The following is a discussion and analysis of the Company's financial condition and results of operations.

FINANCIAL HIGHLIGHTS

2012 Consolidated Results of Operations

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º Net income of $2.47 billion, or $6.35 per share basic and $6.30 diluted

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º Net earned premiums of $22.36 billion

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º Catastrophe losses of $1.86 billion ($1.21 billion after-tax)

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º Net favorable prior year reserve development of $940 million ($622 million after-tax)

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º GAAP combined ratio of 97.1%

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º Net investment income of $2.89 billion ($2.32 billion after-tax)

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º Operating cash flows of $3.23 billion

2012 Consolidated Financial Condition

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º Total investments of $73.84 billion; fixed maturities and short-term securities comprise 93% of total investments

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º Total assets of $104.94 billion

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º Total debt of $6.35 billion, resulting in a debt-to-total capital ratio of 20.0% (22.2% excluding net unrealized investment gains, net of tax)

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º Repurchased 22.4 million common shares for total cost of $1.45 billion under share repurchase authorization

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º Shareholders' equity of $25.41 billion

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º Book value per common share of $67.31

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º Holding company liquidity of $2.03 billion

CONSOLIDATED OVERVIEW

Consolidated Results of Operations

(for the year ended December 31, in millions except per share amounts)         2012       2011       2010
Revenues
Premiums                                                                     $ 22,357   $ 22,090   $ 21,432
Net investment income                                                           2,889      2,879      3,059
Fee income                                                                        323        296        287
Net realized investment gains                                                      51         55        264
Other revenues                                                                    120        126         70

Total revenues                                                                 25,740     25,446     25,112

Claims and expenses
Claims and claim adjustment expenses                                           14,676     16,276     13,210
Amortization of deferred acquisition costs                                      3,910      3,876      3,802
General and administrative expenses                                             3,610      3,556      3,406
Interest expense                                                                  378        386        388

Total claims and expenses                                                      22,574     24,094     20,806

Income before income taxes                                                      3,166      1,352      4,306
Income tax expense (benefit)                                                      693        (74 )    1,090

Net income                                                                   $  2,473   $  1,426   $  3,216

Net income per share
Basic                                                                        $   6.35   $   3.40   $   6.69

Diluted                                                                      $   6.30   $   3.36   $   6.62

GAAP combined ratio
Loss and loss adjustment expense ratio                                           64.9 %     72.9 %     61.0 %
Underwriting expense ratio                                                       32.2       32.2       32.2

GAAP combined ratio                                                              97.1 %    105.1 %     93.2 %

Incremental impact of direct to consumer initiative on GAAP combined ratio        0.8 %      0.9 %      0.8 %

The following discussions of the Company's net income and segment operating income (loss) are presented on an after-tax basis. Discussions of the components of net income and segment operating income are presented on a pretax basis, unless otherwise noted. Discussions of earnings per common share are presented on a diluted basis.

Overview

Diluted net income per share in 2012 was $6.30, an increase of 88% over diluted net income per share of $3.36 in 2011. Net income in 2012 was $2.47 billion, an increase of 73% over net income of $1.43 billion in 2011. The higher rate of increase in diluted net income per share reflected the impact of common share repurchases. The improvement in net income in 2012 compared with 2011 primarily reflected the pretax impact of (i) higher underwriting margins excluding catastrophe losses and prior year reserve development ("underlying underwriting margins") primarily resulting from lower non-catastrophe weather-related losses in the Business Insurance and Personal Insurance segments and the impact of earned pricing that exceeded loss cost trends in the Business Insurance and Financial, Professional & International Insurance segments, (ii) a decline in catastrophe losses and (iii) higher net favorable prior year reserve development. Partially offsetting these pretax improvements were their

related tax expense. The effective tax rate in 2012 increased from the prior year due to interest on municipal bonds, which is effectively taxed at a rate that is lower than the corporate tax rate of 35%, comprising a lower percentage of pretax income. Net income in 2011 benefited from a reduction in income tax expense of $104 million resulting from the favorable resolution of various prior year tax matters. Catastrophe losses in 2012 were $1.86 billion, compared with $2.56 billion in 2011. Net favorable prior year reserve development in 2012 was $940 million, compared with $715 million in 2011.

