Edgar Filing: ST PAUL TRAVELERS COMPANIES INC

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-10898

The St. Paul Travelers Companies, Inc.

(Exact name of registrant as specified in its charter)

Minnesota		41-0518860
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

385 Washington Street,
St. Paul, MN 55102

(Address of principal executive offices) (Zip Code)

(651) 310-7911

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

The number of shares of the Registrant’s Common Stock, without par value, outstanding at April 27, 2006 was 696,254,414.

The St. Paul Travelers Companies, Inc.

Quarterly Report on Form 10-Q

For Quarterly Period Ended March 31, 2006

TABLE OF CONTENTS

		Page

	Part I – Financial Information

Item 1.	Financial Statements:	3

	Consolidated Statement of Income (Unaudited) – Three Months Ended March 31, 2006 and 2005	3

	Consolidated Balance Sheet – March 31, 2006 (Unaudited) and December 31, 2005	4

	Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) – Three Months Ended March 31, 2006 and 2005	5

	Consolidated Statement of Cash Flows (Unaudited) – Three Months Ended March 31, 2006 and 2005	6

	Notes to Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	66

Item 4.	Controls and Procedures	66

	Part II – Other Information	67

Item 1.	Legal Proceedings	67

Item 1A.	Risk Factors	72

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72

Item 3.	Defaults Upon Senior Securities	73

Item 4.	Submission of Matters to a Vote of Security Holders	73

Item 5.	Other Information	74

Item 6.	Exhibits	74

	SIGNATURES	74

	EXHIBIT INDEX	75

Item 1. FINANCIAL STATEMENTS

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

(in millions, except per share data)

For the three months ended March 31,	2006			2005
Revenues
Premiums	$	4,991		$	5,119
Net investment income	875			765
Fee income	150			171
Net realized investment losses	(6		)	—
Other revenues	40			50
Total revenues	6,050			6,105
Claims and expenses
Claims and claim adjustment expenses	3,042			3,223
Amortization of deferred acquisition costs	800			810
General and administrative expenses	794			813
Interest expense	76			71
Total claims and expenses	4,712			4,917
Income from continuing operations before income taxes	1,338			1,188
Income tax expense	332			311
Income from continuing operations	1,006			877
Loss from discontinued operations, net of taxes	—			(665		)
Net income	$	1,006		$	212
Basic earnings per share
Income from continuing operations	$	1.45		$	1.31
Loss from discontinued operations	—			(1.00		)
Net income	$	1.45		$	0.31
Diluted earnings per share
Income from continuing operations	$	1.41		$	1.25
Loss from discontinued operations	—			(0.94		)
Net income	$	1.41		$	0.31
Weighted average number of common shares outstanding:
Basic	692.2			668.1
Diluted	720.8			709.1

See notes to consolidated financial statements (unaudited).

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in millions)

	March 31, 2006			December 31, 2005
	(Unaudited)
Assets
Fixed maturities, available for sale at fair value (including $2,332 and $2,667 subject to securities lending and repurchase agreements) (amortized cost $60,053 and $58,616)	$	59,725		$	58,983
Equity securities, at fair value (cost $510 and $538)	550			579
Real estate	751			752
Mortgage loans	135			145
Short-term securities	4,785			4,802
Other investments	3,062			3,026
Total investments	69,008			68,287
Cash	373			337
Investment income accrued	751			761
Premiums receivable	6,014			6,124
Reinsurance recoverables	19,182			19,574
Ceded unearned premiums	1,638			1,322
Deferred acquisition costs	1,563			1,527
Deferred tax asset	2,103			2,062
Contractholder receivables	5,510			5,516
Goodwill	3,453			3,442
Intangible assets	875			917
Other assets	2,906			3,318
Total assets	$	113,376		$	113,187
Liabilities
Claims and claim adjustment expense reserves	$	60,703		$	61,090
Unearned premium reserves	11,031			10,927
Contractholder payables	5,510			5,516
Payables for reinsurance premiums	1,009			720
Debt	5,839			5,850
Other liabilities	6,447			6,781
Total liabilities	90,539			90,884
Shareholders’ equity
Preferred Stock Savings Plan—convertible preferred stock (0.4 shares and 0.5 shares issued and outstanding)	146			153
Common stock (1,750.0 shares authorized; 696.2 and 693.4 shares issued and outstanding)	18,192			18,096
Retained earnings	4,594			3,750
Accumulated other changes in equity from nonowner sources	(25		)	351
Treasury stock, at cost (1.6 and 1.2 shares)	(70		)	(47		)
Total shareholders’ equity	22,837			22,303
Total liabilities and shareholders’ equity	$	113,376		$	113,187

See notes to consolidated financial statements (unaudited).

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(in millions)

For the three months ended March 31,	2006			2005
Convertible preferred stock—savings plan
Balance, beginning of year	$	153		$	193
Redemptions during period	(7		)	(14		)
Balance, end of period	146			179
Guaranteed obligation—stock ownership plan
Balance, beginning of year	—			(5		)
Principal payments	—			5
Balance, end of period	—			—
Total preferred shareholders’ equity	146			179
Common stock
Balance, beginning of year	18,096			17,331
Net shares issued under employee share-based compensation plans	42			48
Compensation amortization under share-based plans, and other	54			20
Balance, end of period	18,192			17,399
Retained earnings
Balance, beginning of year	3,750			2,744
Net income	1,006			212
Dividends	(161		)	(150		)
Minority interest and other	(1		)	12
Balance, end of period	4,594			2,818
Accumulated other changes in equity from nonowner sources, net of tax
Balance, beginning of year	351			952
Change in net unrealized gain on investment securities	(388		)	(590		)
Net change in unrealized foreign currency translation and other changes	12			(4		)
Balance, end of period	(25		)	358
Treasury stock (at cost)
Balance, beginning of year	(47		)	(14		)
Net shares reacquired related to employee share-based compensation plans	(23		)	(8		)
Balance, end of period	(70		)	(22		)
Total common shareholders’ equity	22,691			20,553
Total shareholders’ equity	$	22,837		$	20,732
Common shares outstanding
Balance, beginning of year	693.4			670.3
Net shares issued under employee share-based compensation plans	2.8			3.3
Balance, end of year	696.2			673.6
Summary of changes in equity from nonowner sources
Net income	$	1,006		$	212
Other changes in equity from nonowner sources, net of tax	(376		)	(594		)
Total changes in equity from nonowner sources	$	630		$	(382	)

See notes to consolidated financial statements (unaudited).

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

(in millions)

For the three months ended March 31,	2006			2005 (1)
Cash flows from operating activities
Net income	$	1,006		$	212
Adjustments to reconcile net income to net cash provided by operating activities:
Loss from discontinued operations, net of tax	—			665
Net realized investment losses	6			—
Depreciation and amortization	197			150
Deferred federal income tax expense on continuing operations	159			110
Amortization of deferred policy acquisition costs	800			810
Premiums receivable	110			92
Reinsurance recoverables	636			228
Deferred acquisition costs	(836		)	(808		)
Claims and claim adjustment expense reserves	(1,137		)	(433		)
Unearned premium reserves	103			(148		)
Trading account activities	4			—
Excess tax benefits from share-based payment arrangements	(5		)	—
Other	(481		)	150
Net cash provided by operating activities of continuing operations	562			1,028
Net cash provided by operating activities of discontinued operations	—			24
Net cash provided by operating activities	562			1,052
Cash flows from investing activities
Proceeds from maturities of investments:
Fixed maturities	1,571			1,073
Mortgage loans	6			5
Proceeds from sales of investments:
Fixed maturities	1,320			1,052
Equity securities	94			39
Purchases of investments:
Fixed maturities	(3,983		)	(4,175		)
Equity securities	(47		)	(21		)
Real estate	(8		)	(8		)
Short-term securities sales, net	67			980
Other investments, net	148			228
Securities transactions in course of settlement	490			195
Other	(38		)	—
Net cash used in investing activities of continuing operations	(380		)	(632		)
Net cash used in investing activities of discontinued operations	—			(20		)
Net cash used in investing activities	(380		)	(652		)
Cash flows from financing activities
Payment of debt	(4		)	(2		)
Dividends to shareholders	(161		)	(150		)
Issuance of common stock-employee share options	32			32
Excess tax benefits from share-based payment arrangements	5			—
Treasury stock acquired—net employee share-based compensation	(16		)	(8		)
Other	(2		)	13
Net cash used in financing activities of continuing operations	(146		)	(115		)
Net cash provided by financing activities of discontinued operations	—			4
Net cash used in financing activities	(146		)	(111		)
Effect of exchange rate changes on cash	—			(2		)
Elimination of cash provided by discontinued operations	—			(8		)
Net increase in cash	36			279
Cash at beginning of period	337			262
Cash at end of period	$	373		$	541
Supplemental disclosure of cash flow information
Income taxes paid (received)	$	(5	)	$	14
Interest paid	$	85		$	93

(1) See note 2.

See notes to consolidated financial statements (unaudited).

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Basis of Presentation

The interim consolidated financial statements include the accounts of The St. Paul Travelers Companies, Inc. (together with its subsidiaries, the Company). These financial statements are prepared in conformity with U.S. generally accepted accounting principles (GAAP) and are unaudited. In the opinion of the Company’s management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation, have been reflected. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted. Certain reclassifications have been made to the 2005 financial statements to conform to the 2006 presentation. The accompanying interim consolidated financial statements and related notes should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s 2005 Annual Report on Form 10-K.

In March 2005, the Company and Nuveen Investments, Inc. (Nuveen Investments), the Company’s asset management subsidiary, jointly announced that the Company would implement a program to divest its 78% equity interest in Nuveen Investments. The Company completed the divestiture through a series of transactions in the second and third quarters of 2005. The Company’s share of Nuveen Investments’ results prior to divestiture was classified as discontinued operations on the consolidated statement of income. See note 2.

Adoption of New Accounting Standards

Share-Based Payment

In December 2004, the Financial Accounting Standards Board (FASB) issued Revised Statement of Financial Accounting Standards No. 123, Share-Based Payment (FAS 123R), an amendment to FAS 123, Accounting for Stock-Based Compensation, and a replacement of APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. FAS 123R requires public entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, and to recognize that cost over the requisite service period.

FAS 123R, which became effective January 1, 2006, requires entities that use the fair-value method of either recognition or disclosure under FAS 123 to apply a modified version of the prospective application. Under modified prospective application, compensation cost is recognized on or after the effective date for all unvested awards, based on their grant-date fair value as calculated under FAS 123 for either recognition or pro forma disclosure purposes.

In addition, the accounting for certain grants of equity awards to individuals who are retirement-eligible on the date of grant has been clarified. FAS 123R states that an employee’s share-based award becomes vested at the date that the employee’s right to receive or retain equity shares is no longer contingent on the satisfaction of a market, performance or service condition. Accordingly, awards granted to retirement-eligible employees are not contingent on satisfying a service condition and therefore are recognized at fair value on the date of the grant. Additionally, the period over which cost is recognized for awards granted to those who become retirement-eligible before the vesting date, will be from the grant date to the retirement-eligible date rather than to the vesting date. This guidance is to be applied prospectively to new or modified awards granted upon adoption of FAS 123R.

The Company adopted FAS 123R effective January 1, 2006 using modified prospective application. The following summarizes the impact of the adoption of FAS 123R:

a) The unrecognized pretax compensation cost of $9 million relating to the portion of awards granted prior to the Company’s adoption of FAS 123 (January 1, 2003) which remained unvested and outstanding on the date of adoption of FAS 123R will be recognized in compensation expense over the remaining requisite service period (approximately 15 months).

b) To the extent there is no performance condition or continued obligation to perform service, compensation cost related to new awards granted to retiree eligible employees or to employees that become retirement-eligible before an award’s vesting date will be recognized from the grant date to the retiree eligible date. Prior to the adoption of 123R, the Company had recognized these costs over the vesting period. This change in accounting policy is effective for awards granted after December 31, 2005. The impact on the current period for costs associated with awards granted under the previous policy was not material.

c) The requirement to report unearned compensation as contra-equity in the consolidated balance sheet was eliminated. Accordingly, the Company’s unearned compensation balances were reclassified to common stock for all periods presented.

FAS 154 - Accounting Changes and Error Corrections

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections (FAS 154), which replaces APB Opinion No. 20, Accounting Changes, and FASB Statement of Financial Accounting Standards No. 3, Reporting Changes in Interim Financial Statements. FAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle. It requires retrospective application to prior period’s financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. FAS 154 is effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after June 1, 2005. It does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of December 15, 2005. The adoption of FAS 154 had no impact on the Company’s results of operations, financial condition or liquidity.

The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments

In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. It requires the establishment of a new cost basis subsequent to the recognition of an other-than-temporary impairment and certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The FSP is effective for reporting periods beginning after December 15, 2005. The Company had previously implemented these requirements. Therefore, the adoption of the FSP had no impact on the Company’s results of operations, financial condition or liquidity.

Accounting Standards Not Yet Adopted

Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts

In September 2005, the Accounting Standards Executive Committee (AcSEC) issued Statement Of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (SOP 05-1). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs

on internal replacements of insurance and investment contracts other than those specifically described in FAS 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract.

SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. The Company does not expect the impact of adopting SOP 05-1 will have a significant effect on its results of operations, financial condition or liquidity.

Accounting Policies

Reinsurance to Close

Under the accounting conventions used by Lloyd’s members, each underwriting account is normally kept open for three years and the underwriting results determined at the end of the third year when the account is closed, normally by reinsurance into the following year of account. When a year of account is closed, a reinsurance contract (the “reinsurance to close” or RITC) is entered into with a subsequent year of account in consideration for which all subsequent underwriting transactions resulting from the closing year and all previous years reinsured therein are brought forward to (accepted by) the subsequent year of account. The RITC, which is calculated by the underwriter and approved by the managing agent, comprises an estimate of all net outstanding liabilities of the closing year and all previous years.

The amount of the assets received in an RITC is equal to the accepted claims including IBNR and is undiscounted for the time value of money. Accordingly, there is no gain or loss at the time the assets and liabilities 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.

Treasury Stock

Treasury stock represents the cost of common stock repurchased by the Company, which stock represents authorized and unissued shares of the Company under the Minnesota Business Corporation Act.

2. DISCONTINUED OPERATIONS

In March 2005, the Company and Nuveen Investments jointly announced that the Company would implement a program to divest its 78% equity interest in Nuveen Investments. 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.

Nuveen Investments’ revenue, derived primarily from asset management fees, totaled $137 million for the three months ended March 31, 2005. The Company’s share of Nuveen Investments’ pretax income, net of minority interest, for the three months ended March 31, 2005 was $51 million. The Company recorded a net loss from discontinued operations of $665 million in the first quarter of 2005, primarily consisting of $687 million of tax expense due to the difference between the tax basis and GAAP carrying value of the Company’s investment in Nuveen Investments, partially offset by the Company’s share of Nuveen Investments’ first quarter 2005 net income.

For the first quarter of 2005, the Company has separately disclosed the operating, investing and financing cash flows attributable to its discontinued operations (Nuveen Investments), which previously were reported as components of cash flows from continuing operations.

3. SEGMENT INFORMATION

The Company is organized into three reportable business segments: Commercial, Specialty and Personal. These segments reflect the manner by which the Company manages its property and casualty insurance products and insurance-related services and represent an aggregation of these products and services based on type of customer, how the business is marketed, and the manner in which the business is underwritten.

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

(at and for the three months ended March 31, in millions)	Commercial		Specialty		Personal		Total Reportable Segments
2006 Revenues
Premiums	$	2,030	$	1,401	$	1,560	$	4,991
Net investment income	517		222		134		873
Fee income	139		11		—		150
Other revenues	6		6		24		36
Total operating revenues (1)	$	2,692	$	1,640	$	1,718	$	6,050
Operating income (1)	$	535	$	257	$	240	$	1,032
Assets	$	73,922	$	26,230	$	12,466	$	112,618

2005 Revenues
Premiums	$	2,204	$	1,456	$	1,459	$	5,119
Net investment income	480		170		109		759
Fee income	163		8		—		171
Other revenues	15		12		24		51
Total operating revenues (1)	$	2,862	$	1,646	$	1,592	$	6,100
Operating income (1)	$	448	$	173	$	285	$	906
Assets	$	72,187	$	25,057	$	10,817	$	108,061

(1) Operating revenues exclude net realized investment gains (losses) and revenues from discontinued operations. Operating income equals net income excluding the after-tax impact of net realized investment gains (losses) and the after-tax impact of discontinued operations.

Business Segment Reconciliations

(for the three months ended March 31, in millions)	2006			2005
Revenue reconciliation
Earned premiums
Commercial:
Commercial multi-peril	$	735		$	670
Workers’ compensation	388			419
Commercial automobile	389			436
Property	336			373
General liability	180			286
Other	2			20
Total Commercial	2,030			2,204

Specialty:
General liability	529			446
Fidelity and surety	260			308
Workers’ compensation	120			120
Commercial automobile	91			119
Property	129			94
Commercial multi-peril	10			65
International	262			304
Total Specialty	1,401			1,456

Personal:
Automobile	872			840
Homeowners and other	688			619
Total Personal	1,560			1,459
Total earned premiums	4,991			5,119
Net investment income	873			759
Fee income	150			171
Other revenues	36			51
Total operating revenues for reportable segments	6,050			6,100
Interest Expense and Other	6			5
Net realized investment losses	(6		)	—
Total consolidated revenues	$	6,050		$	6,105

Income reconciliation, net of tax
Total operating income for reportable segments	$	1,032		$	906
Interest Expense and Other	(21		)	(47		)
Total operating income from continuing operations	1,011			859
Net realized investment gains (losses)	(5		)	18
Total income from continuing operations	1,006			877
Discontinued operations	—			(665		)
Total consolidated net income	$	1,006		$	212

(at March 31, in millions)	2006		2005
Asset reconciliation
Total assets for reportable segments	$	112,618	$	108,061
Net assets of discontinued operations	—		2,071
Other assets (1)	758		618
Total consolidated assets	$	113,376	$	110,750

(1) The primary components of other assets in 2006 and 2005 were prepaid pension cost, deferred taxes and goodwill.

4. INVESTMENTS

Fixed Maturities

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

(at March 31, 2006, in millions)

Amortized
Cost

Gross Unrealized

Fair
Value

Gains

Losses

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

8,030

201

7,870

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

3,439

3,394

Obligations of states, municipalities and political subdivisions

32,363

400

297

32,466

Debt securities issued by foreign governments

1,597

1,596

All other corporate bonds

14,543

121

359

14,305

Redeemable preferred stock

Total

60,053

594

922

59,725

(at December 31, 2005, in millions)	Amortized Cost		Gross Unrealized				Fair Value
			Gains		Losses
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	$	7,997	$	66	$	121	$	7,942
U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities	3,458		18		35		3,441
Obligations of states, municipalities and political subdivisions	31,372		587		137		31,822
Debt securities issued by foreign governments	1,583		11		6		1,588
All other corporate bonds	14,098		201		230		14,069
Redeemable preferred stock	108		14		1		121
Total	$	58,616	$	897	$	530	$	58,983

Equity Securities

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

(at March 31, 2006, in millions)	Cost		Gross Unrealized				Fair Value
(at March 31, 2006, in millions)	Cost		Gains		Losses		Fair Value
Common stock	$	136	$	27	$	2	$	161
Non-redeemable preferred stock	374		19		4		389
Total	$	510	$	46	$	6	$	550

(at December 31, 2005, in millions)	Cost		Gross Unrealized				Fair Value
(at December 31, 2005, in millions)	Cost		Gains		Losses		Fair Value
Common stock	$	136	$	24	$	3	$	157
Non-redeemable preferred stock	402		24		4		422
Total	$	538	$	48	$	7	$	579

Real Estate

The Company’s real estate investments include warehouses, office buildings, land, and other commercial real estate assets that are directly owned. The Company negotiates commercial leases with individual tenants through unrelated, licensed real estate brokers. Negotiated terms and conditions include, among others, rental rates, length of lease period and improvements to the premises to be provided by the landlord.

Venture Capital

The cost and fair value of investments in venture capital, which are reported as part of other investments in the Company’s consolidated balance sheet, were as follows:

(at March 31, 2006, in millions)

Cost

Gross Unrealized

Fair
Value

Gains

Losses

Venture capital

408

130

536

	Cost		Gross Unrealized				Fair Value
(at December 31, 2005, in millions)	Cost		Gains		Losses		Fair Value
Venture capital	$	406	$	91	$	2	$	495

Variable Interest Entities (VIEs)

The following entities are consolidated:

• Municipal Trusts—The Company owns interests in various municipal trusts that were formed to allow more flexibility to generate investment income in a manner consistent with the Company’s investment objectives and tax position. As of March 31, 2006 and December 31, 2005, there were 36 such trusts, which held a combined total of $436 million and $441 million, respectively, in municipal securities, of which $84 million were owned by outside investors at both dates. The net carrying value of the trusts owned by the Company at March 31, 2006 and December 31, 2005 was $352 million and $357 million, respectively.

• Venture Capital Entities and Tax Credit Funds – The Company has investments in venture capital entities which are held for the purposes of generating long-term investment returns. The Company also has investments in certain tax credit funds which generate tax benefits. The Company consolidates certain venture capital investments and tax credit funds under the provisions of the FASB Revised Interpretation No. 46, Consolidation of Variable Interest Entities. The combined carrying values of these investments were not significant at March 31, 2006 and December 31, 2005.

The Company has significant interests in the following VIEs which are not consolidated because the Company is not considered to be the primary beneficiary:

• The Company has a significant variable interest in one real estate entity. This investment has total assets of approximately $146 million and $143 million as of March 31, 2006 and December 31, 2005, respectively. The carrying value of the Company’s share of this investment was approximately $31 million at March 31, 2006 and December 31, 2005, which also represented its maximum exposure to loss. The purpose of the Company’s involvement in this entity is to generate investment returns.

• The Company has a significant variable interest in Camperdown UK Limited, which SPC sold in December 2003. The Company’s variable interest results from an agreement to indemnify the purchaser in the event a specified reserve deficiency develops, a reserve-related foreign exchange impact occurs, or a foreign tax adjustment is imposed on a pre-sale reporting period. The maximum amount of this indemnification obligation is $172 million. The fair value of this obligation as of March 31, 2006 and December 31, 2005 was $66 million. See “Guarantees” section of note 9.

