. The partnership investments include private equity investments and investments in hedge funds. The managers/general partners...

  • Page 152
    ...performs a review on at least an annual basis, of goodwill held by its reporting units, which are the Company's three operating and reportable segments: Business Insurance, Financial, Professional & International Insurance and Personal Insurance. The impairment test of goodwill is a two-step process...

  • Page 153
    ... and other reserves (including, among others, asbestos claim payment patterns); the cost and availability of reinsurance coverage; catastrophe losses; investment performance; market conditions; and strategic initiatives. Such statements are subject to risks and uncertainties, many of which are...

  • Page 154
    ... 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 155
    ... and claim adjustment expense reserves, which if included in the sensitivity analysis model, would mitigate the impact of the loss in fair value associated with a 100 basis point increase in interest rates. Foreign Currency Exchange Rate Risk The Company uses fair values of investment securities to...

  • Page 156
    ...TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm ...Consolidated Statement of Income for the years ended December 31, 2007, 2006 and 2005 ...Consolidated Balance Sheet at December 31, 2007 and 2006 ...Consolidated Statement of Changes in Shareholders...

  • Page 157
    .... We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit...

  • Page 158
    THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (in millions, except per share data) For the year ended December 31, 2007 2006 2005 Revenues Premiums ...Net investment income ...Fee income ...Net realized investment gains Other revenues ... ... ... ... ... ... ... ...

  • Page 159
    ..., available for sale at fair value (including $1,988 and subject to securities lending) (amortized cost $64,152 and $62,244) Equity securities, at fair value (cost $473 and $436) ...Real estate ...Short-term securities ...Other investments ...Cash ...Investment income accrued Premiums receivable...

  • Page 160
    ... investment securities ...Net change in benefit plan assets and obligations recognized in equity . Net change in unrealized foreign currency translation and other changes ... 452 167 (50) 101 670 Balance, end of year ...Treasury stock (at cost) Balance, beginning of year ...Treasury shares acquired...

  • Page 161
    ...Cash flows from financing activities Issuance of debt ...Payment of debt ...Dividends paid to shareholders ...Issuance of common stock-employee share options ...Treasury stock acquired-share repurchase program ...Treasury stock acquired-net employee share-based compensation . . Excess tax benefits...

  • Page 162
    ... Company's accounting policy. All material intercompany transactions and balances have been eliminated. Effective February 26, 2007, The St. Paul Travelers Companies, Inc. amended its articles of incorporation to change its name to The Travelers Companies, Inc. and, effective the same day, amended...

  • Page 163
    ... TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) which there is uncertainty about the timing of deductibility. The timing of such deductibility would not affect the annual effective tax rate...

  • Page 164
    ...on the Company's results of operations, financial position or liquidity. Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158...

  • Page 165
    ... on the Company's results of operations, financial position or liquidity. Fair Value Option for Financial Assets and Financial Liabilities In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (FAS...

  • Page 166
    ... the fair value option for assets and liabilities currently held upon its adoption of FAS 159 effective January 1, 2008. Therefore, FAS 159 will not have an impact on the Company's results of operations, financial position or liquidity. Collateral Assignment Split-Dollar Life Insurance Arrangements...

  • Page 167
    ... stocks, are classified as available for sale with changes in fair value, net of income tax, charged or credited directly to accumulated other changes in equity from nonowner sources. The Company's real estate investments include warehouses, office buildings and other commercial land and properties...

  • Page 168
    ... 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...

  • Page 169
    ...external fund manager reviews such factors as recent filings, operating results, balance sheet stability, growth, and other business and market sector fundamental statistics in estimating fair values of specific investments. With respect to the Company's valuation of such non-publicly traded venture...

  • Page 170
    ... cost, the financial condition and near-term prospects of the issuer, and the Company's ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. The Company's process for reviewing invested assets for impairments during any quarter includes the...

  • Page 171
    ...fair value, the Company uses interest rates reflecting the current real estate financing market returns. Impaired loans were not material at December 31, 2007 and 2006. Venture Capital Investments and Non-Publicly Traded Investments Venture capital investments and non-publicly traded investments are...