Diluted net income per share in 2011 was $3.36, a decrease of 49% from diluted net income per share of $6.62 in 2010. Net income in 2011 was $1.43 billion, a decrease of 56% from net income of $3.22 billion in 2010. The lower rate of decline in diluted net income per share reflected the impact of common share repurchases. The decline in net income in 2011 compared with 2010 primarily reflected the pretax impact of (i) a significant increase in catastrophe losses, (ii) lower net favorable prior year reserve development,
(iii) lower underlying underwriting margins related to earned pricing and loss cost trends and higher non-catastrophe weather-related losses, (iv) lower net investment income and (v) lower net realized investment gains. Partially offsetting these pretax declines were their related tax benefit. The effective tax rate in 2011 decreased from the prior year due to interest on municipal bonds, which is effectively taxed at a rate that is lower than the corporate tax rate of 35%, comprising a higher percentage of pretax income. These factors were partially offset by a $104 million benefit resulting from the favorable resolution of various prior year tax matters. Catastrophe losses in 2011 and 2010 were $2.56 billion and $1.11 billion, respectively. Net favorable prior year reserve development in 2011 and 2010 was $715 million and $1.25 billion, respectively.

Revenues

Earned Premiums

Earned premiums in 2012 were $22.36 billion, $267 million or 1% higher than in 2011. In the Business Insurance segment, earned premiums in 2012 increased by 3% over 2011. In the Financial, Professional & International Insurance segment, earned premiums in 2012 decreased by 4% from 2011. In the Personal Insurance segment, earned premiums in 2012 increased by less than 1% over 2011.

Earned premiums in 2011 were $22.09 billion, $658 million or 3% higher than in 2010. In the Business Insurance segment, earned premiums in 2011 increased by 5% over 2010. In the Financial, Professional & International Insurance segment, earned premiums in 2011 decreased by 4% from 2010. In the Personal Insurance segment, earned premiums in 2011 increased by 3% over 2010.

Factors contributing to the changes in earned premiums in each segment in 2012 and 2011 compared with the respective prior year are discussed in more detail in the segment discussions that follow.

Net Investment Income

    The following table sets forth information regarding the Company's
investments.

     (for the year ended December 31, in millions)     2012       2011       2010
     Average investments(1)                          $ 69,863   $ 70,471   $ 71,637
     Pretax net investment income                       2,889      2,879      3,059
     After-tax net investment income                    2,316      2,330      2,468
     Average pretax yield(2)                              4.1 %      4.1 %      4.3 %
     Average after-tax yield(2)                           3.3 %      3.3 %      3.4 %


--------------------------------------------------------------------------------
   º (1)

º (2)
º Excludes net realized investment gains and losses and net unrealized investment gains and losses.

Net investment income in 2012 was $2.89 billion, $10 million or less than 1% higher than in 2011. Net investment income from fixed maturity investments was $2.44 billion in 2012, a decrease of $104 million from 2011, primarily resulting from lower long-term reinvestment yields available in the market. Net investment income generated by non-fixed maturity investments was $476 million in 2012, an increase of $121 million over 2011, primarily driven by improved results from the Company's real estate partnerships and hedge fund investments. On an after-tax basis, net investment income in 2012 was $14 million or less than 1% lower than in 2011, reflecting a higher proportion of taxable net investment income in 2012 compared with 2011.

Net investment income in 2011 was $2.88 billion, $180 million or 6% lower than in 2010. Net investment income from fixed maturity investments was $2.54 billion in 2011, a decrease of $167 million from 2010, primarily resulting from lower long-term reinvestment yields available in the market, as well as lower average levels of fixed maturity invested assets due to the Company's common share repurchases. Net investment income generated by non-fixed maturity investments was $355 million in 2011, a decrease of $15 million from 2010.

Fee Income

The National Accounts market in the Business Insurance segment is the primary source of the Company's fee-based business. The $27 million and $9 million increases in fee income in 2012 and 2011, respectively, compared with the respective prior years are described in the Business Insurance segment discussion that follows.

Net Realized Investment Gains

    The following table sets forth information regarding the Company's net
pretax realized investment gains.