• The Company has a significant variable interest in two private equity funds. These investments are held for the purpose of generating long-term investment returns. The combined carrying value of these entities was immaterial at March 31, 2006 and December 31, 2005. The Company has an unfunded commitment of $12 million associated with one of these funds. The Company’s exposure to loss is limited to the investment carrying amounts reported in the consolidated balance sheet and the unfunded commitment amount.

• The Company holds significant interests in hedge fund investments that are accounted for under the equity method of accounting and are included in other investments in the consolidated balance sheet. Hedge funds are unregistered private investment partnerships, limited liability companies, funds or pools that may invest and trade in many different markets, strategies and instruments (including securities, non-securities and derivatives). As of March 31, 2006 there were no hedge fund investments determined to be significant VIEs. The Company’s exposure to loss is limited to the investment carrying amounts reported in the consolidated balance sheet.

At December 31, 2005, one hedge fund was determined to be a significant VIE and had a total value for all investors combined of approximately $53 million. The Company’s share of this fund had a carrying value of approximately $11 million at December 31, 2005. The Company’s involvement with this fund began in the third quarter of 2003. The Company does not have any unfunded commitments related to this fund. The Company has reduced its investment in this hedge fund. The Company’s exposure to loss is limited to the investment carrying amounts reported in the consolidated balance sheet.

There are various purposes for the Company’s involvement in these funds, including but not limited to the following:

• to seek capital appreciation by investing and trading in securities including, without limitation, investments in common stock, bonds, notes, debentures, investment contracts, partnership interests, options and warrants;

• to buy and sell U.S. and non-U.S. assets with primary focus on a diversified pool of structured mortgage and asset-backed securities offering attractive and relative value; and

• to sell securities short primarily to exploit arbitrage opportunities in a broad range of equity and fixed income markets.

The following securities are not consolidated:

• Mandatorily redeemable preferred securities of trusts holding solely the subordinated debentures of the Company—These securities were issued by five separate trusts that were established for the sole purpose of issuing the securities to investors, and are fully guaranteed by the Company. The debt that the Company issued to these trusts is included in the “Debt” section of liabilities on the Company’s consolidated balance sheet. That debt had a carrying value of $1.03 billion at March 31, 2006 and December 31, 2005.

Impairments

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 book value and the decline is considered to be other-than-temporary. Factors considered in determining whether a decline is other-than-temporary include the length of time and the extent to which fair value has been below 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.

Additionally, for certain securitized financial assets with contractual cash flows (including asset-backed securities), FASB Emerging Issues Task Force (EITF) 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets, requires the Company to periodically update its best estimate of cash flows over the life of the security. If management determines that the fair value of its securitized financial asset is less than its carrying amount and there has been a decrease in the present value of the estimated cash flows since the last revised estimate, considering both timing and amount, then an other-than-temporary impairment is recognized.

A fixed maturity security is impaired if it is probable that the Company will not be able to collect all amounts due under the security’s contractual terms. Equity securities are impaired when it becomes apparent that the Company will not recover its cost over the expected holding period. Further, for securities expected to be sold, an other-than-temporary impairment charge is recognized if the Company does not expect the fair value of a security to recover prior to the expected date of sale.

The Company’s process for reviewing invested assets for impairments during any quarter includes the following:

• identification and evaluation of investments which have possible indications of impairment;

• analysis of investments with gross unrealized investment losses that have fair values less than 80% of amortized cost during successive quarterly periods over a rolling one-year period;

• review of portfolio manager(s) recommendations for other-than-temporary impairments based on the investee’s current financial condition, liquidity, near-term recovery prospects and other factors, as well as consideration of other investments that were not recommended for other-than-temporary impairments;

• consideration of evidential matter, including an evaluation of factors or triggers that would or could cause individual investments to qualify as having other-than-temporary impairments and those that would not support other-than-temporary impairment; and

• determination of the status of each analyzed investment as other than temporary or not, with documentation of the rationale for the decision.

Real Estate Investments

The carrying values of real estate properties are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. The review for impairment includes an estimate of the undiscounted cash flows expected to result from the use and eventual disposition of the real estate property. An impairment loss is recognized if the expected future undiscounted cash flows are less than the carrying value of the real estate property.

Venture Capital Investments

Other investments include venture capital investments, which are generally non-publicly traded instruments in early-stage companies and, historically, having a holding period of four to seven years. These investments have primarily been made in the health care, software and computer services, and networking and information technologies infrastructures industries. The Company typically is involved with venture capital companies early in their formation, as they are developing and determining the viability of, and market demand for, their product. Generally, the Company does not expect these venture capital companies to record revenues in the early stages of their development, which can often take three to four years, and does not generally expect them to become profitable for an even longer period of time. With respect to the Company’s valuation of such non-publicly traded venture capital investments, on a quarterly basis, portfolio managers as well as an internal valuation committee review and consider a variety of factors in determining the potential for loss due to impairment. Factors considered include the following:

• the issuer’s most recent financing events;

• an analysis of whether fundamental deterioration has occurred;

• whether or not the issuer’s progress has been substantially less than expected;

• whether or not the valuations have declined significantly in the entity’s market sector;

• whether or not the internal valuation committee believes it is probable that the issuer will need financing within six months at a lower price than the Company’s carrying value; and

• whether or not the Company has the ability and intent to hold the security for a period of time sufficient to allow for recovery, enabling it to receive value equal to or greater than the Company’s cost.

The quarterly valuation procedures described above are in addition to the portfolio managers’ ongoing responsibility to frequently monitor developments affecting those invested assets, paying particular attention to events that might give rise to impairment write-downs.

Non-Publicly Traded Investments

The Company’s investment portfolio includes non-publicly traded investments, such as venture capital investments, private equity limited partnerships, joint ventures, other limited partnerships, and certain fixed income securities. Certain venture capital investments that are controlled by the Company are consolidated in the Company’s financial statements. The Company uses the equity method of accounting for joint ventures, limited partnerships and certain private equity securities. Certain other private equity investments, including venture capital investments, are not subject to the provisions of Statement of Financial Accounting Standards (FAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, but are reported at estimated fair value in accordance with FAS 60, Accounting and Reporting by Insurance Enterprises. The fair value of the venture capital investments is based on an estimate determined by an internal valuation committee for securities for which there is no public market. The internal valuation committee 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. Other non-publicly traded securities are valued based on factors such as management judgment, recent financial information and other market data. An impairment loss is recognized if, based on the specific facts and circumstances, it is probable that the Company will not be able to recover all of the cost of an individual holding.

Unrealized Investment Losses

The following tables summarize, for all investment securities in an unrealized loss position at March 31, 2006 and December 31, 2005, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position.

	Less than 12 months				12 months or longer				Total
(at March 31, 2006, in millions)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Fixed maturities
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	$	4,482	$	108	$	1,961	$	93	$	6,443	$	201
U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities	2,405		30		632		24		3,037		54
Obligations of states, municipalities and political subdivisions	15,050		221		2,646		76		17,696		297
Debt securities issued by foreign governments	954		8		169		2		1,123		10
All other corporate bonds	6,118		165		4,240		194		10,358		359
Redeemable preferred stock	62		1		—		—		62		1
Total fixed maturities	29,071		533		9,648		389		38,719		922
Equity securities
Common stock	4		—		13		2		17		2
Nonredeemable preferred stock	11		1		54		3		65		4
Total equity securities	15		1		67		5		82		6
Venture capital	18		2		—		—		18		2
Total	$	29,104	$	536	$	9,715	$	394	$	38,819	$	930

	Less than 12 months				12 months or longer				Total
(at December 31, 2005, in millions)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Fixed maturities
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	$	4,046	$	62	$	1,673	$	59	$	5,719	$	121
U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities	2,395		18		576		17		2,971		35
Obligations of states, municipalities and political subdivisions	9,524		86		2,331		51		11,855		137
Debt securities issued by foreign governments	547		4		196		2		743		6
All other corporate bonds	4,971		105		3,652		125		8,623		230
Redeemable preferred stock	5		—		10		1		15		1
Total fixed maturities	21,488		275		8,438		255		29,926		530
Equity securities
Common stock	10		1		14		2		24		3
Nonredeemable preferred stock	37		1		30		3		67		4
Total equity securities	47		2		44		5		91		7
Venture capital	18		1		4		1		22		2
Total	$	21,553	$	278	$	8,486	$	261	$	30,039	$	539

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

(for the three months ended March 31, in millions)	2006		2005
Fixed maturities	$	—	$	3
Equity securities	1		—
Venture capital	5		6
Real estate and other	4		—
Total	$	10	$	9

5. INTANGIBLE ASSETS AND GOODWILL

Intangible Assets

The following presents a summary of the Company’s intangible assets by major asset class as of March 31, 2006 and December 31, 2005:

(At March 31 2006, in millions)	Gross Carrying Amount		Accumulated Amortization			Net
Intangibles subject to amortization
Customer-related	$	1,036	$	439		$	597
Marketing-related	20		20			—
Fair value adjustment on claims and claim adjustment expense reserves and reinsurance recoverables (1)	191		(67		)	258
Total intangible assets subject to amortization	1,247		392			855
Intangible assets not subject to amortization
Contract-based	20		—			20
Total intangible assets not subject to amortization	20		—			20
Total intangible assets	$	1,267	$	392		$	875

(At December 31 2005, in millions)	Gross Carrying Amount		Accumulated Amortization			Net
Intangibles subject to amortization
Customer-related	$	1,036	$	403		$	633
Marketing-related	20		17			3
Fair value adjustment on claims and claim adjustment expense reserves and reinsurance recoverables (1)	191		(70		)	261
Total intangible assets subject to amortization	1,247		350			897
Intangible assets not subject to amortization
Contract-based	20		—			20
Total intangible assets not subject to amortization	20		—			20
Total intangible assets	$	1,267	$	350		$	917

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

The following presents a summary of the Company’s amortization expense for intangible assets by major asset class:

(for the three months ended March 31, in millions)	2006		2005
Customer-related	$	36	$	40
Marketing-related	3		3
Fair value adjustment on claims and claim adjustment expense reserves and reinsurance recoverables	3		(7		)
Total amortization expense	$	42	$	36

Intangible asset amortization expense is estimated to be $112 million for the remainder of 2006, $145 million in 2007, $126 million in 2008, $100 million in 2009 and $86 million in 2010.

Goodwill

The following table presents the carrying amount of the Company’s goodwill by segment at March 31, 2006 and December 31, 2005:

(in millions)	March 31, 2006		December 31, 2005
Commercial	$	1,862	$	1,862
Specialty	860		860
Personal	613		613
Other	118		107
Total	$	3,453	$	3,442

6. CHANGES IN EQUITY FROM NONOWNER SOURCES

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

(for the three months ended March 31, in millions)	2006			2005

Net income	$	1,006		$	212
Change in net unrealized gain on investment securities	(388		)	(590		)
Other changes	12			(4		)
Total changes in equity from nonowner sources	$	630		$	(382	)

7. EARNINGS PER SHARE

Basic earnings per share was computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share reflected the effect of potentially dilutive securities.

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

(for the three months ended March 31, in millions, except per share amounts)	2006			2005
Basic
Income from continuing operations, as reported	$	1,006		$	877
Preferred stock dividends, net of taxes	(1		)	(2		)

Income from continuing operations available to common shareholders – basic	$	1,005		$	875

Diluted
Income from continuing operations available to common shareholders	$	1,005		$	875
Effect of dilutive securities:
Convertible preferred stock	1			2
Zero coupon convertible notes	1			1
Convertible junior subordinated notes	7			7
Equity unit stock purchase contracts (1)	—			3

Income from continuing operations available to common shareholders – diluted	$	1,014		$	888

Common Shares
Basic
Weighted average shares outstanding	692.2			668.1

Diluted
Weighted average shares outstanding	692.2			668.1
Weighted average effects of dilutive securities:
Stock options and other incentive plans	5.9			2.2
Convertible preferred stock	3.6			4.5
Zero coupon convertible notes	2.4			2.4
Convertible junior subordinated notes	16.7			16.7
Equity unit stock purchase contracts (1)	—			15.2

Total	720.8			709.1

Income from Continuing Operations Per Common Share
Basic	$	1.45		$	1.31

Diluted	$	1.41		$	1.25

(1) Settled in August 2005.

8. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS

The following tables summarize the components of net pension and postretirement benefit expense for the Company’s plans recognized in continuing operations in the consolidated statement of income.

	Qualified Domestic Plan						Non-qualified and Foreign Plans						Total
(for the three months ended March 31, in millions)	2006			2005			2006			2005			2006			2005

Service cost	$	15		$	14		$	1		$	1		$	16		$	15
Interest on benefit obligation	24			23			3			3			27			26
Expected return on plan assets	(35		)	(33		)	(2		)	(2		)	(37		)	(35		)
Amortization of unrecognized:
Prior service cost	(1		)	(1		)	—			—			(1		)	(1		)
Net actuarial loss	2			—			—			—			2			—
Total	$	5		$	3		$	2		$	2		$	7		$	5

	Postretirement Benefit Plans
(for the three months ended March 31, in millions)	2006		2005

Service cost	$	—	$	1
Interest cost on benefit obligation	4		4
Expected return on plan assets	—		—
Amortization of unrecognized:
Prior service cost	—		—
Net actuarial loss	—		—
Total	$	4	$	5

9. CONTINGENCIES, COMMITMENTS AND GUARANTEES

Contingencies

The following section describes the major pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or to which any of 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 damages from asbestos, hazardous waste and other toxic substances which are the subject of related coverage litigation, including, among others, the litigation described below. The Company continues to be subject to aggressive asbestos-related litigation. The conditions surrounding the final resolution of these claims and the related litigation continue to change.

TPC is involved in three significant proceedings (including a bankruptcy proceeding) relating to ACandS, Inc. (ACandS), formerly a national distributor and installer of products containing asbestos. The proceedings involve disputes as to whether and to what extent any of ACandS’ potential liabilities for current or future bodily injury asbestos claims are covered by insurance policies issued by TPC. The status of the various proceedings is described below.

ACandS filed for bankruptcy in September 2002 (In re: ACandS, Inc., pending in the U.S. Bankruptcy Court for the District of Delaware). In its proposed plan of reorganization, ACandS sought to establish a trust to pay asbestos bodily injury claims against it and sought to assign to the trust its rights under the insurance policies issued by TPC. The proposed plan and disclosure statement filed by ACandS claimed that ACandS had settled the vast majority of asbestos-related bodily injury claims currently pending against it for approximately $2.80 billion. ACandS asserts that, based on a prior agreement between TPC and ACandS and ACandS’ interpretation of the July 31, 2003 arbitration panel ruling described below, TPC is liable for 45% of the $2.80 billion. On January 26, 2004, the bankruptcy court issued a decision rejecting confirmation of ACandS’ proposed plan of reorganization. The bankruptcy court found, consistent with TPC’s objections to ACandS’ proposed plan, that the proposed plan was not fundamentally fair, was not proposed in good faith and did not comply with Section 524(g) of the Bankruptcy Code. ACandS has filed a notice of appeal of the bankruptcy court’s decision and has filed objections to the bankruptcy court’s findings of fact and conclusions of law in the United States District Court. TPC has moved to dismiss the appeal and objections and has also filed an opposition to ACandS’ objections.

An arbitration was commenced in January 2001 to determine whether and to what extent ACandS’ financial obligations for bodily injury asbestos claims are subject to insurance policy aggregate limits. On July 31, 2003, the arbitration panel ruled in favor of TPC that asbestos bodily injury claims against ACandS are subject to the aggregate limits of the policies issued to ACandS, which have been exhausted. In October 2003, ACandS commenced a lawsuit seeking to vacate the arbitration award as beyond the panel’s scope of authority (ACandS, Inc. v. Travelers Casualty and Surety Co., U.S.D.Ct. E.D. Pa.). On September 16, 2004, the district court entered an order denying ACandS’ motion to vacate the arbitration award. On January 19, 2006, the United States Court of Appeals for the Third Circuit reversed the district court’s decision and declared the arbitration award void on procedural grounds. On March 1, 2006, the Third Circuit stayed the issuance of its mandate in anticipation of TPC’s petition for a writ of certiorari to the United States Supreme Court. On March 15, 2006, TPC filed a petition for a writ of certiorari to the United States Supreme Court.

In the other proceeding, a related case pending before the same court and commenced in September 2000 (ACandS v. Travelers Casualty and Surety Co., U.S.D.Ct., E.D. Pa.), ACandS sought a declaration of the extent to which the asbestos bodily injury claims against ACandS are subject to occurrence limits under insurance policies issued by TPC. TPC filed a motion to dismiss this action based upon the July 31, 2003 arbitration decision described above. The district court found the dispute was moot as a result of the arbitration panel’s decision. The district court, therefore, based on the arbitration panel’s decision, dismissed the case. If the January 19, 2006 ruling of the Third Circuit described in the paragraph above survives further appeal, this case will be reinstated.

The Company continues to believe it has meritorious positions in these ACandS-related proceedings and intends to litigate vigorously.

In October 2001 and April 2002, two purported class action suits (Wise v. Travelers and Meninger v. Travelers), were filed against TPC and other insurers (not including SPC) in state court in West Virginia. These cases were subsequently consolidated into a single proceeding in the Circuit Court of Kanawha County, West Virginia. Plaintiffs allege that the insurer defendants 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. Lawsuits similar to Wise were filed in Massachusetts and Hawaii (these suits are collectively referred to as the “Statutory and Hawaii Actions”). Also, in November 2001, plaintiffs in consolidated asbestos actions pending before a mass tort panel of judges in West Virginia state court moved to amend their complaint to name TPC as a defendant, alleging that TPC and other insurers breached alleged duties to certain users of asbestos products. In March 2002, the court granted the motion to amend. Plaintiffs seek damages, including punitive damages. Lawsuits seeking similar relief and raising allegations similar to those presented in the West Virginia amended complaint are also pending in Ohio state court against TPC and SPC, in Texas state court against TPC and SPC, and in Louisiana state court against TPC (the claims asserted in these suits, together with the West Virginia suit, are collectively referred to as the “Common Law Claims”).

All of the actions against TPC described in the preceding paragraph, other than the Hawaii Actions, had been subject to a temporary restraining order entered by the federal bankruptcy court in New York that had previously presided over and approved the reorganization in bankruptcy of TPC’s former policyholder Johns-Manville Corporation and affiliated entities. In August 2002, the bankruptcy court held a hearing on TPC’s motion for a preliminary injunction prohibiting further prosecution of the lawsuits pursuant to the reorganization plan and related orders. At the conclusion of this hearing, the court ordered the parties to mediation, appointed a mediator and continued the temporary restraining order. During 2003, the same bankruptcy court extended the existing injunction to apply to an additional set of cases filed in various state courts in Texas and Ohio as well as to the attorneys who are prosecuting these cases. The order also enjoined these attorneys and their respective law firms from commencing any further lawsuits against TPC based upon these allegations without the prior approval of the court. Notwithstanding the injunction, additional Common Law Claims were filed and served on TPC.

On November 19, 2003, the parties advised the bankruptcy court that a settlement of the Statutory and Hawaii Actions had been reached. This settlement includes a lump sum payment of up to $412 million by TPC, subject to a number of significant contingencies. After continued meetings with the mediator, the parties advised the bankruptcy court on May 25, 2004 that a settlement resolving substantially all pending and similar future Common Law Claims against TPC had also been reached. This settlement requires a payment of up to $90 million by TPC, subject to a number of significant contingencies. Each of these settlements is contingent upon, among other things, an order of the bankruptcy court clarifying that all of these claims, and similar future asbestos-related claims against TPC, are barred by prior orders entered by the bankruptcy court in connection with the original Johns-Manville bankruptcy proceedings.

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

Four appeals were taken from the August 17, 2004 ruling. On March 29, 2006, the U.S. District Court for the Southern District of New York substantially affirmed the bankruptcy court’s orders while vacating that portion of the bankruptcy court’s orders which required all future direct actions against TPC to first be approved by the bankruptcy court before proceeding in state or federal court. Judgment was entered on March 31, 2006.

Appeals from the March 29, 2006 ruling have been filed to the U.S. Court of Appeals for the Second Circuit. Those appeals remain pending, and it is not possible to predict how the appellate court will rule on the pending appeals. The Company has no obligation to pay any of the settlement amounts unless and until the orders and relief become final and are not subject to any further appellate review.

SPC, which is not covered by the bankruptcy court rulings or the settlements described above, has numerous defenses in all of the direct action cases asserting Common Law Claims that are pending against it. SPC’s defenses include the fact that these novel theories have no basis in law; that they are directly at odds with the well-established law pertaining to the insured/insurer relationship; that there is no generalized duty to warn as alleged by the plaintiffs; and that the applicable statute of limitations as to many of these claims has long since expired. Many of these defenses have been raised in initial motions to dismiss filed by SPC and other insurers. There have been favorable rulings during 2003 and 2004 in Texas and during 2004 and 2005 in Ohio on some of these motions filed by SPC and other insurers that dealt with statute of limitations and the validity of the alleged causes of actions. On May 26, 2005, the Court of Appeals of Ohio, Eighth District, affirmed the earliest of these favorable rulings. In Texas, only one court, in June of 2005, has denied the insurers’ initial challenges to the pleadings. That ruling was contrary to the rulings by other courts in similar cases, and SPC intends to continue to defend this case vigorously.

The Company is defending its asbestos and environmental-related litigation vigorously and believes that it has meritorious defenses; however, the outcome of these disputes is uncertain. In this regard, the Company employs dedicated specialists and aggressive resolution strategies to manage asbestos and environmental loss exposure, including settling litigation under appropriate circumstances. For a discussion of other information regarding the Company’s asbestos and environmental exposure, see “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Asbestos Claims and Litigation”, “— Environmental Claims and Litigation” and “— Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves.”

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

Shareholder Litigation and Related Proceedings

TPC and its board of directors were named as defendants in three putative class action lawsuits brought by shareholders alleging breach of fiduciary duty in connection with the merger of TPC and SPC and seeking injunctive relief as well as unspecified monetary damages. The actions were captioned Henzel, et al. v. Travelers Property Casualty Corp., et al. (Jud. Dist. of Waterbury, Ct. Nov. 17, 2003); Vozzolo v. Travelers Property Casualty Corp., et al. (Jud. Dist. of Waterbury, Ct. Nov. 17, 2003); and Farina v. Travelers Property Casualty Corp., et al. (Jud. Dist. of Waterbury, Ct. December 15, 2003). The Farina complaint also named SPC and its former subsidiary, Adams Acquisition Corp., as defendants, alleging that they aided and abetted the alleged breach of fiduciary duty. On March 18, 2004, TPC and SPC announced that all of these lawsuits had been settled, subject to court approval. Before court approval of the settlement, additional shareholder litigation was commenced, as described below. On September 12, 2005, plaintiffs voluntarily withdrew their complaints without prejudice.