  • Page 172
    ... are partnership investments and investments in limited liability companies (together ''partnerships'') that generally report investments on their balance sheet at fair value. The partnership investments include private equity investments and investments in hedge funds. The managers/general partners...

  • Page 173
    ... A review is performed on at least an annual basis of goodwill held by the reporting units, which are the Company's three operating and reportable segments: Business Insurance; Financial, Professional & International Insurance; and Personal Insurance. The impairment test is a two-step process. The...

  • Page 174
    ... claims and claim adjustment expense reserves in the consolidated balance sheet are certain reserves discounted to the present value of estimated future payments. The liabilities for losses for most long-term disability payments under workers' compensation insurance and workers' compensation excess...

  • Page 175
    THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) policyholders in accordance with contract provisions. Net written premiums for participating dividend policies were approximately 1% of ...

  • Page 176
    ... are acquired and recognized by the subsequent year of account. In addition, there is no impact on reported premiums and losses as a result of an RITC transaction. In February 2006, following approval by the respective managing agencies, the 2003 and prior years of account of Lloyd's Syndicates 5000...

  • Page 177
    ..., 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...

  • Page 178
    ... six groups, which collectively comprise Business Insurance Core operations: • Select Accounts serves small businesses for property and casualty products, including commercial multi-peril, property, general liability, commercial auto and workers' compensation insurance. • Commercial Accounts...

  • Page 179
    ... and related operations, offering property and liability coverages other than workers' compensation. • Target Risk Underwriting. The following units serve commercial businesses requiring specialized product underwriting, claims handling and risk management services: • National Property provides...

  • Page 180
    ..., Canada and Ireland, offers specialized insurance and risk management services to several customer groups, including those in the technology, public services, and financial and professional services industry sectors. These operations primarily underwrite employers' liability (similar to workers...

  • Page 181
    ...The sale was not material to the Company's results of operations or financial position. 2. SEGMENT INFORMATION The Company is organized into three reportable business segments: Business Insurance; Financial, Professional & International Insurance; and Personal Insurance. The accounting policies used...

  • Page 182
    ...the Company's revenues, operating income and total assets by reportable business segments: Financial, Professional & International Insurance Total Reportable Segments (at and for the year ended December 31, in millions) Business Insurance Personal Insurance 2007 Premiums ...Net investment income...

  • Page 183
    ... INFORMATION (Continued) Net written premiums by market were as follows: (for the year ended December 31, in millions) 2007 2006 2005 Business Insurance: Select Accounts ...Commercial Accounts ...National Accounts ...Industry-Focused Underwriting Target Risk Underwriting ...Specialized Distribution...

  • Page 184
    ..., Professional & International Insurance: Fidelity and surety ...General liability ...International ...Other ... Total Financial, Professional & International Insurance ...Personal Insurance: Automobile ...Homeowners and other ...Total Personal Insurance ...Total earned premiums Net investment...

  • Page 185
    THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SEGMENT INFORMATION (Continued) (at December 31, in millions) 2007 2006 Asset reconciliation(1): Business Insurance ...Financial, Professional & International Insurance ...Personal Insurance ...

  • Page 186
    THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. INVESTMENTS Fixed Maturities The amortized cost and fair value of investments in fixed maturities classified as available for sale were as follows: (at December 31, 2007, in millions) Amortized ...

  • Page 187
    ... TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. INVESTMENTS (Continued) U.S. Treasury securities. The Company's investment strategy is to purchase CMO tranches which offer the most favorable return given the risks involved. One significant risk...

  • Page 188
    ... on operating leases relating to the Company's real estate properties is $110 million, $94 million, $74 million, $53 million, $30 million, and $40 million for 2008, 2009, 2010, 2011, 2012 and 2013 and thereafter, respectively. Short-term Investments Short-term investments consist primarily of money...

  • Page 189
    ... returns. • The Company has a significant variable interest in Camperdown UK Limited, which SPC 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...

  • Page 190
    THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. INVESTMENTS (Continued) impact occurs, or a foreign tax adjustment is imposed on a pre-sale reporting period. The maximum amount of this indemnification obligation is $193 million. The carrying ...