         (for the year ended December 31, in millions)   2012    2011    2010
         Net Realized Investment Gains
         Other-than-temporary impairment losses            (15 )   (25 )   (26 )
         Other net realized investment gains                66      80     290

         Net realized investment gains                   $  51   $  55   $ 264

Other Net Realized Investment Gains-Other net realized investment gains in 2012 of $66 million were primarily driven by $61 million of net realized investment gains related to fixed maturity investments, $19 million of net realized investment gains related to real estate and $8 million of net realized investment gains related to equity securities. These net realized investment gains were partially offset by $14 million of net realized investment losses associated with U.S. Treasury futures contracts (which require daily mark-to-market settlement and are used to shorten the duration of the Company's fixed maturity portfolio) and $8 million of net realized investment losses related to other investments.

Other net realized investment gains in 2011 of $80 million were primarily driven by $52 million of net realized investment gains related to fixed maturity investments, $46 million of net realized investment gains related to equity securities and $41 million of net realized investment gains related to other investments, partially offset by net realized investment losses of $62 million associated with U.S. Treasury futures contracts.

Other net realized investment gains in 2010 of $290 million were primarily driven by a $205 million gain resulting from the Company's sale of substantially all of its remaining common stock holdings in Verisk Analytics, Inc. (Verisk) for total proceeds of approximately $230 million as part of a secondary public offering of Verisk. The 2010 total also included $96 million of net realized investment gains

related to fixed maturity investments and $25 million of net realized investment gains related to equity securities. These gains were partially offset by $30 million of net realized investment losses related to U.S. Treasury futures contracts.

Other Revenues

Other revenues primarily consist of premium installment charges. In 2010, this category also included $60 million of expenses related to the Company's purchase and retirement of $885 million of its $1.0 billion 6.25% fixed-to-floating rate junior subordinated debentures.

Claims and Expenses

Claims and Claim Adjustment Expenses

Claims and claim adjustment expenses in 2012 were $14.68 billion, $1.60 billion or 10% lower than in 2011. The decrease primarily reflected (i) a decline in catastrophe losses and, to a lesser extent, (ii) lower levels of non-catastrophe weather-related losses and (iii) higher net favorable prior year reserve development, partially offset by (iv) the impact of loss cost trends. Catastrophe losses in 2012 and 2011 were $1.86 billion and $2.56 billion, respectively. Catastrophe losses in 2012 primarily resulted from Storm Sandy, as well as multiple tornado, wind and hail storms in several regions of the United States. Catastrophe losses in 2011 primarily resulted from Hurricane Irene and Tropical Storm Lee, multiple tornadoes and hail storms in the Midwest and Southeast regions of the United States and severe winter storms throughout the United States. Catastrophe losses in 2011 also included losses from floods in Thailand and an earthquake in Japan that impacted the Financial, Professional & International Insurance segment. Net favorable prior year reserve development in 2012 and 2011 was $940 million and $715 million, respectively. Factors contributing to net favorable prior year reserve development in each segment during these periods are discussed in more detail in note 7 of notes to the Company's consolidated financial statements.

Claims and claim adjustment expenses in 2011 were $16.28 billion, $3.07 billion or 23% higher than in 2010. The increase primarily reflected (i) the significant increase in catastrophe losses, (ii) the decrease in net favorable prior year reserve development, (iii) the impact of loss cost trends and
(iv) higher non-catastrophe weather-related losses. Catastrophe losses in 2011 and 2010 were $2.56 billion and $1.11 billion, respectively. Catastrophe losses in 2010 primarily resulted from several severe wind and hail storms, as well as severe winter storms. In addition, catastrophe losses in 2010 included losses from an earthquake in Chile that impacted the Financial, Professional & International Insurance segment. Net favorable prior year reserve development in 2011 and 2010 was $715 million and $1.25 billion, respectively. Factors contributing to net favorable prior year reserve development in each segment are discussed in note 7 of notes to the Company's consolidated financial statements.

Amortization of Deferred Acquisition Costs

The amortization of deferred acquisition costs in 2012 was $3.91 billion, $34 million or 1% higher than in 2011. The amortization of deferred acquisition costs in 2011 was $3.88 billion, $74 million or 2% higher than in 2010. Changes in the amortization of deferred acquisition costs in both 2012 and 2011 were generally consistent with the increase in earned premiums compared with the respective prior year.

General and Administrative Expenses

General and administrative expenses in 2012 were $3.61 billion, $54 million or 2% higher than in 2011. General and administrative expenses in 2011 were $3.56 billion, $150 million or 4% higher than in 2010. General and administrative expenses are discussed in more detail in the segment discussions that follow.