Beginning in August 2004, following post-merger announcements by the Company, various shareholders of the Company commenced fourteen putative class action lawsuits against the Company and certain of its current and former officers and directors in the United States District Court for the District of Minnesota. Plaintiff shareholders alleged that certain disclosures relating to the April 2004 merger between TPC and SPC contained false or misleading statements with respect to the value of SPC’s loss reserves in violation of federal securities laws. These actions were consolidated under the caption In re St. Paul Travelers Securities Litigation I, and a lead plaintiff and lead counsel were appointed. An additional putative class action based on the same allegations was brought in New York State Supreme Court. This action was subsequently transferred to the District of Minnesota and was consolidated with In re St. Paul Travelers Securities Litigation I. On June 24, 2005, the lead plaintiff filed an amended consolidated complaint. The complaint did not specify damages. On August 23, 2005, the Company and the other defendants in In re St. Paul Travelers Securities Litigation I moved to dismiss the amended consolidated complaint. On November 22, 2005, the parties reached an agreement to settle the case. The settlement also encompasses the Henzel, Vozzolo and Farina cases described above. On December 28, 2005, the Court approved the settlement.

Three other actions against the Company and certain of its current and former officers and directors are pending in the United States District Court for the District of Minnesota. Two of these actions, which were originally captioned Kahn v. The St. Paul Travelers Companies, Inc., et al. (Nov. 2, 2004) and Michael A. Bernstein Profit Sharing Plan v. The St. Paul Travelers Companies, Inc., et al. (Nov. 10, 2004), are putative class actions brought by certain shareholders of the Company against the Company and certain of its current and former officers and directors. These actions have been consolidated as In re St. Paul Travelers Securities Litigation II, and a lead plaintiff and lead counsel have been appointed. On July 11, 2005, the lead plaintiff filed an amended consolidated complaint. The amended consolidated complaint alleges violations of federal securities laws in connection with the Company’s alleged failure to make disclosure relating to the practice of paying brokers commissions on a contingent basis, the Company’s alleged involvement in a conspiracy to rig bids and the Company’s allegedly improper use of finite reinsurance products. On September 26, 2005, the Company and the other defendants in In re St. Paul Travelers Securities Litigation II moved to dismiss the amended consolidated complaint for failure to state a claim. In the third of these actions, an alleged beneficiary of the Company’s 401(k) savings plan commenced a putative class action against the Company and certain of its current and former officers and directors captioned Spiziri v. The St. Paul Travelers Companies, Inc., et al. (Dec. 28, 2004). The complaint alleges violations of the Employee Retirement Income Security Act based on allegations similar to those in In re St. Paul Travelers Securities Litigation I. On June 1, 2005, the Company and the other defendants in Spiziri moved to dismiss the complaint. On January 4, 2006, the parties in Spiziri entered into a stipulation of settlement. The settlement remains subject to court approval.

In addition, two derivative actions have been brought in the United States District Court for the District of Minnesota against all of the Company’s current directors and certain of the Company’s former Directors, naming the Company as a nominal defendant: Rowe v. Fishman, et al. (Oct. 22, 2004) and Clark v. Fishman, et al. (Nov. 18, 2004). The derivative actions have been consolidated for pretrial proceedings as Rowe, et al. v. Fishman, et al. and a consolidated derivative complaint has been filed. The consolidated derivative complaint asserts state law claims, including breach of fiduciary duty, based on allegations similar to those alleged in In re St. Paul Travelers Securities Litigation I and II described above. On June 10, 2005, the Company and the other defendants in Rowe moved to dismiss the complaint. On March 23, 2006, the Court dismissed the complaint without prejudice.

The Company believes that the pending lawsuits have no merit and intends to defend vigorously; however, the Company is not able to provide any assurance that the financial impact of one or more of these proceedings will not be material to the Company’s results of operations in a future period. The Company is obligated to indemnify its officers and directors to the extent provided under Minnesota law. As part of that obligation, the Company will advance officers and directors attorneys’ fees and other expenses they incur in defending these lawsuits.

Other Proceedings

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

The Company’s Gulf operation brought an action on May 22, 2003, as amended on May 12, 2004, in the Supreme Court of New York, County of New York (Gulf Insurance Company v. Transatlantic Reinsurance Company, et al.), against Transatlantic Reinsurance Company (Transatlantic), XL Reinsurance America, Inc. (XL), Odyssey America Reinsurance Corporation (Odyssey), Employers Reinsurance Company (Employers) and Gerling Global Reinsurance Corporation of America (Gerling), to recover amounts due under reinsurance contracts issued to Gulf and related to Gulf’s February 2003 settlement of a coverage dispute under a vehicle residual value protection insurance policy. The reinsurers have asserted counterclaims seeking rescission of the vehicle residual value reinsurance contracts issued to Gulf and unspecified damages for breach of contract. Separate actions filed by Transatlantic and Gerling have been consolidated with the original Gulf action for pre-trial purposes. On October 1, 2003, Gulf entered into a final settlement agreement with Employers, and all claims and counterclaims with respect to Employers have been dismissed.

On May 26, 2004, the Court denied Gulf’s motion to dismiss certain claims asserted by Transatlantic and a joint motion by Transatlantic, XL and Odyssey for summary judgment against Gulf. Discovery is currently proceeding in the matters. Gulf denies the reinsurers’ allegations, believes that it has a strong legal basis to collect the amounts due under the reinsurance contracts and intends to vigorously pursue the actions.

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

As part of ongoing, industry-wide investigations, the Company and its affiliates have received subpoenas and written requests for information from government agencies and authorities. The areas of inquiry addressed to the Company include its relationship with brokers and agents, the Company’s involvement with “non-traditional insurance and reinsurance products,” branding requirements for salvage automobiles and the reporting of workers’ compensation premiums. The Company or its affiliates have received subpoenas or requests for information, in each case with respect to one or more of the areas described above, from: (i) State of California Office of the Attorney General; (ii) State of California Department of Insurance; (iii) Licensing and Market Conduct Compliance Division, Financial Services Commission of Ontario, Canada; (iv) State of Connecticut Insurance Department; (v) State of Connecticut Office of the Attorney General; (vi) State of Delaware Department of Insurance; (vii) State of Florida Department of Financial Services; (viii) State of Florida Office of Insurance Regulation; (ix) State of Florida Department of Legal Affairs Office of the Attorney General; (x) State of Georgia Office of the Commissioner of Insurance; (xi) State of Hawaii Office of the Attorney General; (xii) State of Illinois Office of the Attorney General; (xiii) State of Illinois Department of Financial and Professional Regulation; (xiv) State of Iowa Insurance Division; (xv) State of Maryland Office of the Attorney General; (xvi) State of Maryland Insurance Administration; (xvii) Commonwealth of Massachusetts Office of the Attorney General; (xviii) State of Minnesota Department of Commerce; (xix) State of Minnesota Office of the Attorney General; (xx) State of New Hampshire Insurance Department; (xxi) State of New York Office of the Attorney General; (xxii) State of New York Insurance Department; (xxiii) State of North Carolina Department of Insurance; (xxiv) State of Ohio Office of the Attorney General; (xxv) State of Ohio Department of Insurance; (xxvi) State of Oregon Department of Justice; (xxvii) Commonwealth of Pennsylvania Office of the Attorney General; (xxviii) State of Texas Office of the Attorney General; (xxvix) State of Texas Department of Insurance; (xxx) Commonwealth of Virginia Office of the Attorney General; (xxxi) State of Washington Office of the Insurance Commissioner; (xxxii) State of West Virginia Office of Attorney General; (xxxiii) the United States Attorney for the Southern District of New York; and (xxxiv) the United States Securities and Exchange Commission. The Company and its affiliates may receive additional subpoenas and requests for information with respect to the areas described above from other agencies or authorities.

The Company is cooperating with these subpoenas and requests for information. In addition, outside counsel, with the oversight of the Company’s Board of Directors, has been conducting an internal review of certain of the Company’s business practices. This review initially focused on the Company’s relationship with brokers and was commenced after the announcement of litigation brought by the New York Attorney General’s office against a major broker.

The internal review was expanded to address the various requests for information described above and to verify whether the Company’s business practices in these areas have been appropriate. The Company’s review has been extensive, involving the examination of e-mails and underwriting files, as well as interviews of current and former employees. The Company also continues to receive and respond to additional requests for information and will expand its review accordingly.

To date, the Company has found only a few instances of conduct that were inconsistent with the Company’s employee code of conduct. The Company has responded, and will continue to respond, appropriately to any such conduct.

The Company’s internal review with respect to finite reinsurance considered finite products the Company both purchased and sold. The Company has completed its review with respect to the identified finite products purchased and sold, and has concluded that no adjustment to previously issued financial statements is required. The related industry-wide investigations previously described are ongoing, as are the Company’s efforts to cooperate with the authorities, and the various authorities could ask that additional work be performed or reach conclusions different from the Company’s. Accordingly, it would be premature to reach any conclusions as to the likely outcome of these matters.

Six putative class action lawsuits and three individual actions were brought against a number of insurance brokers and insurers, including the Company and/or certain of its affiliates, by plaintiffs who allegedly purchased insurance products through one or more of the defendant brokers. Plaintiffs allege that various insurance brokers conspired with each other and with various insurers, including the Company and/or certain of its affiliates, to artificially inflate premiums, allocate brokerage customers and rig bids for insurance products offered to those customers. Five of the class actions were filed in federal district court, and the complaints are captioned: Shell Vacations LLC v. Marsh & McLennan Companies, Inc., et al. (N.D. Ill. Jan. 14, 2005), Redwood Oil Company v. Marsh & McLennan Companies, Inc., et al. (N.D. Ill. Jan. 21, 2005), Boros v. Marsh & McLennan Companies, Inc., et al. (N.D. Cal. Feb. 4, 2005), Mulcahy v. Arthur J. Gallagher & Co., et al. (D.N.J. Feb. 23, 2005) and Golden Gate Bridge, Highway, and Transportation District v. Marsh & McLennan Companies, Inc., et al. (D.N.J. Feb. 23, 2005). The plaintiff in one of the five actions, Shell Vacations LLC, later voluntarily dismissed its complaint. To the extent they were not originally filed there, the federal class actions were transferred by the Judicial Panel on Multidistrict Litigation to the United States District Court for the District of New Jersey and have been consolidated with other class actions under the caption In re Insurance Brokerage Antitrust Litigation, a multidistrict litigation proceeding in that District. On August 1, 2005, various plaintiffs, including the four named plaintiffs in the above-referenced class actions, filed an amended consolidated class action complaint naming various brokers and insurers, including the Company and certain of its affiliates, on behalf of a putative nationwide class of policyholders. The complaint includes causes of action under the Sherman Act, the Racketeer Influenced and Corrupt Organizations Act, state common law

and the laws of the various states prohibiting antitrust violations. Plaintiffs seek monetary damages, including punitive damages and trebled damages, permanent injunctive relief, restitution, including disgorgement of profits, interest and costs, including attorneys’ fees. On November 29, 2005, all defendants moved to dismiss the complaint for failure to state a claim. On February 13, 2006, the named plaintiffs moved to certify a nationwide class consisting of all persons who between August 26, 1994 and the date of class certification engaged the services of a broker defendant (or related entity) in connection with the procurement or renewal of insurance and who entered into or renewed a contract of insurance with one or more of the insurer defendants, including the Company. One individual action naming various brokers and insurers, including several of the Company’s affiliates, was filed in federal district court and is captioned Delta Pride Catfish, Inc. v. Marsh USA, Inc., et al. (D. Miss. Sept. 13, 2005). That action has also been transferred to the District of New Jersey and is being coordinated with In re Insurance Brokerage Antitrust Litigation. On January 17, 2006, all defendants moved to dismiss the complaint in Delta Pride Catfish, Inc. for failure to state a claim. Another individual action, New Cingular Wireless Headquarters, LLC, et al. v. Marsh & McLennan Cos., Inc., et al. (N.D. Ga. Apr. 4, 2006), was filed in federal court and asserts claims that are similar to those asserted in In Re Insurance Brokerage Antitrust Litigation against various brokers and insurers, including the Company and certain of its affiliates. It has not yet been transferred to the District Court of New Jersey. One other putative class action, Bensley Construction, Inc. v. Marsh & McLennan Companies, Inc., et al. (Mass. Super. Ct. May 16, 2005), and one other individual action, Office Depot, Inc. v. Marsh & McLennan Companies, Inc., et al. (Fla. Cir. Ct. June 22, 2005), were filed in state court and assert claims that are similar to those asserted in In re Insurance Brokerage Antitrust Litigation against various brokers and insurers, including the Company and/or certain of its affiliates. Certain defendants in Bensley Construction, Inc., including the Company, removed the action to the United States District Court for the District of Massachusetts. On February 13, 2006, the action was transferred to the District of New Jersey for coordination with In re Insurance Brokerage Antitrust Litigation. Office Depot, Inc. was brought in Florida state court and names several of the Company’s subsidiaries. On November 9, 2005, the court entered an order staying Office Depot pending resolution of In re Insurance Brokerage Antitrust Litigation. The plaintiff in Office Depot, Inc. has appealed. The Company believes that these lawsuits have no merit and intends to defend vigorously.

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

On July 23, 2004, the Company announced that it was seeking guidance from the staff of the Division of Corporation Finance of the Securities and Exchange Commission with respect to the appropriate purchase accounting treatment for certain second quarter 2004 adjustments totaling $1.63 billion ($1.07 billion after-tax). The Company recorded these adjustments as charges in its consolidated statement of income in the second quarter of 2004. Through an informal comment process, the staff of the Division of Corporation Finance has subsequently asked for further information, which the Company has provided. Specifically, the staff has asked for information concerning the Company’s adjustments to certain of SPC’s insurance reserves and reserves for reinsurance recoverables and premiums due from policyholders, and how those adjustments may relate to SPC’s reserves for periods prior to the merger. After reviewing the staff’s questions and comments, the Company continues to believe that its accounting treatment for these adjustments is appropriate. If, however, the staff disagrees, some or all of the adjustments being discussed may not be recorded as charges in the Company’s consolidated statement of income, thereby increasing net income for the second quarter and full year 2004 and increasing shareholders’ equity at March 31, 2006 and December 31, 2005 and 2004, in each case by the approximate after-tax amount of the change. The effect on tangible shareholders’ equity (adjusted for the effects of deferred taxes associated with goodwill and intangible assets) at March 31, 2006 and December 31, 2005 and 2004 would not be material. Increases to goodwill and deferred tax liabilities would be reflected on the Company’s balance sheet as of April 1, 2004, either due to purchase accounting or adjustment of SPC’s reserves prior to the merger. On May 3, 2006, the Company received a letter from the Division of Enforcement of the Securities and Exchange Commission advising the Company that it is conducting an inquiry relating to the second quarter 2004 adjustments and the April 1, 2004 merger between SPC and TPC.

Other Commitments and Guarantees

Commitments

Investment Commitments—The Company has long-term commitments to fund venture capital investments through its subsidiary, St. Paul Venture Capital VI, LLC, through new and existing partnerships and certain other venture capital entities. The Company’s total future estimated obligations related to its venture capital investments were $113 million and $128 million at March 31, 2006 and December 31, 2005, respectively. The Company also has unfunded commitments to partnerships, joint ventures and certain private equity investments in which it invests. These additional commitments were $845 million and $803 million at March 31, 2006 and December 31, 2005, respectively.

Guarantees

The Company has certain contingent obligations 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.

During the first quarter of 2006, the Company entered into construction loan and performance guarantees relating to an investment in a real estate development joint venture. The maximum obligation for the guarantees was $55 million.

In the ordinary course of selling business entities to third parties, the Company has agreed to indemnify purchasers for losses arising out of breaches of representations and warranties with respect to the business entities being sold, covenants and obligations of the Company and/or its subsidiaries following the close, and in certain cases obligations arising from undisclosed liabilities, adverse reserve development or certain named litigation. Such indemnification provisions generally survive for periods ranging from 12 months following the applicable closing date to the expiration of the relevant statutes of limitations, or in some cases agreed upon term limitations. As of March 31, 2006, the aggregate amount of the Company’s obligation for those indemnifications that are quantifiable related to sales of business entities was $1.82 billion. Certain of these contingent obligations are subject to deductibles which have to be incurred by the obligee before the Company is obligated to make payments. Included in the indemnification obligations at March 31, 2006 was $172 million related to the Company’s variable interest in Camperdown UK Limited, which SPC sold in December 2003. The Company’s variable interest results from an agreement to indemnify the purchaser in the event a specified reserve deficiency develops, a reserve-related foreign exchange impact occurs, or a foreign tax adjustment is imposed on a pre-sale reporting period. The fair value of this obligation as of March 31, 2006 was $66 million, which was included in “Other Liabilities” on the Company’s consolidated balance sheet.

10. SHARE-BASED INCENTIVE COMPENSATION

The Company has a share-based incentive compensation plan, The St. Paul Travelers Companies, Inc. 2004 Stock Incentive Plan (the 2004 Incentive Plan), which was adopted in July 2004 following the merger. The purposes of the 2004 Incentive 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 appreciation rights, restricted stock, deferred stock, stock units, performance awards and other stock-based or stock-denominated awards with respect to the Company’s common stock. The number of shares of the Company’s common stock authorized for grant under the 2004 Incentive Plan is 35 million shares, subject to additional shares that may be available for awards as described below.

In connection with the adoption of the 2004 Incentive Plan, the legacy share-based incentive compensation plans of TPC and of SPC were terminated. Outstanding grants were not affected by the termination of these plans, including the grant of reload options related to prior option grants under the legacy TPC and the legacy SPC share-based incentive compensation plans.

The 2004 Incentive Plan is the only plan pursuant to which future stock-based awards may be granted. In addition to the 35 million shares initially authorized for issuance under the 2004 Incentive Plan, the following will not be counted towards the 35 million shares available and will be available for future grants under the 2004 Incentive Plan: (i) shares of common stock subject to an award that expires unexercised, that is forfeited, terminated or canceled, that is settled in cash or other forms of property, or otherwise does not result in the issuance of shares of common stock, in whole or in part; (ii) shares that are used to pay the exercise price of stock options and shares used to pay withholding taxes on awards generally; and (iii) shares purchased by the Company on the open market using cash option exercise proceeds; provided, however, that the increase in the number of shares of common stock available for grant pursuant to such market purchases shall not be greater than the number that could be repurchased at fair market value on the date of exercise of the stock option giving rise to such option proceeds. These provisions also apply to awards granted under the legacy TPC and legacy SPC share-based incentive compensation plans that were outstanding on the effective date of the 2004 Incentive Plan, except for shares delivered to or retained in the legacy TPC Plan in connection with the withholding of taxes applicable to the exercise of outstanding options that have reload features.

The Company also has a compensation program for non-employee directors (the 2004 Director Compensation Program). Under the 2004 Director Compensation Program, non-employee directors’ compensation consists of an annual retainer, a deferred stock award and a stock option award. Each non-employee director may choose to receive all or a portion of his or her annual retainer and any committee chair or co-chair fees paid in the form of cash, common stock or deferred stock. Deferred stock for the annual retainer, and committee chair and co-chair fees, is elected pursuant to the St. Paul Travelers Deferred Compensation Plan for Non-Employee Directors that the Board adopted after the merger and is vested upon grant. The annual deferred stock awards vest one year after the date of award. Any of the deferred stock awards may accumulate until distribution at a future date or upon termination of a director’s service. The shares of the Company’s common stock issued under the 2004 Director Compensation Program, including shares of deferred stock, are awarded under the 2004 Incentive Plan.

Fixed Stock Option Awards

Stock option awards granted to eligible officers and key employees are granted having a ten-year term with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. The stock options granted generally vest upon meeting certain years of service criteria. Except as the Compensation Committee of the Board may allow in the future, stock options cannot be sold or transferred by the participant. The vesting terms for stock options granted under the 2004 Incentive Plan and the legacy TPC and legacy SPC plans are as follows:

Period Option granted		Option Award Vesting terms
2006		Options vest at end of 3-year period (cliff vest)

April 2004 thru 2005		Options vest over 4-year period, 50% on 2^nd anniversary of the date of grant, and 25% of the option shares vest on each of the 3^rd and 4^th anniversaries of the grant date. Certain 2005 special option shares vest 50% on each of the 4^th and 5^th anniversaries of the grant date.

Prior to April 2004		Options vest over 4-year period, 25% each year on the anniversary of the grant date; or options vest over 5-year period, 20% each year on the anniversary of the grant date.

In addition to the regular stock option awards described above, certain stock option awards that were granted under the legacy share-based incentive plans of TPC and SPC permit an employee exercising an option to be granted a new option (a reload option) at an exercise price equal to the fair market value of the Company common stock on the date of the reload grant. The legacy TPC reload option is permitted on the stock option awards granted prior to January 2003 at an amount

equal to the number of shares of the common stock used to satisfy both the exercise price and withholding taxes due upon exercise of an option and vest six months after the grate date and are exercisable for the remaining term of the related original option. The legacy SPC reload option is permitted on stock option awards granted between February 2002 and November 2003 in an amount equal to the number of shares of the common stock used to satisfy both the exercise price and withholding taxes due upon exercise of an option and vest one year after the grant date and are exercisable for the remaining term of the related original option.