  • Page 191
    ... agencies and authorities ...Obligations of states, municipalities and political subdivisions ...Debt securities issued by foreign governments ...Mortgage-backed securities, collateralized mortgage obligations and pass through securities ...All other corporate bonds ...Redeemable preferred stock...

  • Page 192
    THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. INVESTMENTS (Continued) grade assets as those securities rated below investment grade by external rating agencies, or the equivalent by the Company's investment advisors when a public rating ...

  • Page 193
    ...% of this business to the mandatory pool. Such servicing arrangements are arranged to protect the Company from any credit risk, as any ceded balances are jointly backed by all the pool members. The Company utilizes a general catastrophe reinsurance treaty with unaffiliated reinsurers to manage its...

  • Page 194
    ... accounted for using deposit accounting and are included in other liabilities in the consolidated balance sheet. The following is a summary of reinsurance financial data reflected in the consolidated statement of income: (for the year ended December 31, in millions) 2007 2006 2005 Written premiums...

  • Page 195
    ... insurance, medical malpractice insurance, health or life insurance, flood insurance, and reinsurance. The Terrorism Extension Act exempted from coverage certain additional types of insurance, including commercial automobile, professional liability (other than directors and officers'), surety...

  • Page 196
    ... ...Total other intangible assets ... $1,036 191 1,227 20 $1,247 $537 (54) 483 - $483 $499 245 744 20 $764 (1) The fair value adjustment of $191 million was recorded in connection with the merger of The St. Paul Companies, Inc. and Travelers Property Casualty Corp. in 2004 and was based on 184

  • Page 197
    ... with the acquirer's accounting policies for insurance contracts are reported as part of the claims and claim adjustment expense reserves and reinsurance recoverables. The intangible asset will be recognized into income over the expected payment pattern. Because the time value of money and the risk...

  • Page 198
    THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. INSURANCE CLAIM RESERVES (Continued) The table below is a reconciliation of beginning and ending property casualty reserve balances for claims and claim adjustment expenses. (at and for the year...

  • Page 199
    ... expected loss development in international property, employers' liability, professional indemnity and motor lines of business for recent accident years, which was attributable to several factors, including enhanced pricing and underwriting strategies throughout the international operations, and the...

  • Page 200
    ...settlement process, thereby changing historical loss development patterns. In addition, industry and Company initiatives to fight fraud in several states led to a decrease in the total number of claims and a change in historical loss development patterns. In the Homeowners and Other line of business...

  • Page 201
    ... in underwriting and pricing strategies for International property-related exposures. Personal Insurance. Net favorable prior year reserve development in 2005 totaled $360 million. In the Automobile line of business, the improvement was driven by better than expected results from changes in claim...

  • Page 202
    ... trends in its quarterly reserve estimates. The Company's asbestos reserve review includes an analysis of exposure and claim payment patterns by policyholder category, as well as recent settlements, policyholder bankruptcies, judicial rulings and legislative actions. Developing payment trends among...

  • Page 203
    ... FINANCIAL STATEMENTS (Continued) 6. INSURANCE CLAIM RESERVES (Continued) applicable facultative and treaty reinsurance, past ceded experience and reinsurance collections. Conventional actuarial methods are not utilized to establish asbestos reserves. In 2007, the Home Office and Field Office...

  • Page 204
    THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. INSURANCE CLAIM RESERVES (Continued) accept risk-based site analyses and more efficient clean-up technologies. However, the Company has experienced higher than expected defense and settlement ...

  • Page 205
    THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. INSURANCE CLAIM RESERVES (Continued) Catastrophe Exposure The Company has geographic exposure to catastrophe losses, which can be caused by various natural and man-made events including ...

  • Page 206
    THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. DEBT Debt outstanding was as follows: (at December 31, in millions) 2007 2006 Short-term: Commercial paper ...Medium-term notes maturing in following year 3.75% Senior notes due March 15, 2008 ...

  • Page 207
    ... less than ten business days prior to the scheduled maturity date, the Company is required to use commercially reasonable efforts to sell enough qualifying capital securities, or at its option, common stock, qualifying warrants, mandatorily convertible preferred stock, debt exchangeable for common...