Interest Expense

Interest expense in 2012, 2011 and 2010 was $378 million, $386 million and $388 million, respectively. The decline in 2012 compared with 2011 reflected the repayment of $258 million of debt in the second quarter of 2012.

Income Tax Expense (Benefit)

The Company's consolidated income tax expense in 2012 was $693 million, compared to an income tax benefit of $74 million in 2011. The increase in income tax expense of $767 million in 2012 from 2011 primarily reflected the $1.77 billion improvement in underwriting margins in 2012 (including the favorable impacts of a decrease in catastrophe losses and an increase in net favorable prior year reserve development) over 2011 and, to a lesser extent, the $121 million increase in net investment income from non-fixed maturity investments over 2011. The change in income tax expense (benefit) in 2012 from 2011 was also impacted by the $104 million benefit recorded in 2011 resulting from the favorable resolution of various prior year tax matters.

The Company's consolidated income tax benefit in 2011 was $74 million, compared to an income tax expense of $1.09 billion in 2010. The decrease in income tax expense of $1.16 billion in 2011 from 2010 primarily reflected the $2.59 billion decrease in underwriting margins in 2011 (including the unfavorable impacts of an increase in catastrophe losses and a decrease in net favorable prior year reserve development) from 2010 and, to a lesser extent, the decrease in net realized investment gains of $209 million from 2010. The change in income tax expense (benefit) in 2011 from 2010 was also impacted by the $104 million benefit recorded in 2011 resulting from the favorable resolution of various prior year tax matters.

The Company's effective tax rate was 22%, (5%) and 25% in 2012, 2011 and 2010, respectively. The Company's effective tax rates in 2012 and 2010 were lower than the statutory rate of 35% primarily due to the impact of tax-exempt investment income on the calculation of the Company's income tax provision. In addition to the impact of tax-exempt income, the Company's effective tax rate of (5%) in 2011 also reflected the impact of the Company's significant underwriting loss that primarily resulted from catastrophe losses and the $104 million benefit resulting from the favorable resolution of various prior year tax matters recorded in the first quarter of 2011.

GAAP Combined Ratios

The consolidated GAAP combined ratio of 97.1% in 2012 was 8.0 points lower than the consolidated GAAP combined ratio of 105.1% in 2011.

The consolidated loss and loss adjustment expense ratio of 64.9% in 2012 was 8.0 points lower than the consolidated loss and loss adjustment expense ratio of 72.9% in 2011. Catastrophe losses accounted for 8.3 points and 11.6 points of the 2012 and 2011 loss and loss adjustment expense ratios, respectively. The 2012 and 2011 loss and loss adjustment expense ratios included 4.2 points and 3.2 points of benefit from net favorable prior year reserve development, respectively. The consolidated 2012 loss and loss adjustment expense ratio excluding catastrophe losses and prior year reserve development ("underlying loss and loss adjustment expense ratio") was 3.7 points lower than the 2011 ratio on the same basis, primarily reflecting the factors discussed above.

The consolidated underwriting expense ratio of 32.2% in 2012 was level with the consolidated underwriting expense ratio of 32.2% in 2011.

The consolidated GAAP combined ratio of 105.1% in 2011 was 11.9 points higher than the consolidated GAAP combined ratio of 93.2% in 2010.

The consolidated loss and loss adjustment expense ratio of 72.9% in 2011 was 11.9 points higher than the loss and loss adjustment expense ratio of 61.0% in 2010. Catastrophe losses accounted for 11.6

points and 5.2 points of the 2011 and 2010 loss and loss adjustment expense ratios, respectively. The 2011 and 2010 loss and loss adjustment expense ratios included 3.2 points and 5.8 points of benefit from net favorable prior year reserve development, respectively. The consolidated 2011 underlying loss and loss adjustment expense ratio was 2.9 points higher than the 2010 ratio on the same basis, reflecting the factors discussed above.

The consolidated underwriting expense ratio of 32.2% in 2011 was level with the underwriting expense ratio in 2010.