The fair value of each option award is estimated on the date of grant by application of a variation of the Black-Scholes option pricing model using the assumptions noted in the following table. The expected term of newly granted stock options is the time to vest plus half the remaining time to expiration. This considers the vesting restriction and represents an even pattern of exercise behavior over the remaining term. Reload options are exercisable for the remaining term of the original option and therefore would generally have a shorter expected term. The expected volatility is based on the average historical volatility of the common stock of an industry peer group of entities, due to the limited Company stock history, over the estimated option term based on the mid-month of the option grant. The expected dividend is based upon the Company’s current quarter dividend annualized and assumed to be constant over the expected option term. The risk-free interest rate for each option is the interpolated market yield for the mid-month of the option grant on a U.S. Treasury bill with a term comparable to the expected option term of the granted stock option. Shares received through option exercises under the reload program are subject to restriction on sale. Discounts, as measured by the estimated cost of protection, have been applied to the fair value of reload options granted to reflect these sales restrictions. The following assumptions were used in estimating the fair value of options on grant date for the quarter ended March 31, 2006:

	Original Grants		Reload Grants
Expected term of stock options	6 – 7 years		1 – 6 years
Expected volatility of the Company’s stock	30.4% – 32.0	%	18.0% – 30.4	%
Weighted average volatility	30.4	%	20.0	%
Expected annual dividend per share	$ 0.92		$ 0.92
Risk free rate	4.30% – 4.55	%	4.30% – 4.67	%

A summary of stock option activity under the Company’s 2004 Incentive Plan and the legacy TPC and legacy SPC share-based incentive plans as of and for the quarter ended March 31, 2006 is as follows:

Stock Options ($ in millions)	Number		Weighted Average Exercise Price		Weighted Average Contractual Life Remaining	Aggregate Intrinsic Value
Outstanding, beginning of year	43,864,909		$	41.81
Granted:
Original	2,594,714		44.79
Reload	147,015		45.51
Exercised	(1,024,908	)	34.91
Forfeited or expired	(509,984	)	49.70
Outstanding, end of period	45,071,746		$	42.11	4.9 years	$	138

Vested at end of period (1)	35,880,767		$	42.18	4.4 years	$	121
Exercisable at end of period	33,685,843		$	42.17	4.2 years	$	117

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

	Original Grants		Reload Grants
Weighted average grant-date fair value of options granted (per share)	$	13.61	$	5.18
Total intrinsic value of options exercised during the period (in millions)	$	10	$	1

Restricted Stock, Deferred Stock and Performance Share Award Programs

Awards of restricted stock and deferred stock are made to eligible officers and key employees pursuant to the 2004 Incentive Plan. Such awards include restricted stock grants under the Capital Accumulation Program (CAP) and Equity Awards program established pursuant to the 2004 Incentive Plan. Awards issued under the CAP program are in the form of restricted stock and the number of shares included in the restricted stock award is calculated at a 10% discount from the market price on the date of the award and generally vest in full after a two-year period from the date of grant. The CAP program has been discontinued following the issuance of CAP awards in February 2006. Other restricted stock awards issued under the Equity Awards program generally vest in full after a three-year period from the date of grant. Except under limited circumstances, during this period the stock cannot be sold or transferred by the participant, who is required to render service to the Company during the restricted period. Awards granted to non-U.S. participants are in the form of deferred stock awards. These deferred stock awards are granted at market price, generally vest after three years from the date of grant and are subject to the same conditions as the restricted stock awards except that the shares are not issued until the vesting criteria are satisfied.

On October 25, 2005, the Company 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 its equivalent) or above. The performance awards represent target shares that provide the recipient the right to earn shares of the Company’s common stock based upon the Company’s attainment of certain performance goals. The performance goals for performance awards granted in 2006 are based on the Company’s adjusted return on equity over a three-year performance period. If performance falls short of targeted performance, none or only a portion of the shares will vest after the three-year performance period from date of grant. If performance exceeds targeted performance, more than 100% (up to a maximum of 160%) of target shares and accumulated dividend equivalents will vest after the three-year performance period from date of grant.

The fair value of restricted stock, deferred stock, and performance shares is measured at the market price of the Company stock at date of grant.

The total fair value of shares that vested during the quarter ended March 31, 2006 was $49 million.

A summary of restricted stock, deferred stock awards and performance share activity under the Company’s 2004 Incentive Plan and the legacy TPC and legacy SPC share-based incentive plans as of period ended March 31, 2006, and changes during the period then ended, is as follows:

	Restricted and Deferred Shares				Performance Shares
Other Equity Instruments	Number		Weighted Average Grant Date Fair Value		Number		Weighted Average Grant Date Fair Value

Outstanding, beginning of year	3,697,335		$	35.53	—		$	—
Granted	2,037,129		43.25		373,573		44.79
Vested (1)	(1,078,819	)	34.78		—		—
Forfeited	(41,990	)	38.12		(1,024	)	44.79

Outstanding, end of period	4,613,655		$	39.04	372,549		$	44.79

(1) Represents awards for which the requisite service has been rendered including those that are retirement eligible. Excludes performance shares which remain subject to attainment of a performance condition.

Share-Based Compensation Recognition

The compensation cost for awards subject to a service condition is based upon the number of equity instruments for which the requisite service period is expected to be rendered. Awards granted to retiree-eligible or to employees that become retiree-eligible before an awards vesting date are considered to have met the requisite service condition. The compensation cost for awards subject to a performance condition is based upon the probable outcome that the performance condition will be achieved. The compensation cost reflects an estimated annual forfeiture rate of 5% over the requisite service period of the awards. Compensation cost for awards are recognized on a straight-line basis over the requisite service period. For awards that have a graded vesting schedule, the compensation cost is recognized on a straight-line basis over the requisite service period for each separate vesting portion of the award as if the award was, in-substance, multiple awards. The total compensation cost for all share-based incentive compensation awards recognized in earnings for the quarter ended March 31, 2006 was $48 million. The related tax benefit recognized in earnings was $17 million.

As of March 31, 2006, there was $213 million of total unrecognized compensation cost related to all nonvested share-based incentive compensation awards. This includes stock options, restricted stock, deferred stock and performance shares granted under the Company’s 2004 Stock Incentive Plan and legacy TPC and legacy SPC share-based incentive compensation plans. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.1 years.

Cash received from the exercise of employee stock options under share-based compensation plans totaled $32 million for the quarter ended March 31, 2006. The tax benefit realized for tax deductions from employee stock option exercises totaled $4 million for the quarter ended March 31, 2006.

The Company had adopted the fair value method of accounting under FAS 123, Accounting for Stock-based Compensation, on January 1, 2003 using the modified prospective method of recognition in accordance with FAS 148, Accounting for Stock-based Compensation-Transition and Disclosure, to awards granted or modified after December 31, 2002. The Company had retained the recognition and measurement (intrinsic value) principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, for stock-based employee awards granted prior to January 1, 2003. The following table illustrates the effect on net income and earnings per share for each period indicated as if the Company had applied the fair value recognition provisions of FAS 123R to all outstanding and unvested stock-based employee awards.

(for the three months ended March 31, in millions, except per share data)	2005			2004
Net income as reported	$	212		$	587
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects (1)	16			5
Deduct: Stock-based employee compensation expense determined under fair value based method, net of related tax effects (2)	(19		)	(11		)
Net income pro forma	$	209		$	581

Earnings per share
Basic—as reported	$	0.31		$	1.35
Basic—pro forma	0.31			1.34
Diluted—as reported	0.31			1.31
Diluted—pro forma	0.31			1.29

(1) Represents compensation expense on all restricted stock and stock option awards granted after January 1, 2003.

(2) Includes the compensation expense added back in (1).

11. INSURANCE CLAIM RESERVES

In February 2006, following approval by the respective managing agencies, the 2003 and prior years of account of Lloyd’s Syndicates 5000 and 779 closed through reinsurance to close (RITC) into the 2004 year of account, for which the Company is the capital provider through its 100% ownership of Lloyd’s members F&G UK Underwriters, Ltd. and Aprilgrange, Ltd.. The RITC was effective January 1, 2006. The RITC resulted in the Company acquiring $746 million of insurance liabilities and an equal amount of assets, including $470 million of investments, $243 million of reinsurance recoverables, $29 million of cash and other net assets during the first quarter of 2006. There was no impact on the Company’s results of operations at the time the RITC was recorded.

12. SUBSEQUENT EVENT – SHARE REPURCHASE PROGRAM

On May 2, 2006, the Company’s Board of Directors authorized a program to repurchase up to $2 billion of shares of the Company’s common stock. Under this program, repurchases may be made from time to time in the open market, pursuant to pre-set trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, in private transactions or otherwise. This program does not have a stated expiration date. The timing and actual number of shares to be repurchased will depend on a variety of factors, including corporate and regulatory requirements, price, catastrophe losses, weather and other market conditions.

13. CONSOLIDATING FINANCIAL STATEMENTS OF THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

The following consolidating financial statements of the Company have been prepared pursuant to Rule 3-10 of Regulation S-X. These consolidating financial statements have been prepared from the Company’s financial information on the same basis of accounting as the consolidated financial statements. The St. Paul Travelers Companies, Inc. has fully and unconditionally guaranteed certain debt obligations of TPC, its wholly-owned subsidiary, which totaled $2.64 billion as of March 31, 2006.

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

CONSOLIDATING STATEMENT OF INCOME (Unaudited)

For the three months ended March 31, 2006

(in millions)	TPC		Other Subsidiaries		St. Paul Travelers (1)			Eliminations			Consolidated
Revenues
Premiums	$	3,339	$	1,652	$	—		$	—		$	4,991
Net investment income	614		243		18			—			875
Fee income	149		1		—			—			150
Net realized investment gains (losses)	4		11		(21		)	—			(6		)
Other revenues	29		11		3			(3		)	40
Total revenues	4,135		1,918		—			(3		)	6,050

Claims and expenses
Claims and claim adjustment expenses	2,035		1,007		—			—			3,042
Amortization of deferred acquisition costs	529		271		—			—			800
General and administrative expenses	528		263		6			(3		)	794
Interest expense	35		—		41			—			76
Total claims and expenses	3,127		1,541		47			(3		)	4,712

Income (loss) before income taxes	1,008		377		(47		)	—			1,338
Income tax expense (benefit)	243		109		(20		)	—			332
Equity in earnings of subsidiaries, net of tax	—		—		1,033			(1,033		)	—
Net income	$	765	$	268	$	1,006		$	(1,033	)	$	1,006

(1) The St. Paul Travelers Companies, Inc., excluding its subsidiaries.

CONSOLIDATING STATEMENT OF INCOME (Unaudited)

For the three months ended March 31, 2005

(in millions)	TPC		Other Subsidiaries			St. Paul Travelers (1)			Eliminations			Consolidated
Revenues
Premiums	$	3,490	$	1,629		$	—		$	—		$	5,119
Net investment income	531		218			16			—			765
Fee income	168		3			—			—			171
Net realized investment gains (losses)	34		(34		)	—			—			—
Other revenues	36		16			2			(4		)	50
Total revenues	4,259		1,832			18			(4		)	6,105

Claims and expenses
Claims and claim adjustment expenses	2,136		1,087			—			—			3,223
Amortization of deferred acquisition costs	575		235			—			—			810
General and administrative expenses	643		178			(4		)	(4		)	813
Interest expense	35		(1		)	37			—			71
Total claims and expenses	3,389		1,499			33			(4		)	4,917

Income (loss) from continuing operations before income taxes	870		333			(15		)	—			1,188
Income tax expense (benefit)	246		76			(11		)	—			311
Equity in earnings of subsidiaries, net of tax	—		—			768			(768		)	—
Income (loss) from continuing operations	624		257			764			(768		)	877

Discontinued operations
Operating loss, net of taxes	—		(113		)	(552		)	—			(665		)
Gain on disposal, net of taxes	—		—			—			—			—

Loss from discontinued operations	—		(113		)	(552		)	—			(665		)
Net income	$	624	$	144		$	212		$	(768	)	$	212

(1) The St. Paul Travelers Companies, Inc., excluding its subsidiaries.

CONSOLIDATING BALANCE SHEET (Unaudited)

At March 31, 2006

(in millions)	TPC		Other Subsidiaries			St. Paul Travelers (1)			Eliminations			Consolidated
Assets
Fixed maturities, available for sale at fair value (including $2,332 subject to securities lending and repurchase agreements) (amortized cost $60,053)	$	37,872	$	21,420		$	433		$	—		$	59,725
Equity securities, at fair value (cost $510)	385		104			61			—			550
Real estate	7		744			—			—			751
Mortgage loans	97		38			—			—			135
Short-term securities	2,412		1,017			1,356			—			4,785
Other investments	1,704		1,276			82			—			3,062
Total investments	42,477		24,599			1,932			—			69,008

Cash	181		191			1			—			373
Investment income accrued	465		282			8			(4		)	751
Premiums receivable	3,754		2,260			—			—			6,014
Reinsurance recoverables	14,077		5,105			—			—			19,182
Ceded unearned premiums	1,120		518			—			—			1,638
Deferred acquisition costs	1,250		313			—			—			1,563
Deferred tax asset	1,427		548			128			—			2,103
Contractholder receivables	4,552		958			—			—			5,510
Goodwill	2,412		1,041			—			—			3,453
Intangible assets	305		570			—			—			875
Investment in subsidiaries	—		—			23,957			(23,957		)	—
Other assets	1,961		726			414			(195		)	2,906
Total assets	$	73,981	$	37,111		$	26,440		$	(24,156	)	$	113,376

Liabilities
Claims and claim adjustment expense reserves	$	39,983	$	20,720		$	—		$	—		$	60,703
Unearned premium reserves	7,369		3,662			—			—			11,031
Contractholder payables	4,552		958			—			—			5,510
Payables for reinsurance premiums	464		545			—			—			1,009
Debt	2,622		150			3,262			(195		)	5,839
Other liabilities	4,529		1,581			341			(4		)	6,447
Total liabilities	59,519		27,616			3,603			(199		)	90,539

Shareholders’ equity
Preferred Stock Savings Plan—convertible preferred stock (0.4 shares issued and outstanding)	—		—			146			—			146
Common stock (1,750.0 shares authorized; 696.2 shares issued and outstanding)	—		745			18,192			(745		)	18,192
Additional paid-in capital	9,897		7,715			—			(17,612		)	—
Retained earnings	4,445		1,177			4,594			(5,622		)	4,594
Accumulated other changes in equity from nonowner sources	120		(142		)	(25		)	22			(25		)
Treasury stock, at cost (1.6 shares)	—		—			(70		)	—			(70		)
Total shareholders’ equity	14,462		9,495			22,837			(23,957		)	22,837
Total liabilities and shareholders’ equity	$	73,981	$	37,111		$	26,440		$	(24,156	)	$	113,376

(1) The St. Paul Travelers Companies, Inc., excluding its subsidiaries.

CONSOLIDATING BALANCE SHEET (Unaudited)

At December 31, 2005

(in millions)	TPC			Other Subsidiaries			St. Paul Travelers (1)			Eliminations			Consolidated
Assets
Fixed maturities, available for sale at fair value (including $2,667 subject to securities lending and repurchase agreements) (amortized cost $58,616)	$	37,582		$	20,957		$	444		$	—		$	58,983
Equity securities, at fair value (cost $538)	435			86			58			—			579
Real estate	7			745			—			—			752
Mortgage loans	107			38			—			—			145
Short-term securities	2,142			1,551			1,109			—			4,802
Other investments	1,701			1,235			90			—			3,026
Total investments	41,974			24,612			1,701			—			68,287

Cash	136			200			1			—			337
Investment income accrued	471			286			7			(3		)	761
Premiums receivable	3,843			2,281			—			—			6,124
Reinsurance recoverables	14,966			4,608			—			—			19,574
Ceded unearned premiums	1,000			322			—			—			1,322
Deferred acquisition costs	1,218			309			—			—			1,527
Deferred tax asset	1,330			581			151			—			2,062
Contractholder receivables	4,422			1,094			—			—			5,516
Goodwill	2,412			1,030			—			—			3,442
Intangible assets	316			601			—			—			917
Investment in subsidiaries	—			—			23,708			(23,708		)	—
Other assets	2,292			743			478			(195		)	3,318
Total assets	$	74,380		$	36,667		$	26,046		$	(23,906	)	$	113,187

Liabilities
Claims and claim adjustment expense reserves	$	41,213		$	19,877		$	—		$	—		$	61,090
Unearned premium reserves	7,418			3,509			—			—			10,927
Contractholder payables	4,422			1,094			—			—			5,516
Payables for reinsurance premiums	282			438			—			—			720
Debt	2,623			147			3,272			(192		)	5,850
Other liabilities	4,297			2,017			471			(4		)	6,781
Total liabilities	60,255			27,082			3,743			(196		)	90,884

Shareholders’ equity
Preferred Stock Savings Plan—convertible preferred stock (0.5 shares issued and outstanding)	—			—			153			—			153
Common stock (1,750.0 shares authorized; 693.4 shares issued and outstanding)	(24		)	745			18,096			(721		)	18,096
Additional paid-in capital	9,916			7,724			—			(17,640		)	—
Retained earnings	3,835			1,154			3,750			(4,989		)	3,750
Accumulated other changes in equity from nonowner sources	398			(38		)	351			(360		)	351
Treasury stock, at cost (1.2 shares)	—			—			(47		)	—			(47		)
Total shareholders’ equity	14,125			9,585			22,303			(23,710		)	22,303
Total liabilities and shareholders’ equity	$	74,380		$	36,667		$	26,046		$	(23,906	)	$	113,187

(1) The St. Paul Travelers Companies, Inc., excluding its subsidiaries.

CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

For the three months ended March 31, 2006

(in millions)	TPC			Other Subsidiaries			St. Paul Travelers (1)			Eliminations			Consolidated
Cash flows from operating activities
Net income	$	765		$	268		$	1,006		$	(1,033	)	$	1,006
Net adjustments to reconcile net income to net cash provided by operating activities	(213		)	(262		)	(1,002		)	1,033			(444		)
Net cash provided by (used in) operating activities	552			6			4			—			562

Cash flows from investing activities
Proceeds from maturities of investments:
Fixed maturities	1,010			559			2			—			1,571
Mortgage loans	6			—			—			—			6
Proceeds from sales of investments:
Fixed maturities	634			676			10			—			1,320
Equity securities	62			32			—			—			94
Purchases of investments:
Fixed maturities	(2,399		)	(1,575		)	(9		)	—			(3,983		)
Equity securities	(4		)	(43		)	—			—			(47		)
Real estate	—			(8		)	—			—			(8		)
Short-term securities, (purchases) sales, net	(270		)	584			(247		)	—			67
Other investments, net	109			39			—			—			148
Securities transactions in course of settlement	546			(56		)	—			—			490
Other	(44		)	6			—			—			(38		)
Net cash provided by (used in) investing activities	(350		)	214			(244		)	—			(380		)

Cash flows from financing activities
Payment of debt	—			—			(4		)	—			(4		)
Dividends to shareholders	—			—			(161		)	—			(161		)
Issuance of common stock —- employee share options	—			—			32			—			32
Excess tax benefits from share-based payment arrangements	—			—			5			—			5
Treasury stock acquired — net employee share-based compensation	—			—			(16		)	—			(16		)
Dividends received by (paid to) parent company	(155		)	(250		)	405			—			—
Capital contributions and loans between subsidiaries	—			21			(21		)	—			—
Other	(2		)	—			—			—			(2		)
Net cash provide by (used in) financing activities	(157		)	(229		)	240			—			(146		)
Effect of exchange rate changes on cash	—			—			—			—			—
Net increase (decrease) in cash	45			(9		)	—			—			36
Cash at beginning of period	136			200			1			—			337
Cash at end of period	$	181		$	191		$	1		$	—		$	373

Supplemental disclosure of cash flow information
Income taxes paid (received)	$	(15	)	$	10		$	—		$	—		$	(5	)
Interest paid	$	46		$	—		$	39		$	—		$	85

(1) The St. Paul Travelers Companies, Inc., excluding its subsidiaries.

CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

For the three months ended March 31, 2005 (1)

(in millions)	TPC			Other Subsidiaries			St. Paul Travelers (2)			Eliminations			Consolidated
Cash flows from operating activities
Net income (loss)	$	624		$	144		$	212		$	(768	)	$	212
Net adjustments to reconcile net income to net cash provided by operating activities	(234		)	743			(461		)	768			816
Net cash provided by (used in) operating activities of continuing operations	390			887			(249		)	—			1,028
Net cash provided by operating activities of discontinued operations	—			24			—			—			24
Net cash provided by (used in) operating activities	390			911			(249		)	—			1,052

Cash flows from investing activities
Proceeds from maturities of investments:
Fixed maturities	642			431			—			—			1,073
Mortgage loans	5			—			—			—			5
Proceeds from sales of investments:
Fixed maturities	851			201			—			—			1,052
Equity securities	31			7			1			—			39
Purchases of investments:
Fixed maturities	(2,164		)	(2,011		)	—			—			(4,175		)
Equity securities	—			(15		)	(6		)	—			(21		)
Real estate	—			(8		)	—			—			(8		)
Short-term securities, (purchases) sales, net	447			575			(42		)	—			980
Other investments, net	273			(45		)	—			—			228
Securities transactions in course of settlement	97			98			—			—			195
Net cash provided by (used in) by investing activities of continuing operations	182			(767		)	(47		)	—			(632		)
Net cash used in investing activities of discontinued operations	—			(20		)	—			—			(20		)
Net cash provided by (used in) investing activities	182			(787		)	(47		)	—			(652		)

Cash flows from financing activities
Payment of debt	—			—			(2		)	—			(2		)
Dividends to shareholders	—			—			(150		)	—			(150		)
Issuance of common stock – employee share options	—			—			32			—			32
Treasury stock acquired – net employee share-based compensation	—			—			(8		)	—			(8		)
Intercompany dividends	(610		)	133			477			—			—
Capital contributions and loans between subsidiaries	—			35			(35		)	—			—
Other	—			2			11			—			13
Net cash used in financing activities of continuing operations	(610		)	170			325			—			(115		)
Net cash used in financing activities of discontinued operations	—			4			—			—			4
Net cash used in financing activities	(610		)	174			325			—			(111		)

Effect of exchange rate changes on cash	—			(2		)	—			—			(2		)
Elimination of cash provided by discontinued operations	—			(8		)	—			—			(8		)
Net increase (decrease) in cash	(38		)	288			29			—			279
Cash at beginning of period	166			79			17			—			262
Cash at end of period	$	128		$	367		$	46		$	—		$	541

Supplemental disclosure of cash flow information
Income taxes paid (received)	$	361		$	(146	)	$	(201	)	$	—		$	14
Interest paid	$	46		$	6		$	41		$	—		$	93

(1) See note 2.

(2) The St. Paul Travelers Companies, Inc., excluding its subsidiaries.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of the financial condition and results of operations of The St. Paul Travelers Companies, Inc. (together with its subsidiaries, the Company).

EXECUTIVE SUMMARY

2006 First Quarter Consolidated Results of Operations

• Income from continuing operations and net income of $1.01 billion, or $1.45 per share basic and $1.41 diluted

• Net favorable prior year reserve development of $49 million pretax and $32 million after-tax

• Net written premiums of $4.77 billion

• GAAP combined ratio of 88.9%

• Pretax net investment income of $875 million ($670 million after-tax)

2006 First Quarter Consolidated Financial Condition

• Total assets of $113.38 billion, up $189 million from December 31, 2005

• Total investments of $69.01 billion, up $721 million from December 31, 2005; fixed maturities and short-term securities comprise 93% of total investments

• Shareholders’ equity of $22.84 billion, up $534 million from December 31, 2005; book value per common share of $32.59

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.