  • Page 208
    ... assumed by the Company after the merger of The St. Paul Companies Inc. (SPC) and Travelers Property Casualty Corp. (TPC). During the period prior to redemption, the Company had repurchased and retired $22 million of the debentures in open market transactions. Upon the Company's redemption of the...

  • Page 209
    ...described above was also used to fund this maturity. Description of Debt Commercial Paper-The Company maintains an $800 million commercial paper program with $1 billion of back-up liquidity, consisting entirely of a bank credit agreement. Interest rates on commercial paper issued in 2007 ranged from...

  • Page 210
    ...of the instruments is paid semi-annually. The Company's consolidated balance sheet includes the debt instruments acquired in the merger, which were recorded at fair value as of the acquisition date. The resulting fair value adjustment is being amortized over the remaining life of the respective debt...

  • Page 211
    ...DIVIDEND AVAILABILITY 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 Plan (SOP) Trust, less the remaining principal balance on the SOP...

  • Page 212
    ... Savings Plan. On February 5, 2008, the Company, under The Travelers Companies, Inc. 2004 Incentive Plan, granted 1,969,496 common stock awards in the form of restricted stock units, deferred stock and performance share awards to participating officers, non-employee directors and other key employees...

  • Page 213
    ... under these plans. Common shares acquired are reported as treasury stock in the consolidated balance sheet. Dividends The Company's insurance subsidiaries are subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid to their parent without prior...

  • Page 214
    ... to initially apply the provisions of FAS 158. Activity in 2007 represented net changes in benefit plan assets and benefit plan obligations recognized in equity from nonowner sources. (2) Includes foreign currency translation adjustments, changes in the value of private equity securities, and...

  • Page 215
    ...Income from continuing operations available to common shareholders- diluted ...Common Shares Basic Weighted average shares outstanding ...Diluted Weighted average shares outstanding ...Weighted average effects of dilutive securities: Stock options and other incentive plans ...Convertible preferred...

  • Page 216
    ...(benefit) relating to stock-based compensation, the change in unrealized appreciation on investments, unrealized loss on foreign exchange and unrealized loss on derivatives, and other comprehensive income ...Total income tax expense included in consolidated financial statements ...Effective tax rate...

  • Page 217
    ...realized. For tax return purposes, as of December 31, 2007, the Company had a net operating loss (NOL) carryforward that expires, if unused, in 2017 and 2018. The amount and timing of realizing the benefit of NOL carryforwards depends on future taxable income and limitations imposed by tax laws. The...

  • Page 218
    ... Plan are to reward the efforts of the Company's non-employee directors, executive officers and other employees and to attract new personnel by providing incentives in the form of stock-based awards. The 2004 Incentive Plan permits grants of nonqualified stock options, incentive stock options, stock...

  • Page 219
    ...the 2004 Director Compensation Program are awarded under the 2004 Incentive Plan. Stock Option Awards Stock option awards granted to eligible officers and key employees have a ten-year term. Prior to January 1, 2007, stock options were granted with an exercise price equal to the fair market value of...

  • Page 220
    THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. SHARE-BASED INCENTIVE COMPENSATION (Continued) cannot be sold or transferred by the participant. The vesting terms for stock options granted under the 2004 Incentive Plan and legacy plans are ...

  • Page 221
    ... the fair value of options on grant date for the years ended December 31, 2007 and 2006: 2007 Original Grants Reload Grants Expected term of stock options ...Expected volatility of the Company's Weighted average volatility ...Expected annual dividend per share Risk-free rate ...2006 ...stock...

  • Page 222
    THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. SHARE-BASED INCENTIVE COMPENSATION (Continued) A summary of stock option activity under the Company's 2004 Incentive Plan and legacy sharebased incentive compensation plans as of and for the ...

  • Page 223
    ..., the Company's board of directors approved a Performance Share Awards Program pursuant to the 2004 Incentive Plan. Under the program, which became effective beginning in 2006, the Company may issue performance share awards to certain employees of the Company who hold positions of Vice President (or...

  • Page 224
    THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. SHARE-BASED INCENTIVE COMPENSATION (Continued) A summary of restricted stock units, deferred stock awards and performance share activity under the Company's 2004 Incentive Plan and legacy plans...