Written Premiums

    Consolidated gross and net written premiums were as follows:

                                                           Gross Written Premiums
   (for the year ended December 31, in millions)         2012       2011       2010
   Business Insurance                                  $ 13,111   $ 12,418   $ 11,891
   Financial, Professional & International Insurance      3,275      3,408      3,534
   Personal Insurance                                     7,923      8,061      7,877

   Total                                               $ 24,309   $ 23,887   $ 23,302

                                                            Net Written Premiums
   (for the year ended December 31, in millions)         2012       2011       2010
   Business Insurance                                  $ 11,872   $ 11,340   $ 10,857
   Financial, Professional & International Insurance      2,981      3,102      3,211
   Personal Insurance                                     7,594      7,745      7,567

   Total                                               $ 22,447   $ 22,187   $ 21,635

Gross and net written premiums in 2012 increased by 2% and 1%, respectively, over 2011. Gross and net written premiums in 2011 both increased by 3% over 2010. Factors contributing to the changes in gross and net written premiums in each segment in 2012 and 2011 as compared with the respective prior year are discussed in more detail in the segment discussions that follow.

RESULTS OF OPERATIONS BY SEGMENT

Business Insurance

    Results of the Company's Business Insurance segment were as follows:

     (for the year ended December 31, in millions)     2012       2011       2010
     Revenues:
     Earned premiums                                 $ 11,691   $ 11,327   $ 10,766
     Net investment income                              2,090      2,041      2,156
     Fee income                                           322        295        285
     Other revenues                                        40         31         28

     Total revenues                                  $ 14,143   $ 13,694   $ 13,235

     Total claims and expenses                       $ 11,761   $ 12,206   $ 10,157

     Operating income                                $  1,843   $  1,354   $  2,301

     Loss and loss adjustment expense ratio              65.9 %     73.1 %     59.1 %
     Underwriting expense ratio                          31.5       31.6       32.2

     GAAP combined ratio                                 97.4 %    104.7 %     91.3 %

Overview

Operating income in 2012 was $1.84 billion, $489 million or 36% higher than operating income of $1.35 billion in 2011. The improvement in operating income in 2012 compared with 2011 primarily reflected the pretax impact of (i) higher underlying underwriting margins primarily resulting from earned pricing that exceeded loss cost trends, lower non-catastrophe weather-related losses and higher business volume, (ii) a decline in catastrophe losses, (iii) an increase in net favorable prior year reserve development and (iv) an increase in net investment income. Partially offsetting these pretax improvements were their related tax expense. The effective tax rate in 2012 increased from the prior year due to interest on municipal bonds, which is effectively taxed at a rate that is lower than the corporate tax rate of 35%, comprising a lower percentage of pretax income. Operating income in 2011 included a $76 million benefit resulting from the favorable resolution of various prior year tax matters. Catastrophe losses in 2012 were $794 million, compared with $1.02 billion in 2011. Net favorable prior year reserve development in 2012 was $467 million, compared with $245 million in 2011.

Operating income in 2011 was $1.35 billion, $947 million or 41% lower than in 2010. The decline in operating income in 2011 compared with 2010 primarily reflected the pretax impact of (i) lower net favorable prior year reserve development, (ii) a significant increase in catastrophe losses, (iii) lower underlying underwriting margins related to earned pricing and loss cost trends, partially offset by higher business volume, and (iv) lower net investment income. Partially offsetting these net pretax declines were their related net tax benefit. The effective tax rate in 2011 decreased from the prior year due to interest on municipal bonds, which is effectively taxed at a rate that is lower than the corporate tax rate of 35%, comprising a higher percentage of pretax income. These factors were partially offset by the $76 million benefit resulting from the favorable resolution of various prior year tax matters. Net favorable prior year reserve development was $245 million in 2011, compared with $901 million in 2010. Catastrophe losses in 2011 were $1.02 billion, compared with $437 million in 2010.

Revenues

Earned Premiums

Earned premiums in 2012 were $11.69 billion, $364 million or 3% higher than in 2011. Earned premiums in 2011 were $11.33 billion, $561 million or 5% higher than in 2010. The increases in both years primarily reflected the impact of increases in net written premiums over the preceding twelve months. Earned premiums in 2012 and 2011 also benefited from positive audit premium adjustments related to increased insured exposures for existing policyholders, compared with negative audit premium adjustments in 2010 related to decreased insured exposures for existing policyholders.

Net Investment Income

Net investment income in 2012 was $2.09 billion, $49 million or 2% higher than in 2011, primarily due to higher net investment income generated by non-fixed maturity investments, partially offset by lower net investment income from fixed maturity investments. Net investment income in 2011 was $2.04 billion, $115 million or 5% lower than in 2010, primarily due to lower net . . .