Consolidated Results of Operations

(for the three months ended March 31, in millions except per share data)	2006			2005
Revenues
Premiums	$	4,991		$	5,119
Net investment income	875			765
Fee income	150			171
Net realized investment losses	(6		)	—
Other revenues	40			50
Total revenues	6,050			6,105
Claims and expenses
Claims and claim adjustment expenses	3,042			3,223
Amortization of deferred acquisition costs	800			810
General and administrative expenses	794			813
Interest expense	76			71
Total claims and expenses	4,712			4,917
Income from continuing operations before income taxes	1,338			1,188
Income tax expense	332			311
Income from continuing operations	1,006			877
Loss from discontinued operations	—			(665		)
Net income	$	1,006		$	212
Income from continuing operations per share
Basic	$	1.45		$	1.31
Diluted	$	1.41		$	1.25
GAAP combined ratio
Loss and loss adjustment expense ratio	58.9		%	61.3		%
Underwriting expense ratio	30.0			29.2
GAAP combined ratio	88.9		%	90.5		%

The Company’s discussions related to all items, other than net income, income from continuing operations, loss from discontinued operations, and segment operating income, are presented on a pretax basis, unless otherwise noted.

Overview

Income from continuing operations in the first quarter of 2006 totaled $1.01 billion, or $1.41 per share diluted, 15% higher than income from continuing operations of $877 million, or $1.25 per share diluted, in the same period of 2005. The increase in 2006 was driven by strong growth in net investment income, an after-tax benefit of $49 million resulting from the favorable resolution of various prior year federal and state tax matters, and strong underwriting results from all of the Company’s business segments, driven by lower non-catastrophe weather-related losses and the absence of catastrophe losses.

Revenues

Earned Premiums

The $128 million decrease in earned premiums in 2006 from 2005 was concentrated in the Commercial segment and reflected a significant decline in runoff operations, where business is intentionally being non-renewed, and a decline in ongoing operations due to a lower level of written premium volume in 2005 compared with 2004. In addition, earned premiums declined in the Specialty segment, primarily reflecting the impact of the Company’s sale of its Personal Catastrophe Risk operation in the fourth quarter of 2005 and its sale in the first quarter of 2005 of certain credit-related personal lines classes previously written through the Company’s operations at Lloyd’s. These declines were partially offset by premium growth in the Personal segment resulting from an increase in new business volume, strong business retention rates and renewal price increases.

Net Investment Income

Net investment income of $875 million in the first quarter of 2006 grew $110 million, or 14%, over the same 2005 period. The increase was primarily generated by growth in the Company’s fixed maturity portfolio. That portfolio totaled $59.73 billion at March 31, 2006, an increase of $4.31 billion over the same date in 2005. The increase in that portfolio was primarily due to strong operational cash flows in the last twelve months and the investment of $2.40 billion of proceeds from the divestiture of Nuveen Investments in the second and third quarters of 2005. Yields on short-term securities and taxable new investment purchases have increased, also contributing to the growth in net investment income. In addition, the Company’s non-fixed maturity investment portfolio produced strong net investment income in the first quarter of 2006.

The Company allocates invested assets and the related net investment income (NII) to its identified business segments. Pretax net investment income is allocated based upon an investable funds concept, which takes into account liabilities (net of non-invested assets) and appropriate capital considerations for each segment. The investment yield for investable funds reflects the duration of the loss reserves’ future cash flows, the interest rate environment at the time the losses were incurred and A+ rated corporate debt instrument yields. The investment yield for capital reflects the average yield on the total investment portfolio. It is the application of the yields to the segments’ investable funds and capital that determines the respective business segment’s share of actual NII.

Fee Income

The National Accounts market in the Commercial segment is the primary source of the Company’s fee-based business. The 12% decline in fee income compared with the first quarter of 2005 is described in the Commercial segment discussion that follows.

Net Realized Investment Gains (Losses)

Net realized investment losses in the first quarter of 2006 totaled $6 million, compared with net realized investment gains of less than $0.1 million in the same period of 2005. The 2006 total included $28 million of net realized investment gains related to U.S. Treasury futures which require a daily mark-to-market settlement and are used to shorten the duration of the Company’s fixed maturity investment portfolio. These gains were offset by $24 million of realized investment losses related to the Company’s holdings of stock purchase warrants of Platinum Underwriters Holdings, Ltd., a publicly-held company, and $10 million of impairment losses that are described in more detail later in this narrative.

Written Premiums

Consolidated gross and net written premiums were as follows:

	2006				2005
(for the three months ended March 31, in millions)	Gross		Net		Gross		Net

Commercial	$	2,519	$	2,085	$	2,751	$	2,192
Specialty	1,670		1,117		1,691		1,154
Personal	1,621		1,572		1,478		1,434
Total	$	5,810	$	4,774	$	5,920	$	4,780

Gross written premiums in the first quarter of 2006 declined 2% from the same period of 2005, and net written premiums were virtually level with the first quarter of 2005. The $107 million decline in Commercial’s net written premium volume in the first quarter of 2006 was primarily attributable to National Accounts, due to a reduction in premiums related to favorable loss experience on retrospectively rated policies, changes in the effective dates of certain large account renewals, a reduction in assumed premiums from the involuntary auto residual market, and lower new business volume. The decline in Commercial’s net written premiums also reflected the impact of a significant decline in runoff operations, where business is intentionally being non-renewed. In the Specialty segment, the $37 million decline in net written premium volume in the first quarter of 2006 primarily reflected the impact of the Company’s fourth quarter 2005 sale of its Personal Catastrophe Risk operation. The Personal segment’s net written premium volume grew 10% over the first quarter of 2005, driven by strong business retention rates, an increase in new business and renewal price increases.

Claims and Expenses

Claims and Claim Adjustment Expenses

Claims and claim adjustment expenses of $3.04 billion in the first quarter of 2006 were $181 million lower than the 2005 total of $3.22 billion. The decline was primarily related to the reduction in earned premium volume and also reflected lower non-catastrophe weather-related losses. The 2006 total included $49 million of net favorable prior year reserve development and no catastrophe losses, whereas the 2005 total included $55 million of net favorable prior year reserve development and $31 million of catastrophe losses.

General and Administrative Expenses

General and administrative expenses totaled $794 million in the first quarter of 2006, down $19 million from the 2005 first quarter total of $813 million. The decline reflected the benefit of expense efficiencies achieved since the completion of the merger, certain tax benefits and lower premium tax-related expenses, partially offset by continued investments to support business growth and product development.

Interest Expense

Interest expense of $76 million in the first quarter of 2006 was $5 million higher than in the same period of 2005, primarily due to the issuance in November 2005 of $400 million, 5.50% senior notes.

GAAP Combined Ratios

The consolidated loss and loss adjustment expense ratio of 58.9 in the first quarter of 2006 was 2.4 points less than the first quarter 2005 ratio of 61.3, primarily reflecting lower non-catastrophe weather-related losses, the absence of catastrophe losses and the continuation of favorable loss trends experienced in recent quarters. The 2006 first quarter ratio included no impact from catastrophes, whereas the 2005 first quarter loss and loss adjustment expense ratio included a 0.6 point impact from catastrophe losses. The 2006 and 2005 first quarter loss and loss adjustment expense ratios reflected impacts of 1.0 points and 1.1 points, respectively, of net favorable prior year reserve development. The 0.8 point increase in the underwriting expense ratio in the first quarter of 2006 compared with the same 2005 period primarily reflected a decline in National Accounts’ fee income, a portion of which is accounted for as a reduction of expenses for purposes of calculating the expense ratio.

Discontinued Operations

RESULTS OF OPERATIONS BY SEGMENT

Commercial

The Commercial segment offers a broad array of property and casualty insurance and insurance-related services to its clients. Commercial is organized into the following three marketing and underwriting groups, each of which focuses on a particular client base and which collectively comprise Commercial’s core operations:

• Commercial Accounts serves primarily mid-sized businesses for casualty products and large and mid-sized businesses for property products. In addition to the traditional middle market, Commercial Accounts includes seven units dedicated to unique business needs.

• Select Accounts serves small businesses and offers commercial multi-peril, property, general liability, commercial auto and workers’ compensation insurance.

• National Accounts comprises three distinct business units. The largest provides casualty products and services to large companies, with particular emphasis on workers’ compensation, general liability and automobile liability. National Accounts also includes the commercial residual market business, which primarily offers workers’ compensation products and services to the involuntary market. National Accounts also includes Discover Re, which provides unbundled property and casualty insurance products to insureds who utilize programs such as self-insurance, collateralized deductibles and captive reinsurers.

Commercial also includes the Special Liability Group (which manages the Company’s asbestos and environmental liabilities); the assumed reinsurance, health care, and certain international and other runoff operations; and policies written by the Company’s Gulf operation (Gulf), which was placed into runoff in 2004. These operations are collectively referred to as Commercial Other.

Results of the Company’s Commercial segment were as follows:

(for the three months ended March 31, in millions)	2006			2005
Revenues:
Earned premiums	$	2,030		$	2,204
Net investment income	517			480
Fee income	139			163
Other revenues	6			15
Total revenues	$	2,692		$	2,862
Total claims and expenses	$	1,969		$	2,258
Operating income	$	535		$	448

Loss and loss adjustment expense ratio	60.0		%	65.3		%
Underwriting expense ratio	29.7			29.1
GAAP combined ratio	89.7		%	94.4		%

Overview

Operating income of $535 million in the first quarter of 2006 was $87 million, or 19%, higher than operating income of $448 million in the same period of 2005. Results in 2006 benefited from higher net investment income and lower weather-related losses.

Earned Premiums

Earned premiums of $2.03 billion in the first quarter of 2006 declined $174 million, or 8%, compared with the same period of 2005, reflecting a significant decline in runoff operations, where business was intentionally non-renewed, and a decline in ongoing operations due to a lower level of written premiums in 2005.

Net Investment Income

Refer to the “Net Investment Income” section of the “Consolidated Results of Operations” discussion herein for a description of the factors contributing to the increase in the Company’s net investment income in 2006.

Fee Income

National Accounts is the primary source of fee income due to its service businesses, which include claim and loss prevention services to large companies that choose to self-insure a portion of their insurance risks, and claims and policy management services to workers’ compensation residual market pools, automobile assigned risk plans and to self-insurance pools. The $24 million, or 15%, decline in fee income in the first quarter of 2006 compared with the same 2005 period resulted from lower serviced claim volume resulting from the depopulation of workers’ compensation residual market pools, changes in the effective dates of certain large account renewals, the impact on fee income from lower loss costs due to California workers’ compensation reforms and lower new business volume due to increased competition.

Claims and Expenses

Claim and claim adjustment expenses in the first quarter of 2006 totaled $1.31 billion, down $211 million, or 14%, compared with the same 2005 period. The decline was primarily related to the reduction in earned premium volume. Net favorable prior year reserve development in the first quarter of 2006 totaled $10 million, compared with net unfavorable prior year reserve development of $6 million in the same 2005 period. There were no catastrophe losses incurred in the first quarters of 2006 or 2005; however, the first quarter of 2005 included non-catastrophe weather-related losses resulting from winter storms. General and administrative expenses in the first quarter of 2006 declined by $57 million when compared to the same period of 2005, reflecting the decline in business volume and a reduction in premium tax-related expenses.

GAAP Combined Ratio

The 5.3 point improvement in the loss and loss adjustment expense ratio in the first quarter of 2006 over the same 2005 period primarily reflected lower non-catastrophe weather-related losses and the continuation of favorable loss trends experienced in recent quarters. The 2006 ratio reflected a 0.5 point impact of net favorable prior year reserve development, whereas the 2005 ratio included a 0.3 point impact from net unfavorable prior year reserve development. The 0.6 point increase in the underwriting expense ratio over the first quarter of 2005 primarily reflected the impact of declines in fee income and earned premiums, which were partially offset by a reduction in premium tax-related expenses. (A portion of fee income is accounted for as a reduction of expenses for purposes of calculating the expense ratio).

Written Premiums

The Commercial segment’s gross and net written premiums by market were as follows:

	2006				2005
(for the three months ended March 31, in millions)	Gross		Net		Gross		Net

Commercial Accounts	$	1,247	$	1,133	$	1,229	$	1,127
Select Accounts	695		679		706		684
National Accounts	575		268		739		341
Total Commercial Core	2,517		2,080		2,674		2,152
Commercial Other	2		5		77		40
Total Commercial	$	2,519	$	2,085	$	2,751	$	2,192

Gross and net written premiums in the first quarter of 2006 declined 8% and 5%, respectively, compared with the same period of 2005. In the Commercial Core operations, net written premium volume was down 3% from the first quarter of 2005. In the Commercial Accounts market, net written premiums in the first quarter of 2006 were slightly ahead of first quarter 2005 premium volume. Renewal price changes in the Commercial Accounts market in the first quarter of 2006 increased over the same period of 2005, partially offset by a slight decline in new business volume. Business retention rates remained strong and increased over the first quarter of 2005. In the Select Accounts market, net written premiums in the first quarter of 2006 were slightly below the same period of 2005, primarily reflecting the impact of a decline in premium volume from programs for small businesses (the majority of which was business transferred to the Commercial Accounts market). Business retention rates and new business volume in the Select Accounts market grew over the first quarter of 2005, but renewal price changes declined from the prior year quarter.

In National Accounts, net written premiums in the first quarter of 2006 declined by $73 million, or 21%, from the same period of 2005. The decline was impacted by several factors, including a reduction in premiums related to favorable loss experience on retrospectively rated policies, changes in the effective dates of certain large account renewals, a reduction in assumed premiums from involuntary auto residual market pools, and lower new business volume.

In Commercial Other, the significant decline in 2006 first-quarter premium volume compared with the same period of 2005 reflected the intentional non-renewal of business in the runoff operations comprising this category.

Specialty

The Specialty segment provides a full range of standard and specialized insurance coverages and services through dedicated underwriting, claims handling and risk management groups. The segment comprises two primary groups: Domestic Specialty and International Specialty.

• Domestic Specialty includes several marketing and underwriting groups, each of which possesses customer expertise and offers products and services to address its respective customers’ specific needs. These groups include Financial and Professional Services, Bond, Construction, Technology, Ocean Marine, Oil and Gas, Public Sector, Underwriting Facilities and Umbrella/Excess & Surplus Group.

• International Specialty includes coverages marketed and underwritten to several specialty customer groups within the United Kingdom, Canada and the Republic of Ireland and the Company’s participation in Lloyd’s.

In November 2005, the Company sold its Personal Catastrophe Risk operation, which had been included in the Specialty segment. In accordance with terms of the agreement, the Company retained responsibility for the pre-sale loss and loss adjustment expense reserves related to this business and remains responsible for any changes in estimates in those reserves through a quota-share reinsurance agreement. The impact of this transaction was not material to the Company’s ongoing operations.

Results of the Company’s Specialty segment were as follows:

(for the three months ended March 31, in millions)	2006			2005
Revenues:
Earned premiums	$	1,401		$	1,456
Net investment income	222			170
Fee income	11			8
Other revenues	6			12
Total revenues	$	1,640		$	1,646
Total claims and expenses	$	1,285		$	1,409
Operating income	$	257		$	173

Loss and loss adjustment expense ratio	57.7		%	64.3		%
Underwriting expense ratio	33.0			32.0
GAAP combined ratio	90.7		%	96.3		%

Overview

Operating income of $257 million in the first quarter of 2006 improved by $84 million, or 49%, over the same period of 2005, driven by strong growth in net investment income, net favorable prior year reserve development and the absence of catastrophe losses.

Earned Premiums

Earned premiums in the first quarter of 2006 decreased $55 million, or 4%, from the same period of 2005, primarily reflecting the impact of the Company’s sale of its Personal Catastrophe Risk operation in November 2005 and the sale of certain credit-related personal lines classes previously written through the Company’s operations at Lloyd’s. Earned premiums in the first quarter of 2005 included $31 million of net earned premiums from the Personal Catastrophe Risk operation and $32 million of net earned premiums from the personal lines classes at Lloyd’s that were sold in that quarter.

Net Investment Income

Claims and Expenses

Claims and claims adjustment expenses in the first quarter of 2006 totaled $816 million, down $120 million, or 13%, compared with the same 2005 period. The 2006 total included $9 million of net favorable prior year reserve development, whereas the 2005 total included $53 million of net unfavorable prior year reserve development, which related to four hurricanes that had occurred in 2004. The Specialty segment incurred no catastrophe losses in the first quarter of 2006. In the first quarter of 2005, catastrophe losses totaled $19 million, resulting from floods in the United Kingdom. The decline also reflected favorable current accident year loss trends in several domestic businesses (particularly in the Bond operation), and the impact of the sales of the Personal Catastrophe Risk operation and the personal lines classes at Lloyd’s. General and administrative expenses of $238 million in the first quarter of 2006 were 2% higher than in the same 2005 period.

GAAP Combined Ratio

The loss and loss adjustment expense ratio in the first quarter of 2006 improved 6.6 points compared with the same 2005 period. The first quarter 2006 ratio included a 0.6 point benefit from net favorable prior year reserve development and no impact from catastrophes, whereas the 2005 first quarter loss and loss adjustment expense ratio included a 3.6 point impact from net unfavorable prior year reserve development and a 1.3 point impact from catastrophe losses. The 2006 first quarter loss and loss adjustment expense ratio also reflected the benefit of continued favorable loss trends experienced in recent quarters. The 1.0 point increase in the underwriting expense ratio over the first quarter of 2005 primarily reflected the decline in earned premium volume.

Written Premiums

Specialty’s gross and net written premiums by market were as follows:

	2006				2005
(for the three months ended March 31, in millions)	Gross		Net		Gross		Net

Construction	$	262	$	252	$	265	$	250
Bond	407		204		371		163
Financial and Professional Services	214		89		200		120
Other	442		339		481		357
Total Domestic Specialty	1,325		884		1,317		890
International Specialty	345		233		374		264
Total Specialty	$	1,670	$	1,117	$	1,691	$	1,154

The Specialty segment’s gross and net written premiums in the first quarter of 2006 declined 1% and 3%, respectively, from written premium volume in the same period of 2005, primarily due to the sale of the Company’s Personal Catastrophe Risk operation in November 2005, which was included in the “Other” category in the foregoing table. Bond net written premiums in 2006 grew $41 million, or 25%, over the first quarter of 2005, driven by strong new business volumes. In the Financial and Professional Services operation, the $31 million decline in net written premium volume compared with the first quarter of

2005 was primarily due to a change in reinsurance treaty structure. In Domestic Specialty operations in total, business retention rates and new business levels increased over the first quarter of 2005. Renewal price changes remained positive, but were down slightly from the first quarter of 2005. The $31 million decrease in International Specialty net written premiums in the first quarter of 2006 compared with the same 2005 period was driven by a decline in volume in the Company’s operations at Lloyd’s, changes in a reinsurance program at Lloyd’s, and, to a lesser extent, by a significant decline in new business volume in Ireland.

Personal

The Personal segment writes virtually all types of property and casualty insurance covering personal risks. The primary coverages in Personal are automobile and homeowners insurance sold to individuals. These products are distributed through independent agents, sponsoring organizations such as employee and affinity groups, and joint marketing arrangements with other insurers.

Automobile policies provide coverage for liability to others for both bodily injury and property damage, and for physical damage to an insured’s own vehicle from collision and various other perils. In addition, many states require policies to provide first-party personal injury protection, frequently referred to as no-fault coverage.

Homeowners policies are available for dwellings, condominiums, mobile homes and rental property contents. Protection against losses to dwellings and contents from a wide variety of perils is included in these policies, as well as coverage for liability arising from ownership or occupancy.

Results of the Company’s Personal segment were as follows:

(for the three months ended March 31, in millions)	2006			2005
Revenues:
Earned premiums	$	1,560		$	1,459
Net investment income	134			109
Other revenues	24			24
Total revenues	$	1,718		$	1,592
Total claims and expenses	$	1,372		$	1,172
Operating income	$	240		$	285

Loss and loss adjustment expense ratio	58.7		%	52.4		%
Underwriting expense ratio	27.7			26.3
GAAP combined ratio	86.4		%	78.7		%

Overview

The Personal segment in the first quarter of 2006 continued to benefit from an increase in net investment income, low claim frequency levels, strong premium growth fueled by new business and renewal price increases and net favorable prior year reserve development. Operating income of $240 million in the first quarter of 2006, however, was $45 million lower than operating income in the same period of 2005, primarily the result of a reduction in the amount of net favorable prior year reserve development and modest loss cost inflation in 2006.

Earned Premiums

Earned premiums of $1.56 billion in the first quarter of 2006 increased $101 million, or 7%, over earned premiums of $1.46 billion in the same period of 2005, reflecting continued strong business retention rates and new business volumes over the preceding twelve months, and renewal price increases.

Net Investment Income

Claims and Expenses

Claims and claim adjustment expenses in the first quarter of 2006, totaled $915 million, an increase of $150 million, or 20%, over the same period of 2005. The increase reflected the growth in earned premium volume and a reduction in net favorable prior year reserve development. The 2006 and 2005 totals included $30 million and $114 million, respectively, of net favorable prior year reserve development. The favorable development in both years was primarily driven by declines in the frequency of non-catastrophe losses and lower than expected severity. No catastrophe losses were incurred in the first quarter of 2006, whereas the same period of 2005 included $12 million of catastrophe losses, resulting from one wind and hail storm.

GAAP Combined Ratio

The loss and loss adjustment expense ratio of 58.7 for the first quarter of 2006 was 6.3 points higher than the 2005 first quarter ratio of 52.4, primarily reflecting the reduction in favorable prior year reserve development and modest loss cost inflation. The 2006 ratio included a 1.9 point benefit of net favorable prior year reserve development, whereas the 2005 ratio included a 7.8 point benefit from net favorable prior year reserve development. Catastrophe losses had no impact on the 2006 first quarter ratio, whereas the 2005 first quarter ratio included a 0.8 point impact of catastrophes. The underwriting expense ratio in the first quarter of 2006 was 1.4 points higher than in the same 2005 period, reflecting continued investments to support business growth and product development, as well as an increase in commission expenses primarily resulting from a changing business mix.