  • Page 225
    ...SAVINGS PLANS The Company sponsors a qualified non-contributory defined benefit pension plan, which covers substantially all employees and provides benefits under a cash balance formula, except that employees satisfying certain age and service requirements remain covered by a prior final average pay...

  • Page 226
    THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS (Continued) As discussed in note 1, the Company adopted the provisions of FAS 158, Employers' Accounting for Defined Benefit Pension and ...

  • Page 227
    ... . Actual return on plan assets ...Company contributions ...Benefits paid ...Asset transfer-divestiture ...Foreign currency exchange rate change ... Fair value of plan assets at end of year ...Funded status of plan at end of year ...$ Amounts recognized in the statement of financial position consist...

  • Page 228
    ... earned ...Interest cost on benefit obligation ...Actuarial gain ...Benefits paid ...Divestiture ...Foreign currency exchange rate change Change in plan assets: Fair value of plan assets at beginning Actual return on plan assets ...Company contributions ...Benefits paid ...Asset transfer-divestiture...

  • Page 229
    ...in a 414(k) transfer to the Travelers 401K Plan in the third quarter 2007. The 414(k) asset transfer was made as a result of the Company's review of the structure and investment options available under the pension plan, and after recent changes in federal law governing tax-deferred IRA transfers for...

  • Page 230
    ... long-term rate of return, the Company's Pension Plan Investment Committee considered the historical returns of equity and fixed income markets in conjunction with today's economic and financial market conditions. As an indicator of sensitivity, increasing the assumed health care cost trend rate by...

  • Page 231
    ... non-U.S. stocks. Other assets such as partnerships and real estate are used to enhance long-term returns while improving portfolio diversification. Investment risk is measured and monitored on an ongoing basis through daily and monthly investment portfolio review, annual liability measurements, and...

  • Page 232
    THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS (Continued) Estimated Future Benefit Payments Benefits expected to be paid, which reflect estimated future employee service, are estimated ...

  • Page 233
    THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS (Continued) SOP's debt obligation. The SOP's debt obligation was paid off in January 2005 with a final payment of $5 million; consequently, ...

  • Page 234
    ... which an estimated market price from the pricing service or external broker quote is not available was $489 million and $547 million at December 31, 2007 and 2006, respectively. See note 1. The carrying values of cash, short-term securities, mortgage loans and investment income accrued approximated...

  • Page 235
    ...of its subsidiaries is a party or to which any of the Company's property is 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...

  • Page 236
    ... engaged 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. Similar lawsuits were filed in West Virginia...

  • Page 237
    ... certain shareholders of the Company against the Company and certain of its current and former officers and directors. These two actions were consolidated as In re St. Paul Travelers Securities Litigation II. An amended consolidated complaint was filed alleging violations of federal securities laws...

  • Page 238
    ...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...

  • Page 239
    ... 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. The...

  • Page 240
    ... 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...

  • Page 241
    ... develops, a reserve-related foreign exchange impact occurs, or a foreign tax adjustment is imposed on a pre-sale reporting period. The carrying value of this obligation as of December 31, 2007 was $59 million, which was included in ''Other Liabilities'' on the Company's consolidated balance...

  • Page 242
    ...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...

  • Page 243
    ... CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES (Continued) CONSOLIDATING STATEMENT OF INCOME (Unaudited) For the year ended December 31, 2006 (in millions) TPC Other Subsidiaries Travelers(1) Eliminations Consolidated Revenues Premiums ...Net investment income...

  • Page 244
    ... CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES (Continued) CONSOLIDATING STATEMENT OF INCOME (Unaudited) For the year ended December 31, 2005 (in millions) TPC Other Subsidiaries Travelers(1) Eliminations Consolidated Revenues Premiums ...Net investment income...

  • Page 245
    ..., available for sale at fair value (including $1,988 subject to securities lending) (amortized cost $64,152) ...Equity securities, at fair value (cost $473) ...Real estate ...Short-term securities ...Other investments ...Total investments ...Cash ...Investment income accrued ...Premiums receivable...