Written Premiums

Personal’s gross and net written premiums by product line were as follows:

	2006				2005
(for the three months ended March 31, in millions)	Gross		Net		Gross		Net

Automobile	$	942	$	932	$	870	$	854
Homeowners and Other	679		640		608		580
Total Personal	$	1,621	$	1,572	$	1,478	$	1,434

Gross and net written premiums in the first quarter of 2006 both increased 10% over the same period of 2005. Automobile net written premiums increased $78 million, or 9%, over the first quarter of 2005, driven by strong growth in new business volume. Renewal price changes in the Automobile line of business in the first quarter of 2006 remained positive, but declined when compared with the same period of 2005. The increase in new business in the Automobile line reflected the continued success of the Company’s multivariate pricing product that has been introduced in 23 states. In the Homeowners and Other line of business, net written premium volume in the first quarter of 2006 grew 10% over the same period of 2005, primarily due to continued renewal price increases and strong new business volume. Business retention rates in both the Automobile and Homeowners and Other lines of business remained strong and were consistent with the first quarter of 2005.

The Personal segment had approximately 6.7 million and 6.3 million policies in force at March 31, 2006 and 2005, respectively.

Interest Expense and Other

(for the three months ended March 31, in millions)	2006			2005
Net loss	$	(21	)	$	(47	)

The decline in net loss for Interest Expense and Other was primarily due to the favorable resolution of various prior year federal and state tax matters, partially offset by a decline in net investment income and an increase in interest expense that resulted from the issuance in November 2005 of $400 million, 5.50% senior notes.

ASBESTOS CLAIMS AND LITIGATION

The Company believes that the property and casualty insurance industry has suffered from court decisions and other trends that have attempted to expand insurance coverage for asbestos claims far beyond the intent of insurers and policyholders. As a result, the Company continues to experience a significant number of asbestos claims being tendered to the Company by the Company’s policyholders (which includes others seeking coverage under a policy), including claims against the Company’s policyholders by individuals who do not appear to be impaired by asbestos exposure. Factors underlying these claim filings include intensive advertising by lawyers seeking asbestos claimants, the focus by plaintiffs on new and previously peripheral

defendants and entities seeking bankruptcy protection as a result of asbestos-related liabilities. In addition to contributing to the overall number of claims, bankruptcy proceedings may increase the volatility of asbestos-related losses by initially delaying the reporting of claims and later by significantly accelerating and increasing loss payments by insurers, including the Company. Bankruptcy proceedings are also causing increased settlement demands against those policyholders who are not in bankruptcy but that remain in the tort system. Recently, in many jurisdictions, those who allege very serious injury and who can present credible medical evidence of their injuries are receiving priority trial settings in the courts, while those who have not shown any credible disease manifestation have their hearing dates delayed or placed on an inactive docket. This trend, along with the focus on new and previously peripheral defendants, contributes to the loss and loss expense payments experienced by the Company. In addition, the Company’s asbestos-related loss and loss expense experience is impacted by the exhaustion or unavailability due to insolvency of other insurance potentially available to policyholders along with the insolvency or bankruptcy of other defendants. The Company is currently involved in coverage litigation concerning a number of policyholders who have filed for bankruptcy, including, among others, ACandS, Inc., who in some instances have asserted that all or a portion of their asbestos-related claims are not subject to aggregate limits on coverage as described generally in the next paragraph. (Also see “Part II — Item 1, Legal Proceedings”). These trends are expected to continue in the near term. As a result of the factors described above, there is a high degree of uncertainty with respect to future exposure from asbestos claims.

In some instances, policyholders continue to assert that their claims for asbestos-related insurance are not subject to aggregate limits on coverage and that each individual bodily injury claim should be treated as a separate occurrence under the policy. It is difficult to predict whether these policyholders will be successful on both issues or whether the Company will be successful in asserting additional defenses. To the extent both issues are resolved in policyholders’ favor and other additional Company defenses are not successful, the Company’s coverage obligations under the policies at issue would be materially increased and bounded only by the applicable per-occurrence limits and the number of asbestos bodily injury claims against the policyholders. Accordingly, it is difficult to predict the ultimate cost of the claims for coverage not subject to aggregate limits.

Many coverage disputes with policyholders are only resolved through settlement agreements. Because many policyholders make exaggerated demands, it is difficult to predict the outcome of settlement negotiations. Settlements involving bankrupt policyholders may include extensive releases which are favorable to the Company but which could result in settlements for larger amounts than originally anticipated. As in the past, the Company will continue to pursue settlement opportunities.

In addition, proceedings have been launched directly against insurers, including the Company, challenging insurers’ conduct in respect of asbestos claims, and, as discussed below, claims by individuals seeking damages arising from alleged asbestos-related bodily injuries. The Company anticipates the filing of other direct actions against insurers, including the Company, in the future. It is difficult to predict the outcome of these proceedings, including whether the plaintiffs will be able to sustain these actions against insurers based on novel legal theories of liability. The Company believes it has meritorious defenses to these claims and has received favorable rulings in certain jurisdictions. Additionally, TPC has entered into settlement agreements, which have been approved by the court in connection with the proceedings initiated by TPC in the Johns Manville bankruptcy court. On March 29, 2006, the United States District Court for the Southern District of New York substantially affirmed the bankruptcy court’s orders while vacating that portion of the bankruptcy court’s orders which required all future direct actions against TPC to first be approved by the bankruptcy court before proceeding in state or federal court. Certain parties to the proceeding have filed appeals of the District Court’s affirmance. No briefing schedule has been set. If the rulings of the district court are affirmed through the appellate process, then TPC will have resolved substantially all of the pending direct action claims against it. (Also, see “Part II — Item 1, Legal Proceedings”).

Because each policyholder presents different liability and coverage issues, the Company generally reviews the exposure presented by each policyholder on a policyholder-by-policyholder basis. In the course of this review, the Company considers, among other factors: available insurance coverage, including the role of any umbrella or excess insurance the Company has issued to the policyholder; limits and deductibles; an analysis of each policyholder’s potential liability; the jurisdictions involved; past and anticipated future claim activity and loss development on pending claims; past settlement values of similar claims; allocated claim adjustment expense; potential role of other insurance; the role, if any, of non-asbestos claims or potential non-asbestos claims in any resolution process; and applicable coverage defenses or determinations, if any, including the determination as to whether or not an asbestos claim is a products/completed operation claim subject to an aggregate limit and the available coverage, if any, for that claim. When an estimate of the gross ultimate exposure for indemnity and related claim adjustment expense is determined for a policyholder, the Company calculates, by each policy year, a ceded reinsurance projection based on any applicable facultative and treaty reinsurance, past ceded experience and reinsurance collections. Conventional actuarial methods are not utilized to establish asbestos reserves. The Company’s evaluations have not resulted in any data from which a meaningful average asbestos defense or indemnity payment may be determined.

The Company also compares its historical gross and net loss and expense paid experience, year-by-year, to assess any emerging trends, fluctuations, or characteristics suggested by the aggregate paid activity. Net asbestos losses and expenses paid in the first quarter of 2006 were $84 million, compared with $75 million in the same period of 2005. Approximately 44% in 2006 and 37% in 2005 of total net paid losses related to policyholders with whom the Company previously entered into settlement agreements limiting the Company’s liability. At March 31, 2006, net asbestos reserves totaled $4.28 billion, compared with $3.86 billion at March 31, 2005. The increase was primarily due to an $830 million charge to strengthen reserves in the fourth quarter of 2005, which was partially offset by loss payments during the twelve months ended March 31, 2006.

The following table displays activity for asbestos losses and loss expenses and reserves:

(at and for the three months ended March 31, in millions)	2006			2005
Beginning reserves:
Direct	$	5,103		$	4,775
Ceded	(739		)	(843		)
Net	4,364			3,932

Incurred losses and loss expenses:
Direct	—			—
Ceded	—			—
Net	—			—

Accretion of discount:
Direct	—			—
Ceded	—			—
Net	—			—

Losses paid:
Direct	103			100
Ceded	(19		)	(25		)
Net	84			75

Ending reserves:
Direct	5,000			4,675
Ceded	(720		)	(818		)
Net	$	4,280		$	3,857

See “—Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves.”

ENVIRONMENTAL CLAIMS AND LITIGATION

The Company continues to receive claims from policyholders who allege that they are liable for injury or damage arising out of their alleged disposition of toxic substances. Mostly, these claims are due to various legislative as well as regulatory efforts aimed at environmental remediation. For instance, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), enacted in 1980 and later modified, enables private parties as well as federal and state governments to take action with respect to releases and threatened releases of hazardous substances. This federal statute permits the recovery of response costs from some liable parties and may require liable parties to undertake their own remedial action. Liability under CERCLA may be joint and several with other responsible parties.

The Company has been, and continues to be, involved in litigation involving insurance coverage issues pertaining to environmental claims. The Company believes that some court decisions have interpreted the insurance coverage to be broader than the original intent of the insurers and policyholders. These decisions often pertain to insurance policies that were issued by the Company prior to the mid-1970s. These decisions continue to be inconsistent and vary from jurisdiction to jurisdiction. Environmental claims when submitted rarely indicate the monetary amount being sought by the claimant from the policyholder, and the Company does not keep track of the monetary amount being sought in those few claims which indicate a monetary amount.

At March 31, 2006, approximately 78% of the net environmental reserve (approximately $300 million) was carried in a bulk reserve and included unresolved environmental claims, incurred but not reported environmental claims and the anticipated cost of coverage litigation disputes relating to these claims. The bulk reserve the Company carries is established and adjusted based upon the aggregate volume of in-process environmental claims and the Company’s experience in resolving those claims. The balance, approximately 22% of the net environmental reserve (approximately $87 million), consists of case reserves.

The resolution of environmental exposures by the Company generally occurs by settlement on a policyholder-by-policyholder basis as opposed to a claim-by-claim basis. Generally, the Company strives to extinguish any obligations it may have under any policy issued to the policyholder for past, present and future environmental liabilities and extinguish any pending coverage litigation dispute with the policyholder. This form of settlement is commonly referred to as a “buy-back” of policies for future environmental liability. In addition, many of the agreements have also extinguished any insurance obligation which the Company may have for other claims, including but not limited to asbestos and other cumulative injury claims. The Company and its policyholders may also agree to settlements which extinguish any future liability arising from known specified sites or claims. Provisions of these agreements also include appropriate indemnities and hold harmless provisions to protect the Company. The Company’s general purpose in executing these agreements is to reduce the Company’s potential environmental exposure and eliminate the risks presented by coverage litigation with the policyholder and related costs.

In establishing environmental reserves, the Company evaluates the exposure presented by each policyholder and the anticipated cost of resolution, if any. In the course of this analysis, the Company considers the probable liability, available coverage, relevant judicial interpretations and historical value of similar exposures. In addition, the Company considers the many variables presented, such as the nature of the alleged activities of the policyholder at each site; the allegations of environmental harm at each site; the number of sites; the total number of potentially responsible parties at each site; the nature of environmental harm and the corresponding remedy at each site; the nature of government enforcement activities at each site; the ownership and general use of each site; the overall nature of the insurance relationship between the Company and the policyholder, including the role of any umbrella or excess insurance the Company has issued to the policyholder; the involvement of other insurers; the potential for other available coverage, including the number of years of coverage; the role, if any, of non-environmental claims or potential non-environmental claims, in any resolution process; and the applicable law in each jurisdiction. Conventional actuarial techniques are not used to estimate these reserves.

In its review of environmental reserves, the Company considers: the adequacy of reserves for past settlements; changing judicial and legislative trends; the potential for policyholders with smaller exposures to be named in new clean-up action for both on- and off-site waste disposal activities; the potential for adverse development; the potential for additional new claims beyond previous expectations; and the potential higher costs for new settlements.

The duration of the Company’s investigation and review of these claims and the extent of time necessary to determine an appropriate estimate, if any, of the value of the claim to the Company vary significantly and are dependent upon a number of factors. These factors include, but are not limited to, the cooperation of the policyholder in providing claim information, the pace of underlying litigation or claim processes, the pace of coverage litigation between the policyholder and the Company and the willingness of the policyholder and the Company to negotiate, if appropriate, a resolution of any dispute pertaining to these claims. Because these factors vary from claim-to-claim and policyholder-by-policyholder, the Company cannot provide a meaningful average of the duration of an environmental claim. However, based upon the Company’s experience in resolving these claims, the duration may vary from months to several years.

The Company’s review of policyholders tendering claims for the first time has indicated that they are lower in severity. These policyholders generally present smaller exposures, have fewer sites and are lower tier defendants. Further, regulatory agencies are utilizing risk-based analysis and more efficient clean-up technologies. However, the Company has experienced an increase in the anticipated settlement amounts of certain matters as well as an increase in loss adjustment expenses. There also have been judicial interpretations that, in some cases, have been unfavorable to the industry and the Company.

Gross paid losses in the first quarters of 2006 and 2005 were $88 million and $101 million, respectively. TPC made a significant settlement with one policyholder in 2005. TPC executed an agreement with this policyholder which resolved all past, present and future hazardous waste and pollution property damage claims, and all related past and pending bodily injury claims. In addition, TPC and this policyholder entered into a coverage-in-place agreement which addressed the handling and resolution of all future hazardous waste and pollution bodily injury claims. Under the coverage-in-place agreement, TPC has no defense obligation, and there is an overall cap with respect to any indemnity obligation that might be owed. The first two of three payments related to this settlement were made during 2005 (including one in the first quarter of the year), and the final payment was made in the first quarter of 2006.

The following table displays activity for environmental losses and loss expenses and reserves:

(at and for the three months ended March 31, in millions)	2006			2005
Beginning reserves:
Direct	$	494		$	725
Ceded	(69		)	(84		)
Net	425			641

Incurred losses and loss expenses:
Direct	—			—
Ceded	—			—
Net	—			—

Losses paid:
Direct	88			101
Ceded	(50		)	1
Net	38			102

Ending reserves:
Direct	406			624
Ceded	(19		)	(85		)
Net	$	387		$	539

UNCERTAINTY REGARDING ADEQUACY OF ASBESTOS AND ENVIRONMENTAL RESERVES

As a result of the processes and procedures described above, management believes that the reserves carried for asbestos and environmental claims at March 31, 2006 are appropriately established based upon known facts, current law and management’s judgment. However, the uncertainties surrounding the final resolution of these claims continue, and it is difficult to determine the ultimate exposure for asbestos and environmental claims and related litigation. As a result, these reserves are subject to revision as new information becomes available and as claims develop. The continuing uncertainties include, without limitation, the risks and lack of predictability inherent in complex litigation, any impact from the bankruptcy protection sought by various asbestos producers and other asbestos defendants, a further increase or decrease in asbestos and environmental claims which cannot now be anticipated, the role of any umbrella or excess policies the Company has issued, the resolution or adjudication of some disputes pertaining to the amount of available coverage for asbestos and environmental claims in a manner inconsistent with the Company’s previous assessment of these claims, the number and outcome of direct actions against the Company and future developments pertaining to the Company’s ability to recover reinsurance for asbestos and environmental claims. In addition, the Company’s asbestos-related claims and claim adjustment expense experience has been impacted by the exhaustion or unavailability due to insolvency of other insurance sources potentially available to policyholders along with the insolvency or bankruptcy of other defendants. It is also not possible to predict changes in the legal and legislative environment and their impact on the future development of asbestos and environmental claims. This development will be affected by future court decisions and interpretations, as well as changes in applicable legislation, including legislation related to asbestos reform. It is also difficult to predict the ultimate outcome of large coverage disputes until settlement negotiations near completion and significant legal questions are resolved or, failing settlement, until the dispute is adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations often involve a large number of claimants and other parties and require court approval to be effective. As part of its continuing analysis of asbestos reserves, which includes an annual ground-up review of asbestos policyholders, the Company continues to study the implications of these and other developments. The Company completed its most recent annual ground-up review during the fourth quarter of 2005. Also see “Part II — Item 1, Legal Proceedings.”

Because of the uncertainties set forth above, additional liabilities may arise for amounts in excess of the current asbestos and environmental reserves. In addition, the Company’s estimate of claims and claim adjustment expenses may change. These additional liabilities or increases in estimates, or a range of either, cannot now be reasonably estimated and could result in income statement charges that could be material to the Company’s operating results and financial condition in future periods.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet the short- and 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 maturities and income received on investments. Cash provided from these sources is used primarily for claims and claim adjustment expense payments and operating expenses. The timing and amount of catastrophe claims are inherently unpredictable. Such claims increase liquidity requirements. The timing and amount of reinsurance recoveries may be affected by reinsurer solvency and reinsurance coverage disputes. Additionally, the volatility of asbestos-related claim payments, as well as potential judgments and settlements arising out of litigation, may also result in increased liquidity requirements. It is the opinion of the Company’s management that the Company’s future liquidity needs will be adequately met from all of the above sources.

Net cash flows provided by operating activities of continuing operations in the first quarters of 2006 and 2005 totaled $562 million and $1.03 billion, respectively. The decline in 2006 was primarily due to a higher level of claim and claim adjustment expense payments in the first quarter of 2006 related to the catastrophe losses incurred in the third and fourth quarters of 2005.

Net cash flows used in investing activities of continuing operations in the first quarters of 2006 and 2005 totaled $380 million and $632 million, respectively. Fixed maturity securities accounted for the majority of investment purchases in both years.

The majority of funds available for investment are deployed in a widely diversified portfolio of high quality, liquid intermediate-term taxable U.S. government, corporate and mortgage backed bonds and tax-exempt U.S. municipal bonds. The Company closely monitors the duration of its fixed maturity investments, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy the Company’s insurance and debt obligations. The Company’s management of the duration of the fixed income investment portfolio generally produces a duration that exceeds the duration of the Company’s net insurance liabilities. As the Company’s investment strategy focuses on asset and liability durations, and not specific cash flows, asset sales may be required to satisfy obligations and/or rebalance asset portfolios. The average duration of fixed maturities and short-term securities was 4.0 years at March 31, 2006, compared with 3.9 years at December 31, 2005.

The Company also invests much smaller amounts in equity securities, venture capital and real estate. These investment classes have the potential for higher returns but also involve varying degrees of risk, including less stable rates of return and less liquidity.

The primary goals of the Company’s asset liability management process are to satisfy the insurance liabilities, manage the interest rate risk embedded in those insurance liabilities, and maintain sufficient liquidity to cover fluctuations in projected liability cash flows. Generally, the expected principal and interest payments produced by the Company’s fixed income portfolio adequately fund the estimated runoff of the Company’s insurance reserves. Although this is not an exact cash flow match in each period, the substantial degree by which the market value of the fixed income portfolio exceeds the present value of the net insurance liabilities, plus the positive cash flow from newly sold policies and the large amount of high quality liquid bonds provides assurance of the Company’s ability to fund the payment of claims without having to sell illiquid assets or access credit facilities.

At March 31, 2006, total cash, short-term invested assets and other readily marketable securities aggregating $1.82 billion were held at the holding company level. The assets held at the holding company, combined with other sources of funds available, primarily additional dividends from operating subsidiaries, are considered sufficient to meet its liquidity requirements. These liquidity requirements primarily include shareholder dividends and debt service.

Net cash flows used in financing activities of continuing operations in the first quarters of 2006 and 2005 totaled $146 million and $115 million, respectively. There were no significant issuances or repayments of debt in the first quarters of 2006 or 2005. Dividends paid to shareholders totaled $161 million and $150 million in the first quarters of 2006 and 2005, respectively. On May 2, 2006, the Company’s Board of Directors declared a quarterly dividend of $0.26 per share, a 13% increase over the prior quarterly dividend rate of $0.23 per share. The dividend is payable June 30, 2006 to shareholders of record on June 9, 2006.

The declaration and payment of future dividends to holders of the Company’s common stock will be at the discretion of the Company’s Board of Directors and will depend upon many factors, including the Company’s financial condition, 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 legally available, subject to any other restrictions that may be applicable to the Company.

The Company has the option to defer interest payments on its convertible junior subordinated notes for a period not exceeding 20 consecutive quarterly interest periods. If the Company elects to defer interest payments on the notes, it will not be permitted, with limited exceptions, to pay dividends on its common stock during a deferral period.

Upon completion of the merger on April 1, 2004, the Company acquired all obligations related to SPC’s outstanding debt, which had a carrying value of $3.68 billion at the time of the merger. In accordance with purchase accounting, the carrying value of the SPC debt acquired was adjusted to market value as of April 1, 2004 using the effective interest rate method, which resulted in a $301 million adjustment to increase the amount of the Company’s consolidated debt outstanding. That fair value adjustment is being amortized over the remaining life of the respective debt instruments acquired. That amortization, which totaled $9 million and $19 million in the first quarters of 2006 and 2005, respectively, reduced reported interest expense.

RATINGS

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

The Company’s insurance operations could be negatively impacted by a downgrade in one or more of the Company’s financial strength ratings. If this were to occur, there could be a reduced demand for certain products in certain markets. Additionally, the Company’s ability to access the capital markets could be impacted and higher borrowing costs may be incurred.

The following rating agency actions were taken with respect to the Company to date in 2006:

• On February 2, 2006, Fitch affirmed all ratings of the Company, including the “A-” long-term issuer rating, “A-” ratings on the Company’s senior unsecured notes, and “BBB+” ratings on the Company’s subordinated notes in capital securities. Additionally, Fitch affirmed the “AA-” insurer financial strength (IFS) ratings on members of the St. Paul Travelers Inter-Company Pool. The rating outlooks are stable.

• On May 3, 2006, Moody’s affirmed the long-term debt ratings (senior unsecured debt at A3) of the Company and the IFS ratings on members of the St. Paul Travelers Inter-Company Pool (Aa3). The outlook for these ratings was changed to stable from negative.

Claims – Paying Ratings

The following table summarizes the current claims-paying (or financial strength) ratings of the St. Paul Travelers Reinsurance Pool, Travelers C&S of America, Northland Pool, Travelers Personal single state companies, Travelers Europe, Discover Reinsurance Company, Afianzadora Insurgentes, S.A., St. Paul Guarantee Insurance Company and St. Paul Travelers Insurance Company Limited by A.M. Best, Moody’s, S&P and Fitch as of May 4, 2006. The table also presents the position of each rating in the applicable agency’s rating scale.

	A.M. Best		Moody’s		S&P		Fitch
St. Paul Travelers Reinsurance Pool(a,b)	A+ (2nd of 16	)	Aa3 (4th of 21	)	A+ (5th of 21	)	AA- (4th of 24	)
Travelers C&S of America	A+ (2nd of 16	)	Aa3 (4th of 21	)	A+ (5th of 21	)	AA- (4th of 24	)
Northland Pool(c)	A (3rd of 16	)	—		—		—
First Floridian Auto and Home Ins. Co.	A (3rd of 16	)	—		—		AA- (4th of 24	)
First Trenton Indemnity Company	A (3rd of 16	)	—		—		AA- (4th of 24	)
The Premier Insurance Co. of MA	A (3rd of 16	)	—		—		AA- (4th of 24	)
Travelers Europe	A+ (2nd of 16	)	Aa3 (4th of 21	)	A+ (5th of 21	)	—
Discover Reinsurance Company	A- (4th of 16	)	—		—		—
Afianzadora Insurgentes, S.A.	A- (4th of 16	)	—		—		—
St. Paul Guarantee Insurance Company	A (3rd of 16	)	—		—		—
St. Paul Travelers Insurance Company Limited	A (3rd of 16	)	—		—		—

(a) The St. Paul Travelers Reinsurance Pool consists of: The Travelers Indemnity Company, The Charter Oak Fire Insurance Company, The Phoenix Insurance Company, The Travelers Indemnity Company of Connecticut, The Travelers Indemnity Company of America, Travelers Property Casualty Company of America, Travelers Commercial Casualty Company, TravCo Insurance Company, The Travelers Home and Marine Insurance Company, Travelers Casualty and Surety Company, The Standard Fire Insurance Company, The Automobile Insurance Company of Hartford, Connecticut, Travelers Casualty Insurance Company of America, Farmington Casualty Company, Travelers Commercial Insurance Company, Travelers Casualty Company of Connecticut, Travelers Property Casualty Insurance Company, Travelers Personal Security Insurance Company, Travelers Personal Insurance Company, Travelers Excess and Surplus Lines Company, St. Paul Fire and Marine Insurance Company, St. Paul Surplus Lines Insurance Company, Athena Assurance Company, St. Paul Protective Insurance Company, St. Paul Medical Liability Insurance Company, Discover Property & Casualty Insurance Company, Discover Specialty Insurance Company, and United States Fidelity and Guaranty Company.

(b) The following affiliated companies are 100% reinsured by one of the pool participants noted in (a) above: Atlantic Insurance Company, Commercial Guaranty Lloyds Insurance Company, Fidelity and Guaranty Insurance Company, Fidelity and Guaranty Insurance Underwriters, Inc., Gulf Group Lloyds, Gulf Underwriters Insurance Company, Travelers Auto Insurance Co. of New Jersey, Seaboard Surety Company, Select Insurance Company, St. Paul Fire and Casualty Insurance Company, St. Paul Guardian Insurance Company, St. Paul Mercury Insurance Company, The Travelers Lloyds Insurance Company, Travelers Lloyds of Texas Insurance Company, and USF&G Insurance Company of Mississippi.

(c) The Northland Pool consists of Northland Insurance Company, Northfield Insurance Company, Northland Casualty Company, Mendota Insurance Company, Mendakota Insurance Company, American Equity Insurance Company and American Equity Specialty Insurance Company.

Debt Ratings

The following table summarizes the current debt, preferred stock and commercial paper ratings of the Company and its subsidiaries by A.M. Best, Moody’s, S&P and Fitch as of May 4, 2006. 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	a- (7th of 22	)	A3 (7th of 21	)	BBB+ (8th of 22	)	A- (7th of 22	)
Subordinated debt	bbb+ (8th of 22	)	Baa (8th of 21	)	BBB (9th of 22	)	A- (7th of 22	)
Junior subordinated debt	bbb+ (8th of 22	)	Baa (8th of 21	)	BBB- (10th of 22	)	BBB+ (8th of 22	)
Trust preferred securities	bbb (9th of 22	)	Baa (8th of 21	)	BBB- (10th of 22	)	BBB+ (8th of 22	)
Preferred stock	bbb (9th of 22	)	Baa2 (9th of 21	)	BBB- (10th of 22	)	BBB+ (8th of 22	)
Commercial paper.	AMB-1 (2nd of 6	)	Prime-2 (2nd of 4	)	A-2 (3rd of 8	)	F-2 (3rd of 8	)

CRITICAL ACCOUNTING ESTIMATES

The Company considers its most significant accounting estimates to be those applied to claim and claim adjustment expense reserves and related reinsurance recoverables, and investment impairments.

Claim and Claim Adjustment Expense Reserves

Claim and claim adjustment expense reserves (loss reserves) represent management’s estimate of ultimate unpaid costs of losses and loss adjustment expenses for claims that have been reported and claims that have been incurred but not yet reported. Loss reserves do not represent an exact calculation of liability, but instead represent management estimates, generally utilizing actuarial expertise and projection techniques, at a given accounting date. These loss reserve estimates are expectations of what the ultimate settlement and administration of claims will cost upon final resolution in the future, based on the Company’s assessment of facts and circumstances then known, review of historical settlement patterns, estimates of trends in claims severity and frequency, expected interpretations of legal theories of liability and other factors. In establishing reserves, the Company also takes into account estimated recoveries, reinsurance, salvage and subrogation. The reserves are reviewed regularly by a qualified actuary 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 procedures, economic inflation, legal trends and legislative changes, among others. The impact of many of these items on ultimate costs for loss and loss adjustment expenses is difficult to estimate. Loss reserve estimation difficulties also differ significantly by product line due to differences in claim complexity, the volume of claims, the potential severity of individual claims, the determination of occurrence date for a claim and reporting lags (the time between the occurrence of the policyholder event and when it is actually reported to the insurer). Informed judgment is applied throughout the process. The Company continually refines its loss reserve estimates in a regular ongoing process as historical loss experience develops and additional claims are reported and settled. The Company rigorously attempts to consider all significant facts and circumstances known at the time loss reserves are established. Due to the inherent uncertainty underlying loss reserve estimates, including but not limited to the future settlement environment, final resolution of the estimated liability will be different from that anticipated at the reporting date. Therefore, actual paid losses in the future may yield a materially different amount than currently reserved—favorable or unfavorable.

Because establishment of loss reserves is an inherently uncertain process involving estimates, currently established reserves may change. The Company reflects adjustments to reserves in the results of operations in the period the estimates are changed.

There are also risks which impact the estimation of ultimate costs for catastrophes. For example, the estimation of reserves related to hurricanes can be affected by the inability of the Company and its insureds to access portions of the impacted areas, the complexity of factors contributing to the losses, the legal and regulatory uncertainties and the nature of the information available to establish the reserves. Complex factors include, but are not limited to: determining whether damage was caused by flooding versus wind; evaluating general liability and pollution exposures; estimating additional living expenses; the impact of demand surge; infrastructure disruption; fraud; the effect of mold damage and business interruption costs; and reinsurance collectibility. The timing of a catastrophe’s occurrence, such as at or near the end of a reporting period, can also affect the information available to us in estimating reserves for that reporting period. The estimates related to catastrophes are adjusted as actual claims emerge.

A portion of the Company’s loss reserves are for asbestos and environmental claims and related litigation which aggregated $4.67 billion at March 31, 2006. While the ongoing study of asbestos claims and associated liabilities and of environmental claims considers the inconsistencies of court decisions as to coverage, plaintiffs’ expanded theories of liability and the risks inherent in complex litigation and other uncertainties, in the opinion of the Company’s management, it is possible that the outcome of the continued uncertainties regarding these claims could result in liability in future periods that differs from current reserves by an amount that could be material to the Company’s future operating results and financial condition. See the preceding discussion of “Asbestos Claims and Litigation” and “Environmental Claims and Litigation.”

The Company acquired SPC’s runoff health care reserves in the merger, which are included in the General Liability product line in the table below. SPC decided to exit this market at the end of 2001 and ceased underwriting new business as quickly as regulatory considerations allowed. SPC had experienced significant adverse loss development on its health care loss reserves both prior to and since its decision to exit this market. The Company continues to utilize specific tools and metrics to explicitly monitor and validate its key assumptions supporting its conclusions with regard to these reserves since management believed that its traditional statistics and reserving methods needed to be supplemented in order to provide a more meaningful analysis. The tools developed track three primary indicators which influence those conclusions and include: newly reported claims; reserve development on known claims; and the “redundancy ratio,” which compares the cost of resolving claims to the reserve established for that individual claim. These three indicators are related such that if one deteriorates, improvement on another is necessary for the Company to conclude that further reserve strengthening is not necessary. The Company’s current view is that it has recorded a reasonable reserve for its medical malpractice exposures as of March 31, 2006.

Claims and claim adjustment expense reserves by product line were as follows:

	March 31, 2006						December 31, 2005
(in millions)	Case		IBNR		Total		Case		IBNR		Total
General liability	$	8,092	$	12,303	$	20,395	$	8,198	$	12,251	$	20,449
Property	1,854		1,164		3,018		1,987		1,050		3,037
Commercial multi-peril	2,298		2,679		4,977		2,448		2,901		5,349
Commercial automobile	2,651		1,878		4,529		2,792		1,885		4,677
Workers’ compensation	8,860		6,279		15,139		8,816		6,374		15,190
Fidelity and surety	1,141		783		1,924		1,240		673		1,913
Personal automobile	1,445		1,168		2,613		1,470		1,138		2,608
Homeowners and personal—other	482		937		1,419		709		987		1,696
International and other	3,442		3,165		6,607		3,033		3,055		6,088
Property-casualty	30,265		30,356		60,621		30,693		30,314		61,007
Accident and health	73		9		82		74		9		83
Claims and claim adjustment expense reserves	$	30,338	$	30,365	$	60,703	$	30,767	$	30,323	$	61,090

The $387 million decline in gross claims and claim adjustment expense reserves since December 31, 2005 primarily reflected loss payouts for the third and fourth quarter 2005 hurricanes, partially offset by an increase for reserves acquired through reinsurance to close included in International and other reserves. (see note 11 to the consolidated financial statements).

Asbestos and environmental reserves are included in the General liability, Commercial multi-peril lines and International and other lines in the summary table. Asbestos and environmental reserves are discussed separately, see “Asbestos Claims and Litigation”, “Environmental Claims and Litigation” and “Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves”.

General Discussion

The process for estimating the liabilities for claim and claim expenses begins with the collection and analysis of claim data. Data on individual reported claims, both current and historical, including paid amounts and individual claim adjuster estimates, are grouped by common characteristics (“components”) and evaluated by actuaries in their analyses of ultimate claim liabilities by product line. Such data is occasionally supplemented with external data as available and when appropriate. The process of analyzing reserves for a component is undertaken on a regular basis, generally quarterly, in light of continually updated information.

Multiple estimation methods are available for the analysis of ultimate claim liabilities. Each estimation method has its own set of assumption variables and its own advantages and disadvantages, with no single estimation method being better than the others in all situations and no one set of assumption variables being meaningful for all product line components. The relative strengths and weaknesses of the particular estimation methods when applied to a particular group of claims can also change over time. Therefore, the actual choice of estimation method(s) can change with each evaluation. The estimation method(s) chosen are those that are believed to produce the most reliable indication at that particular evaluation date for the claim liabilities being evaluated.

In most cases, multiple estimation methods will be valid for the particular facts and circumstances of the claim liabilities being evaluated. This will result in a range of reasonable estimates for any particular claim liability. The Company uses such range analyses to back test whether previously established estimates for reserves at the reporting segments are reasonable, given subsequent information. Reported values found to be closer to the endpoints of a range of reasonable estimates are subject to further detailed reviews. These reviews may substantiate the validity of management’s recorded estimate or lead to a change in the reported estimate.

The exact boundary points of these ranges are more qualitative than quantitative in nature, as no clear line of demarcation exists to determine when the set of underlying assumptions for an estimation method switches from being reasonable to unreasonable. As a result, the Company does not believe that the endpoints of these ranges are or would be comparable across companies. In addition, potential interactions among the different estimation assumptions for different product lines make the aggregation of individual ranges a highly judgmental and inexact process.

Property casualty insurance policies are either written on a claims made or on an occurrence basis. Policies written on a claims made basis require that claims be reported during the policy period. Policies that are written on an occurrence basis require that the insured demonstrate that a loss occurred in the policy period, even if the insured reports the loss many years later.

Most general liability policies are written on an occurrence basis. These policies are subject to substantial loss development over time as facts and circumstances change in the years following the policy issuance. The use of the occurrence form accounts for much of the reserve development in asbestos and environmental exposures, and it is also used to provide coverage for construction general liability, including construction defect. Occurrence based forms of insurance for general liability exposures require substantial projection of various trends, including future inflation and judicial interpretations and societal litigation dynamics, among others.

A key assumption in most actuarial analyses is that past patterns demonstrated in the data will repeat themselves in the future, absent a material change in the associated risk factors discussed below. To the extent a material change affecting the ultimate claim liability is known, such change is quantified to the extent possible through an analysis of internal company and, if available and when appropriate, external data. Such a measurement is specific to the facts and circumstances of the particular claim portfolio and the known change being evaluated. Significant structural changes to the available data, product mix or organization can materially impact the reserve estimation process.

Informed management judgment is applied throughout the reserving process. This includes the application, on a consistent basis over time, of various individual experiences and expertise to multiple sets of data and analyses. In addition to actuaries, individuals involved with the reserving process also include underwriting and claims personnel as well as other company management. Therefore, it is quite possible and, generally, likely that management must consider varying individual viewpoints as part of its estimation of loss reserves. It is also likely that during periods of significant change, such as a merger, consistent application of informed judgment becomes even more complicated and difficult.

The variables discussed above in this general discussion have different impacts on reserve estimation uncertainty for a given product line, depending on the length of the claim tail, the reporting lag, the impact of individual claims and the complexity of the claim process for a given product line.

Product lines are generally classifiable as either long tail or short tail, based on the average length of time between the event triggering claims under a policy and the final resolution of those claims. Short tail claims are reported and settled quickly, resulting in less estimation variability. The longer the time before final claim resolution, the greater the exposure to estimation risks and hence the greater the estimation uncertainty.

A major component of the claim tail is the reporting lag. The reporting lag, which is the time between the event triggering a claim and the reporting of the claim to the insurer, makes estimating IBNR inherently more uncertain. In addition, the greater the reporting lag the greater the proportion of IBNR claims to the total claim liability for the product line. Writing new products with material reporting lags can result in adding several years worth of IBNR claim exposure before the reporting lag exposure becomes clearly observable, thereby increasing the risk associated with pricing and reserving such products. The most extreme example of claim liabilities with long reporting lags are asbestos claims.

For some lines, the impact of large individual claims can be material to the analysis. These lines are generally referred to as being low frequency/high severity, while lines without this “large claim” sensitivity are referred to as “high frequency/low severity”. Estimates of claim liabilities for low frequency/high severity lines can be sensitive to a few key assumptions. As a result, the role of judgment is much greater for these reserve estimates. In contrast, high frequency/low severity lines tend to have much greater spread of estimation risk, such that the impact of individual claims are relatively minor and the range of reasonable reserve estimates is narrower and more stable.

Claim complexity can also greatly affect the estimation process by impacting the number of assumptions needed to produce the estimate, the potential stability of the underlying data and claim process and the ability to gain an understanding of the data. Product lines with greater claim complexity, such as for certain surety and construction exposures, have inherently greater estimation uncertainty.

Actuaries have to exercise a considerable degree of judgment in the evaluation of all these factors in their analysis of reserves. The human element in the application of actuarial judgment is unavoidable when faced with material uncertainty. Different experts will choose different assumptions when faced with such uncertainty, based on their individual backgrounds, professional experiences and areas of focus. Hence, the estimate selected by the various actuaries may differ materially from each other.

Lastly, significant structural changes to the available data, product mix or organization can also materially impact the reserve estimation process. The merger of TPC and SPC resulted in the exposure of each other’s actuaries and claim departments to different products, data histories, analysis methodologies, claim settlement experts, and more robust data when viewed on a combined basis. This impacted the range of estimates produced by the Company’s actuaries, as they reacted to new data, approaches, and sources of expertise to draw upon. It also resulted in additional levels of uncertainty, as past trends (that were a function of past products, past claim handling procedures, past claim departments, and past legal and other experts) may not repeat themselves, as those items affecting the trends change or evolve due to the merger. This also increased the potential for material variation in estimates, as experts can have differing views as to the impact of these frequently evolutionary changes. Events such as mergers increase the inherent uncertainty of reserve estimates for a period of time, until stable trends reestablish themselves within the new organization.

Risk Factors

The major causes of material uncertainty (“risk factors”) generally will vary for each product line, as well as for each separately analyzed component of the product line. In some cases, such risk factors are explicit assumptions of the estimation method and in others, they are implicit. For example, a method may explicitly assume that a certain percentage of claims will close each year, but will implicitly assume that the legal interpretation of existing contract language will remain unchanged. Actual results will likely vary from expectations for each of these assumptions, resulting in an ultimate 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, state mix of claimants, and degree of claimant fraud. The extent of the impact of a risk factor will also vary by components within a product line. Individual risk factors are also subject to interactions with other risk factors within product line components.

The effect of a particular risk factor on estimates of claim liabilities cannot be isolated in most cases. For example, estimates of potential claim settlements may be impacted by the risk associated with potential court rulings, but the final settlement agreement typically does not delineate how much of the settled amount is due to this and other factors.

The evaluation of data is also subject to distortion from extreme events or structural shifts, sometimes in unanticipated ways. For example, the timing of claims payments in one geographic region will be impacted if claim adjusters are temporarily reassigned from that region to help settle catastrophe claims in another region.

While some changes in the claim environment are sudden in nature (such as a new court ruling affecting the interpretation of all contracts in that jurisdiction), others are more evolutionary. Evolutionary changes can occur when multiple factors affect final claim values, with the uncertainty surrounding each factor being resolved separately, in step-wise fashion. The final impact is not known until all steps have occurred.

Sudden changes generally cause a one-time shift in claim liability estimates, although there may be some lag in reliable quantification of their impact. Evolutionary changes generally cause a series of shifts in claim liability estimates, as each component of the evolutionary change becomes evident and estimable.

Management’s Estimates

At least once per quarter, Company management meets with its actuaries to review the latest claim and claim adjustment expense reserve analyses. Based on these analyses, management determines whether its ultimate claim liability estimates should be changed. In doing so, it must evaluate whether the new data provided represents credible actionable information or an anomaly that will have no effect on estimated ultimate claim liability. For example, as described above, payments may have decreased in one geographic region due to fewer claim adjusters being available to process claims. The resulting claim payment patterns would be analyzed to determine whether or not the change in payment pattern represents a change in ultimate claim liability.

Such an assessment requires considerable judgment. It is frequently not possible to determine whether a change in the data is an anomaly until sometime after the event. Even if a change is determined to be permanent, it is not always possible to reliably determine the extent of the change until sometime later. The overall detailed analyses supporting such an effort can take several months to perform. This is due to the need to evaluate the underlying cause of the trends observed, and may include the gathering or assembling of data not previously available. It may also include interviews with experts involved with the underlying processes. As a result, there can be a time lag between the emergence of a change and a determination that the change should be reflected in the Company’s estimated claim liabilities. The final estimate selected by management in a reporting period is a function of these detailed analyses of past data, adjusted to reflect any new actionable information.

Reinsurance Recoverables

The following table summarizes the composition of the Company’s reinsurance recoverable assets:

(in millions)	March 31, 2006			December 31, 2005
Gross reinsurance recoverables on paid and unpaid claims and claim adjustment expenses	$	14,188		$	14,177
Allowance for uncollectible reinsurance	(803		)	(804		)
Net reinsurance recoverables	13,385			13,373
Mandatory pools and associations	1,991			2,211
Structured settlements	3,806			3,990
Total reinsurance recoverables	$	19,182		$	19,574

The Company reports its reinsurance recoverables net of an allowance for estimated uncollectible reinsurance recoverables. The allowance is based upon the Company’s ongoing review of amounts outstanding, length of collection periods, changes in reinsurer credit standing, disputes, applicable coverage defenses, and other relevant factors. Accordingly, the establishment of reinsurance recoverables and the related allowance for uncollectible reinsurance recoverables is also an inherently uncertain process involving estimates. Changes in these estimates could result in additional income statement charges.

Investment Impairments

Fixed Maturities and Equity Securities

An investment in a fixed maturity or equity security which is available for sale or reported at fair value is impaired if its fair value falls below its book value and the decline is considered to be other-than-temporary.

Fixed maturities for which fair value is less than 80% of amortized cost for more than one quarter are evaluated for other-than-temporary impairment. A fixed maturity is impaired if it is probable that the Company will not be able to collect all amounts due under the security’s contractual terms.

Factors the Company considers in determining whether a decline is other-than-temporary for debt securities include the following:

• the length of time and the extent to which fair value has been below cost. It is likely that the Company will conclude that the decline is “other-than-temporary” if the market value has been below cost for six to nine months;

• the financial condition and near-term prospects of the issuer. The issuer may be experiencing depressed and declining earnings relative to competitors, erosion of market share, deteriorating financial position, lowered dividend payments, declines in securities ratings, bankruptcy, and financial statement reports that indicate an uncertain future. Also, the issuer may experience specific events that may influence its operations or earnings potential, such as changes in technology, discontinuation of a business segment, catastrophic losses or exhaustion of natural resources; and

• the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery.

Equity investments are impaired when it becomes probable that the Company will not recover its cost over the expected holding period. Public equity investments (i.e., common stocks) trading at a price that is less than 80% of cost for more than one quarter are reviewed for impairment. Investments accounted for using the equity method of accounting are evaluated for impairment any time the investment has sustained losses and/or negative operating cash flow for a period of nine months or more. Events triggering the other-than-temporary impairment analysis of public and non-public equities may include the following, in addition to the considerations noted above for debt securities:

Factors affecting performance:

• the investee loses a principal customer or supplier for which there is no short-term prospect for replacement or experiences other substantial changes in market conditions;

• the company is performing substantially and consistently behind plan;

• the investee has announced, or the Company has become aware of, adverse changes or events such as changes or planned changes in senior management, restructurings, or a sale of assets; and

• the regulatory, economic, or technological environment has changed in a way that is expected to adversely affect the investee’s profitability.

Factors affecting on-going financial condition:

• factors that raise doubts about the investee’s ability to continue as a going concern, such as negative cash flows from operations, working-capital deficiencies, investment advisors’ recommendations, or non-compliance with regulatory capital requirements or debt covenants;

• a secondary equity offering at a price substantially lower than the holder’s cost;

• a breach of a covenant or the failure to service debt; and

• fraud within the company.

For fixed maturity and equity investments, factors that may indicate that a decline in value is not other-than-temporary include the following:

• the securities owned continue to generate reasonable earnings and dividends, despite a general stock market decline;

• bond interest or preferred stock dividend rate (on cost) is lower than rates for similar securities issued currently but quality of investment is not adversely affected;

• the investment is performing as expected and is current on all expected payments;

• specific, recognizable, short-term factors have affected the market value; and

• financial condition, market share, backlog and other key statistics indicate growth.