  • Page 246
    ... maturities, available for sale at fair value (including $1,674 subject to securities lending) (amortized cost $62,244) ...Equity securities, at fair value (cost $436) ...Real estate ...Short-term securities ...Other investments ...Cash ...Investment income accrued Premiums receivable ...Reinsurance...

  • Page 247
    ... shares acquired-net employee sharebased compensation ...Excess tax benefits from share-based payment arrangements ...Dividends paid to parent company ...Capital contributions and loans between subsidiaries ... Net cash used in financing activities ...Effect of exchange rate changes on cash ...Net...

  • Page 248
    ... acquired-net employee share-based compensation ...Excess tax benefits from share-based payment arrangements ...Dividends paid to parent company ...Capital contributions and loans between subsidiaries Other ... ... Net cash used in financing activities ...Effect of exchange rate changes on cash...

  • Page 249
    ... Issuance of debt ...Payment of debt ...Dividends paid to shareholders ...Issuance of common stock-employee share options ...Issuance of common stock-maturity of equity unit forward contracts . Treasury shares acquired-net employee share-based compensation Dividends paid to parent company ...Capital...

  • Page 250
    THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 19. SELECTED QUARTERLY FINANCIAL DATA (Unaudited) 2007 (in millions, except per share data) First Quarter Second Quarter Third Quarter Fourth Quarter Total Total revenues ...Total expenses ......

  • Page 251
    ... is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as...

  • Page 252
    ... financial reporting as of that date. KPMG LLP, an independent registered public accounting firm, which has audited and reported on the consolidated financial statements contained in this Form 10-K, has issued its written attestation report on the Company's internal control over financial reporting...

  • Page 253
    ... with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of The Travelers Companies, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statement of income, changes in shareholders' equity, and cash flows...

  • Page 254
    ...-Claim Services Executive Vice President-Personal Insurance Executive Vice President-Business Insurance Executive Vice President-Strategic Development and Financial, Professional & International Insurance Executive Vice President-Chief Marketing Officer Executive Vice President-Insurance Operations...

  • Page 255
    .... From 1994 to May 2002, she managed the TPC Bond claim operation and served as General Counsel of that business unit. She joined TIGHI in 1986 as a claim attorney. Joseph P. Lacher, Jr., 38, has been Executive Vice President of Personal Insurance for the Company since January 2005 and prior to that...

  • Page 256
    ...policy processing, agency operations and billing. Prior to joining Travelers as its Chief Information Officer in 2003, Mr. Bloom was a partner in the Financial Services Practice at Accenture. He also served previously as a Vice President at Hartford Life, responsible for business technology services...

  • Page 257
    ...Tabular Executive Compensation Disclosure'' and ''Non-Employee Director Compensation.'' Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS The ''Share Ownership Information'' section of the Company's Proxy Statement relating to its Annual Meeting...

  • Page 258
    ... Public Accounting Firm-Audit and Non-Audit Fees'' section of the Company's Proxy Statement relating to its Annual Meeting of Shareholders to be held May 6, 2008 is incorporated herein by reference. PART IV Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Documents filed as a part of the report...

  • Page 259
    ... signed below by the following persons on behalf of The 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...

  • Page 260
    Date By * Thomas R. Hodgson Director February 21, 2008 By * Cleve L. Killingsworth, Jr. Director February 21, 2008 By * Robert I. Lipp Director February 21, 2008 By * Blythe J. McGarvie Director February 21, 2008 By * Glen D. Nelson, M.D. Director February 21, 2008 By * Laurie ...

  • Page 261
    ... 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 262
    ... Public Accounting Firm The Board of Directors and Stockholders The Travelers Companies, Inc.: Under date of February 21, 2008, we reported on the consolidated balance sheet of The Travelers Companies, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statement...

  • Page 263
    SCHEDULE II THE TRAVELERS COMPANIES, INC. (Parent Company Only) CONDENSED FINANCIAL INFORMATION OF REGISTRANT (in millions) CONDENSED STATEMENT OF INCOME For the year ended December 31, 2007 2006 2005 Revenues Net investment income ...Net realized investment gains (losses) ...Other revenues ......