Real Estate Investments

Venture Capital Investments

Other investments include venture capital investments, which are generally non-publicly traded instruments, consisting of early-stage companies and, historically, having a holding period of four to seven years. These investments have primarily been made in the health care, software and computer services, and networking and information technologies infrastructures industries. The Company typically is involved with venture capital companies early in their formation, as they are developing and determining the viability of, and market demand for, their product. Generally, the Company does not expect these venture capital companies to record revenues in the early stages of their development, which can often take three to four years, and does not generally expect them to become profitable for an even longer period of time. With respect to the Company’s valuation of such non-publicly traded venture capital investments, on a quarterly basis, portfolio managers as well as an internal valuation committee review and consider a variety of factors in determining the potential for loss impairment. Factors considered include the following:

• the issuer’s most recent financing event;

• an analysis of whether fundamental deterioration has occurred;

• whether or not the issuer’s progress has been substantially less than expected;

• whether or not the valuations have declined significantly in the entity’s market sector;

• whether or not the internal valuation committee believes it is probable that the issuer will need financing within six months at a lower price than our carrying value; and

• whether or not we have the ability and intent to hold the security for a period of time sufficient to allow for recovery, enabling us to receive value equal to or greater than our cost.

The Company manages the portfolio to maximize long-term return, evaluating current market conditions and the future outlook for the entities in which it has invested. Because this portfolio primarily consists of privately-held, early-stage venture investments, events giving rise to impairment can occur in a brief period of time (e.g., the entity has been unsuccessful in securing additional financing, other investors decide to withdraw their support, complications arise in the product development process, etc.), and decisions are made at that point in time, based on the specific facts and circumstances, with respect to a recognition of “other-than-temporary” impairment or sale of the investment.

Non-Publicly Traded Investments

The Company’s investment portfolio includes non-publicly traded investments, such as venture capital investments, private equity limited partnerships, joint ventures, other limited partnerships, and certain fixed income securities. Certain venture capital investments that are controlled by the Company are consolidated in the Company’s financial statements. The Company uses the equity method of accounting for joint ventures, limited partnerships and certain private equity securities. Certain other private equity investments, including venture capital investments, are not subject to the provisions of FAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, but are reported at estimated fair value in accordance with FAS 60, Accounting and Reporting by Insurance Enterprises. The fair value of the venture capital investments is based on an estimate determined by an internal valuation committee for securities for which there is no public market. The internal valuation committee 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. Other non-publicly traded securities are valued based on factors such as management judgment, recent financial information and other market data. An impairment loss is recognized if, based on the specific facts and circumstances, it is probable that the Company will not be able to recover all of the cost of an individual holding.

The following is a summary of the approximate carrying value of the Company’s non-publicly traded securities at March 31, 2006:

(in millions)	Carrying Value
Investment partnerships, including hedge funds	$	1,803
Fixed income securities	230
Equity investments	111
Real estate partnerships and joint ventures	118
Venture capital	478
Total	$	2,740

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

	2006
(in millions)	1st Quarter

Fixed maturities	$	—
Equity securities	1
Venture capital	5
Real estate and other	4
Total	$	10

	2005
(in millions)	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter

Fixed maturities	$	3	$	2	$	5	$	1
Equity securities	—		—		—		—
Venture capital	6		40		29		5
Real estate and other	—		—		—		18
Total	$	9	$	42	$	34	$	24

The following table summarizes for all fixed maturities and equity securities available for sale and for equity securities reported at fair value for which fair value is less than 80% of amortized cost at March 31, 2006, the gross unrealized investment loss by length of time those securities have continuously been in an unrealized loss position:

	Period For Which Fair Value Is Less Than 80% of Amortized Cost
(in millions)	Less Than 3 Months		Greater Than 3 Months, Less Than 6 Months		Greater Than 6 Months, Less Than 12 Months		Greater Than 12 Months		Total
Fixed maturities	$	2	$	—	$	—	$	—	$	2
Equity securities	—		—		—		—		—
Venture capital	—		1		—		—		1
Total	$	2	$	1	$	—	$	—	$	3

Unrealized investment losses as of March 31, 2006 represent less than 2% of the portfolio, and, therefore, any impact on the Company’s financial position would not be significant.

At March 31, 2006, non-investment grade securities comprised 3% of the Company’s fixed income investment portfolio. Included in those categories at March 31, 2006 were securities in an unrealized loss position that, in the aggregate, had an amortized cost of $938 million and a fair value of $905 million, resulting in a net pretax unrealized investment loss of $33 million. These securities in an unrealized loss position represented less than 2% of the total amortized cost and less than 2% of the fair value of the fixed income portfolio at March 31, 2006, and accounted for 4% of the total pretax unrealized investment loss in the fixed income portfolio.

Following are the pretax realized losses on investments sold during the three months ended March 31, 2006:

(in millions)	Loss		Fair Value

Fixed maturities	$	34	$	870
Equity securities	1		13
Total	$	35	$	883

Purchases and sales of investments are based on cash requirements, the characteristics of the insurance liabilities and current market conditions. The Company identifies investments to be sold to achieve its primary investment goals of assuring the Company’s ability to meet policyholder obligations as well as to optimize investment returns, given these obligations.

OTHER MATTERS

Effective January 1, 2006, the Company adopted the revised Statement of Financial Accounting Standards No. 123, Share-Based Payment (FAS 123R), using the modified prospective method, which amended and replaced previous guidance on measuring and recognizing the cost of employee services received in exchange for an award of equity instruments. This method prescribes the fair value method of accounting as the method for recognizing share-based employee compensation. The Company had previously adopted the fair value method of accounting under FAS 123, Accounting for Stock-based Compensation, on January 1, 2003, using the modified prospective method, to awards granted or modified after December 31, 2002 while retaining the intrinsic value recognition and measurement for stock-based awards granted prior to January 1, 2003. The impact of adopting FAS 123R is to recognize prospectively in earnings the remaining unamortized compensation cost relating to unvested awards granted prior to the Company’s adoption of FAS 123 (January 1, 2003) and which were outstanding on the date of adoption of FAS 123R (January 1, 2006). The Company has unrecognized pretax compensation cost of $9 million related to the portion of awards granted prior to the Company’s adoption of FAS 123 and which were outstanding on the date of adoption of FAS 123R which will be recognized pro rata over the remaining requisite service period (approximately 15 months). The impact on the current period of recognizing the pro rata amount of unrecognized compensation cost due to the adoption of FAS 123R was not significant.

In addition, FAS 123R clarified the accounting treatment for certain grants of equity awards to individuals who are retirement-eligible on the date of grant or who become retirement-eligible prior to the vesting date of the award. Those employees who are retirement-eligible on date of grant or who become retirement eligible prior to vesting are deemed to have met the requisite service condition, and therefore compensation attributable to these employees is to be recognized over the service period to the retirement eligible date. FAS 123R is effective on a prospective basis only. The impact of not previously applying this guidance to awards granted prior to January 1, 2006 that remained outstanding and unvested at January 1, 2006 was not material.

As of March 31, 2006, there was $213 million of total unrecognized compensation cost related to all nonvested share-based incentive compensation awards. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.1 years.

On July 23, 2004, the Company announced that it was seeking guidance from the staff of the Division of Corporation Finance of the Securities and Exchange Commission with respect to the appropriate purchase accounting treatment for certain second quarter 2004 adjustments totaling $1.63 billion ($1.07 billion after-tax). The Company recorded these adjustments as charges in its consolidated statement of income in the second quarter of 2004. Through an informal comment process, the staff of the Division of Corporation Finance has subsequently asked for further information, which the Company has provided. Specifically, the staff has asked for information concerning the Company’s adjustments to certain of SPC’s insurance reserves and reserves for reinsurance recoverables and premiums due from policyholders, and how those adjustments may relate to SPC’s reserves for periods prior to the merger. After reviewing the staff’s questions and comments and discussions with the Company’s independent auditors, the Company continues to believe that its accounting treatment for these adjustments is appropriate. If, however, the staff disagrees, some or all of the adjustments being discussed may not be recorded as charges in the Company’s consolidated statement of income, thereby increasing net income for the second quarter and full year 2004 and increasing shareholders’ equity at March 31, 2006 and December 31, 2005 and 2004, in each case by the approximate after-tax amount of the change. The effect on tangible shareholders’ equity (adjusted for the effects of deferred taxes associated with goodwill and intangible assets) at March 31, 2006 and December 31, 2005 and 2004 would not be material. Increases to goodwill and deferred tax liabilities would be reflected on the Company’s balance sheet as of April 1, 2004, either due to purchase accounting or adjustment of SPC’s reserves prior to the merger. On May 3, 2006, the Company received a letter from the Division of Enforcement of the Securities and Exchange Commission advising the Company that it is conducting an inquiry relating to the second quarter 2004 adjustments and the April 1, 2004 merger between SPC and TPC.

FUTURE APPLICATION OF ACCOUNTING STANDARDS

See note 1 of notes to the Company’s consolidated financial statements for a discussion of recently issued accounting pronouncements.

OUTLOOK

The Company expects that the trend of increased severity and frequency of storms experienced in 2005 and 2004 will continue in the foreseeable future. Given the increased severity and frequency of storms, the Company continues to reassess its definition of and exposure to coastal risks, as well as the impact on its reinsurance program. Accordingly, the Company is reviewing its pricing, exposures, return thresholds and terms and conditions it offers in coastal areas. In part as a result of the severity and frequency of storms in 2005 and 2004, the Company expects the cost of reinsurance to increase, and there may be reduced availability of reinsurance coverage. To the extent that the Company is not able to reflect the potentially increased costs of increased severity and frequency of storms or reinsurance in its pricing, the Company’s results of operations will be adversely impacted. In particular, in the Personal segment (and, to a lesser extent, in the Commercial segment’s Select Accounts market), the Company expects a delay in its ability to increase pricing to offset these potentially increased costs since the Company cannot increase rates to the extent necessary without the approval of the regulatory authorities of certain states. Also, particularly in light of the frequency and severity of storms in the past two years, rating agencies are increasing their capital requirements for the Company.

There are currently various state and federal legislative and judicial proposals relating to asbestos liability. At this time, it is not possible to predict the likelihood or timing of such proposals being enacted or the effect if they are enacted. The Company’s ongoing analysis of its asbestos reserves did not assume the adoption of any asbestos reforms. For information about the outlook with respect to asbestos-related claims and liabilities, see “—Asbestos Claims and Litigation” and “—Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves.”

FORWARD-LOOKING STATEMENTS

This report may contain, and management may make, certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, may be forward-looking statements. Specifically, the Company may make forward-looking statements about the Company’s results of operations (including, among others, premium volume, income from continuing operations, net and operating income and return on equity), financial condition and liquidity; the sufficiency of the Company’s asbestos and other reserves (including, among others, asbestos claim payment patterns); the post-merger integration (including, among others, expense savings); the cost and availability of reinsurance coverage; and strategic initiatives. Such statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond the Company’s control, that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements.

Some of the factors that could cause actual results to differ include, but are not limited to, the following: catastrophe losses could materially reduce the Company’s profitability and adversely impact its ratings, its ability to raise capital and the availability and cost of reinsurance; the Company’s business could be harmed because of its potential exposure to asbestos and environmental claims and related litigation; reinsurance may not protect the Company against losses; the Company is exposed to, and may face adverse developments involving, mass tort claims such as those relating to exposure to potentially harmful products or substances; if actual claims exceed the Company’s loss reserves, or if changes in the estimated level of loss reserves are necessary, the Company’s financial results could be significantly and adversely affected; the effects of emerging claim and coverage issues on the Company’s business are uncertain; the insurance industry is the subject of a number of investigations by state and federal authorities in the United States, and the Company cannot predict the outcome of these investigations or their impact on its business or financial results; the Company’s businesses are heavily regulated and changes in regulation may reduce the Company’s profitability and limit its growth; assessments and other surcharges for guaranty funds, second-injury funds, catastrophe funds and other mandatory pooling arrangements may reduce the Company’s profitability; a downgrade in the Company’s claims-paying and financial strength ratings could significantly reduce its business volumes, adversely impact its ability to access the capital markets and increase its borrowing costs; the Company’s investment portfolio may suffer reduced returns or losses which could reduce the Company’s profitability; the intense competition that the Company faces could harm its ability to maintain or increase its profitability and premium volume; the Company may not be able to execute announced and future strategic initiatives as planned; the inability of the

Company’s insurance subsidiaries to pay dividends to the Company in sufficient amounts would limit its ability to meet its obligations and to pay future dividends; loss or significant restriction of the use of credit scoring in the pricing and underwriting of personal lines products could reduce the Company’s future profitability; disruptions to the Company’s relationships with its distributors, independent agents and brokers could adversely affect the Company’s future income and profitability; if the Company experiences difficulties with outsourcing relationships, its ability to conduct its business might be negatively impacted; and the effects of corporate bankruptcies on surety bond claims.

The Company’s forward-looking statements speak only as of the date of this report or as of the date they are made, and the Company undertakes no obligation to update its forward-looking statements. For a more detailed discussion of these factors, see the information under the caption “Risk Factors” in the Company’s 2005 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes in the Company’s market risk components since December 31, 2005.

Item 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2006. Based upon that evaluation and subject to the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the design and operation of the Company’s disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures are effective to accomplish their objectives.

In addition, except as described above, there was no change in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

This section describes the major pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or to which any of the Company’s property is subject.

Asbestos and Environmental-Related Proceedings

The Company continues to believe it has meritorious positions in these ACandS-related proceedings and intends to litigate vigorously.

the earliest of these favorable rulings. In Texas, only one court, in June of 2005, has denied the insurers’ initial challenges to the pleadings. That ruling was contrary to the rulings by other courts in similar cases, and SPC intends to continue to defend this case vigorously.

Shareholder Litigation and Related Proceedings

claim. In the third of these actions, an alleged beneficiary of the Company’s 401(k) savings plan commenced a putative class action against the Company and certain of its current and former officers and directors captioned Spiziri v. The St. Paul Travelers Companies, Inc., et al. (Dec. 28, 2004). The complaint alleges violations of the Employee Retirement Income Security Act based on allegations similar to those in In re St. Paul Travelers Securities Litigation I. On June 1, 2005, the Company and the other defendants in Spiziri moved to dismiss the complaint. On January 4, 2006, the parties in Spiziri entered into a stipulation of settlement. The settlement remains subject to court approval.

Other Proceedings

February 13, 2006, the named plaintiffs moved to certify a nationwide class consisting of all persons who between August 26, 1994 and the date of class certification engaged the services of a broker defendant (or related entity) in connection with the procurement or renewal of insurance and who entered into or renewed a contract of insurance with one or more of the insurer defendants, including the Company. One individual action naming various brokers and insurers, including several of the Company’s affiliates, was filed in federal district court and is captioned Delta Pride Catfish, Inc. v. Marsh USA, Inc., et al. (D. Miss. Sept. 13, 2005). That action has also been transferred to the District of New Jersey and is being coordinated with In re Insurance Brokerage Antitrust Litigation. On January 17, 2006, all defendants moved to dismiss the complaint in Delta Pride Catfish, Inc. for failure to state a claim. Another individual action, New Cingular Wireless Headquarters, LLC, et al. v. Marsh & McLennan Cos., Inc., et al. (N.D. Ga. Apr. 4, 2006), was filed in federal court and asserts claims that are similar to those asserted in In Re Insurance Brokerage Antitrust Litigation against various brokers and insurers, including the Company and certain of its affiliates. It has not yet been transferred to the District Court of New Jersey. One other putative class action, Bensley Construction, Inc. v. Marsh & McLennan Companies, Inc., et al. (Mass. Super. Ct. May 16, 2005), and one other individual action, Office Depot, Inc. v. Marsh & McLennan Companies, Inc., et al. (Fla. Cir. Ct. June 22, 2005), were filed in state court and assert claims that are similar to those asserted in In re Insurance Brokerage Antitrust Litigation against various brokers and insurers, including the Company and/or certain of its affiliates. Certain defendants in Bensley Construction, Inc., including the Company, removed the action to the United States District Court for the District of Massachusetts. On February 13, 2006, the action was transferred to the District of New Jersey for coordination with In re Insurance Brokerage Antitrust Litigation. Office Depot, Inc. was brought in Florida state court and names several of the Company’s subsidiaries. On November 9, 2005, the court entered an order staying Office Depot pending resolution of In re Insurance Brokerage Antitrust Litigation. The plaintiff in Office Depot, Inc. has appealed. The Company believes that these lawsuits have no merit and intends to defend vigorously.

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

Item 1A. RISK FACTORS

For a discussion of the Company’s potential risks or uncertainties, please see Part I, Item 1A, of the Company’s 2005 Annual Report on Form 10-K filed with the Securities and Exchange Commission. There have been no material changes to the risk factors disclosed in Part I, Item 1A, of the Company’s 2005 Annual Report on Form 10-K.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The table below sets forth information regarding repurchases by the Company of its common stock during the periods indicated.

ISSUER PURCHASES OF EQUITY SECURITIES (1)

Period Beginning	Period Ending	(a) Total number of shares (or units) purchased	(b) Average price paid per share (or unit)		(c) Total number of shares or (units) purchased as part of publicly announced plans or programs	(d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
Jan. 1, 2006	Jan. 31, 2006	365,118	$	45.69	—	—
Feb. 1, 2006	Feb. 28, 2006	120,431	44.65		—	—
March 1, 2006	March 31, 2006	10,702	36.22		—	—
Total		496,251	$	45.24	—	—

(1) All amounts in the table represent shares repurchased to cover payroll withholding taxes in connection with the vesting of restricted stock awards and exercises of stock options, and shares used to cover the exercise price of certain stock options that were exercised.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The annual meeting of shareholders of the Company was held on May 3, 2006. At the meeting:

(1) eleven persons were elected to serve as directors of the Company until the 2007 annual meeting of shareholders;

(2) the selection of KPMG LLP to serve as the independent registered public accounting firm of the Company for 2006 was ratified;

(3) the shareholder proposal relating to the vote required to elect directors was approved; and

(4) the shareholder proposal relating to political contributions was defeated.

The number of votes cast for, against or withheld, and the number of abstentions with respect to each such matter are set forth below, as are the number of broker non-votes, where applicable.

(1) Election of Directors:

	Votes For	Votes Withheld
John H. Dasburg	609,327,953	19,345,168
Leslie B. Disharoon	591,519,425	37,153,696
Janet M. Dolan	608,002,027	20,671,094
Kenneth M. Duberstein	601,148,207	27,524,915
Jay S. Fishman	610,022,433	18,650,689
Lawrence G. Graev	585,161,231	43,511,890
Thomas R. Hodgson	617,073,365	11,599,757
Robert I. Lipp	591,269,802	37,403,319
Blythe J. McGarvie	602,406,352	26,266,770
Glen D. Nelson, M.D.	597,228,547	31,444,575
Laurie J. Thomsen	617,012,335	11,660,786

(2) Ratification of independent registered public accounting firm:

Votes For		Votes Against		Votes Abstained		Broker Non-Votes
592,585,664		29,265,076		4,025,576		—

(3) Shareholder proposal relating to the vote required to elect directors:

Votes For		Votes Against		Votes Abstained		Broker Non-Votes
329,006,412		213,249,576		7,010,494		79,140,493

(4) Shareholder proposal relating to political contributions:

Votes For		Votes Against		Votes Abstained		Broker Non-Votes
143,701,968		357,181,918		48,567,224		78,956,485

Item 5. OTHER INFORMATION

None.

Item 6. EXHIBITS

See Exhibit Index.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, The St. Paul Travelers Companies, Inc. has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

			THE ST. PAUL TRAVELERS COMPANIES, INC.
	(Registrant)

Date: May 4, 2006	By		/S/ BRUCE A. BACKBERG
		Bruce A. Backberg Senior Vice President (Authorized Signatory)

Date: May 4, 2006	By		/S/ DOUGLAS K. RUSSELL
		Douglas K. Russell Senior Vice President, Corporate Controller and Treasurer (Principal Accounting Officer)

EXHIBIT INDEX

Exhibit Number		Description of Exhibit

3.1		Amended and Restated Articles of Incorporation of The St. Paul Travelers Companies, Inc. (the Company), effective as of April 1, 2004, were filed as Exhibit 3.1 to the Company’s Form 8-K filed on April 1, 2004, and are incorporated herein by reference.

3.2		Amended and Restated Bylaws of the Company, effective as of February 7, 2006, were filed as Exhibit 3.2 to the Company’s Form 8-K filed on February 10, 2006, and are incorporated herein by reference.

10.1		Form of Stock Option Grant Notification and Agreement was filed as Exhibit 10.18 to the Company’s Form 10-K for the fiscal year ended December 31, 2005, and is incorporated herein by reference.

10.2		Form of Restricted Stock Award Notification and Agreement was filed as Exhibit 10.19 to the Company’s Form 10-K for the fiscal year ended December 31, 2005, and is incorporated herein by reference.

10.3		Form of Performance Share Award Notification and Agreement was filed as Exhibit 10.20 to the Company’s Form 10-K for the fiscal year ended December 31, 2005, and is incorporated herein by reference.

10.4		Form of Non-Solicitation and Non-Disclosure Agreement, 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.

12.1	†	Statement regarding the computation of the ratio of earnings to fixed charges and the ratio of earnings to combined fixed charges and preferred stock dividends.

31.1	†	Certification of Jay S. Fishman, Chairman and Chief Executive Officer of the Company, as required by Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	†	Certification of Jay S. Benet, Vice Chairman and Chief Financial Officer of the Company, as required by Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	†	Certification of Jay S. Fishman, Chairman and Chief Executive Officer of the Company, as required by Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	†	Certification of Jay S. Benet, Vice Chairman and Chief Financial Officer of the Company, as required by Section 906 of the Sarbanes-Oxley Act of 2002.

Copies of any of the exhibits referred to above will be furnished to security holders who make written request therefor to The St. Paul Travelers Companies, Inc., 385 Washington Street, Saint Paul, MN 55102, Attention: Corporate Secretary.

The total amount of securities authorized pursuant to any instrument defining rights of holders of long-term debt of the Company does not exceed 10% of the total assets of the Company and its consolidated subsidiaries. Therefore, the Company is not filing any instruments evidencing long-term debt. However, the Company will furnish copies of any such instrument to the Securities and Exchange Commission upon request.

† Filed herewith