  • Page 264
    SCHEDULE II THE TRAVELERS COMPANIES, INC. (Parent Company Only) CONDENSED FINANCIAL INFORMATION OF REGISTRANT (in millions) CONDENSED BALANCE SHEET At December 31, 2007 2006 Assets Fixed maturities ...Equity securities ...Short-term securities ...Investment in subsidiaries Other assets ... ... ... ...

  • Page 265
    SCHEDULE II THE TRAVELERS COMPANIES, INC. (Parent Company Only) CONDENSED FINANCIAL INFORMATION OF REGISTRANT (in millions) CONDENSED STATEMENT OF CASH FLOWS For the year ended December 31, 2007 2006 2005 Cash flows from operating activities Net income ...Adjustments to reconcile net income to net ...

  • Page 266
    ...3,214 301 $3,515 Premiums Written $11,318 3,465 6,835 21,618 - $21,618 $11,046 3,393 6,711 21,150 - $21,150 $10,999 3,159 6,228 20,386 - $20,386 2007 Business Insurance ...Financial, Professional & International Insurance . Personal Insurance ... Total-Reportable Segments ...Other ... Consolidated...

  • Page 267
    SCHEDULE V THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts (in millions) Balance at beginning of period Charged to costs and expenses Charged to other accounts(1) Balance at end of period Deductions(2) 2007 Reinsurance recoverables . . Allowance for uncollectible: ...

  • Page 268
    ... Paid claims of deferred and claim acquisition adjustment Premiums costs expenses written $3,706 $3,339 $3,252 $11,945 $12,911 $13,098 $21,618 $21,150 $20,386 2007 ...2006 ...2005 ... (1) Excludes accident and health insurance business. (2) Consolidated property-casualty insurance operations...

  • Page 269
    ... The Travelers Insurance Company, was filed as Exhibit 10.2 to TPC's quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2002, and is incorporated herein by reference. Revolving Credit Agreement, dated June 10, 2005, between the Company and a syndicate of financial institutions...

  • Page 270
    ... Form 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. 10.19* Non-Employee Director Annual...

  • Page 271
    ...amending The St. Paul Travelers Companies, Inc. Severance Plan, was filed as Exhibit 99 to the Company's Form 8-K filed on February 16, 2006, and is incorporated herein by reference. 10.36 Assurance of Discontinuance with the Office of the Attorney General of the State of New York, the Office of the...

  • Page 272
    ... be furnished to security holders who make written request therefor to The Travelers Companies, Inc., 385 Washington Street, Saint Paul, MN, 55102, Attention: Corporate Secretary. †* Filed herewith Management contract or compensatory plan in which directors and/or executive officers are eligible...

  • Page 273
    ... for TPC for the period January 1, 2004 through March 31, 2004, and for the Company for the nine-month period from the merger date of April 1, 2004 through December 31, 2004. Data for 2003 reflects information for TPC only. The ratio of earnings to fixed charges is computed by dividing income...

  • Page 274
    ... S. 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, 2007 of The Travelers Companies, Inc. (the Company); Based on my knowledge, this report does not contain any untrue statement of a material fact or...

  • Page 275
    ... I, Jay S. 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, 2007 of The Travelers Companies, Inc. (the Company); Based on my knowledge, this report does not contain any untrue statement of a material...

  • Page 276
    ...15(d) of the Exchange Act and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 21, 2008 By: /s/ JAY S. FISHMAN Name: Jay S. Fishman Title: Chairman and Chief Executive Officer 264

  • Page 277
    ...(d) of the Exchange Act and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 21, 2008 By: /s/ JAY S. BENET Name: Jay S. Benet Title: Vice Chairman and Chief Financial Officer 265

  • Page 278

  • Page 279
    ... and SEC Rules 13a-14(a) and 15d-14(a) regarding Travelers financial statements, disclosure controls and procedures and other matters. In addition, following its 2007 annual meeting of shareholders, Travelers submitted to the NYSE the annual certification of the company's Chief Executive Officer, as...

  • Page 280
    NYSE: TRV The Travelers Companies, Inc. 385 Washington Street Saint Paul, MN 55102-1396 800.328.2189 www.travelers.com