Edgar Filing: TRAVELERS COMPANIES, INC.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2010

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 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.)

485 Lexington Avenue

New York, NY 10017

(Address of principal executive offices) (Zip Code)

(917) 778-6000

(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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares of the Registrant’s Common Stock, without par value, outstanding at July 16, 2010 was 469,989,766.

Table of Contents

The Travelers Companies, Inc.

Quarterly Report on Form 10-Q

For Quarterly Period Ended June 30, 2010

TABLE OF CONTENTS

		Page
	Part I — Financial Information

Item 1.	Financial Statements:

	Consolidated Statement of Income (Unaudited) — Three Months and Six Months Ended June 30, 2010 and 2009	3

	Consolidated Balance Sheet — June 30, 2010 (Unaudited) and December 31, 2009	4

	Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) — Six Months Ended June 30, 2010 and 2009	5

	Consolidated Statement of Cash Flows (Unaudited) — Six Months Ended June 30, 2010 and 2009	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 Disclosures About Market Risk	72

Item 4.	Controls and Procedures	72

	Part II — Other Information

Item 1.	Legal Proceedings	72

Item 1A.	Risk Factors	72

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

Item 5.	Other Information	73

Item 6.	Exhibits	73

	SIGNATURES	73

	EXHIBIT INDEX	74

Table of Contents

PART 1 — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

(in millions, except per share amounts)

	Three Months Ended June 30,					Six Months Ended June 30,
	2010			2009		2010			2009

Revenues
Premiums	$	5,340		$	5,353	$	10,570		$	10,654
Net investment income	762			658		1,515			1,200
Fee income	76			89		155			162
Net realized investment gains (losses)	(31		)	13		(6		)	(201		)
Other revenues	32			49		64			82
Total revenues	6,179			6,162		12,298			11,897

Claims and expenses
Claims and claim adjustment expenses	3,419			3,335		6,807			6,525
Amortization of deferred acquisition costs	950			953		1,879			1,897
General and administrative expenses	832			839		1,679			1,621
Interest expense	97			94		195			186
Total claims and expenses	5,298			5,221		10,560			10,229

Income before income taxes	881			941		1,738			1,668
Income tax expense	211			201		421			266
Net income	$	670		$	740	$	1,317		$	1,402

Net income per share
Basic	$	1.37		$	1.27	$	2.63		$	2.40
Diluted	$	1.35		$	1.27	$	2.60		$	2.38

Weighted average number of common shares outstanding
Basic	484.5			575.8		496.3			580.1
Diluted	490.8			579.8		502.6			584.9

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009

Net Realized Investment Gains (Losses)
Other-than-temporary impairment losses:
Total gains (losses)	$	2		$	(75	)	$	1		$	(259	)
Portion of losses recognized in accumulated other changes in equity from nonowner sources	(6		)	45			(15		)	45
Other-than-temporary impairment losses	(4		)	(30		)	(14		)	(214		)
Other net realized investment gains (losses)	(27		)	43			8			13
Net realized investment gains (losses)	$	(31	)	$	13		$	(6	)	$	(201	)

See notes to consolidated financial statements (unaudited).

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in millions)

	June 30, 2010			December 31, 2009
	(Unaudited)
Assets
Fixed maturities, available for sale, at fair value (including $146 and $90 subject to securities lending) (amortized cost $61,561 and $63,311)	$	64,891		$	65,847
Equity securities, available for sale, at fair value (cost $389 and $373)	585			451
Real estate	846			865
Short-term securities	3,859			4,852
Other investments	2,948			2,950
Total investments	73,129			74,965

Cash	266			255
Investment income accrued	799			825
Premiums receivable	5,840			5,471
Reinsurance recoverables	12,273			12,816
Ceded unearned premiums	848			916
Deferred acquisition costs	1,804			1,758
Deferred tax asset	368			672
Contractholder receivables	5,595			5,797
Goodwill	3,365			3,365
Other intangible assets	543			588
Other assets	2,193			2,132
Total assets	$	107,023		$	109,560

Liabilities
Claims and claim adjustment expense reserves	$	52,271		$	53,127
Unearned premium reserves	11,092			10,861
Contractholder payables	5,595			5,797
Payables for reinsurance premiums	467			546
Debt	6,276			6,527
Other liabilities	5,036			5,287
Total liabilities	80,737			82,145

Shareholders’ equity
Preferred Stock Savings Plan—convertible preferred stock (0.2 shares issued and outstanding)	72			79
Common stock (1,748.6 shares authorized; 470.8 and 520.3 shares issued and outstanding)	19,884			19,593
Retained earnings	17,285			16,315
Accumulated other changes in equity from nonowner sources	1,690			1,219
Treasury stock, at cost (255.6 and 199.6 shares)	(12,645		)	(9,791		)
Total shareholders’ equity	26,286			27,415
Total liabilities and shareholders’ equity	$	107,023		$	109,560

See notes to consolidated financial statements (unaudited).

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(in millions)

For the six months ended June 30,	2010			2009
Convertible preferred stock—savings plan
Balance, beginning of year	$	79		$	89
Redemptions during period	(7		)	(6		)
Balance, end of period	72			83

Common stock
Balance, beginning of year	19,593			19,242
Employee share-based compensation	209			44
Compensation amortization under share-based plans and other changes	82			67
Balance, end of period	19,884			19,353

Retained earnings
Balance, beginning of year	16,315			13,314
Cumulative effect of adoption of updated accounting guidance at April 1, 2009	—			71
Net income	1,317			1,402
Dividends	(345		)	(352		)
Other	(2		)	7
Balance, end of period	17,285			14,442

Accumulated other changes in equity from nonowner sources, net of tax
Balance, beginning of year	1,219			(900		)
Cumulative effect of adoption of updated accounting guidance at April 1, 2009	—			(71		)
Change in net unrealized gain (loss) on investment securities:
Having no credit losses recognized in the consolidated statement of income	476			1,026
Having credit losses recognized in the consolidated statement of income	44			53
Net change in unrealized foreign currency translation and other changes	(49		)	150
Balance, end of period	1,690			258

Treasury stock (at cost)
Balance, beginning of year	(9,791		)	(6,426		)
Treasury shares acquired — share repurchase authorization	(2,800		)	(750		)
Net shares acquired related to employee share-based compensation plans	(54		)	(40		)
Balance, end of period	(12,645		)	(7,216		)
Total common shareholders’ equity	26,214			26,837
Total shareholders’ equity	$	26,286		$	26,920

Common shares outstanding
Balance, beginning of year	520.3			585.1
Treasury shares acquired — share repurchase authorization	(55.0		)	(18.5		)
Net shares issued under employee share-based compensation plans	5.5			0.9
Balance, end of period	470.8			567.5
Summary of changes in equity from nonowner sources
Net income	$	1,317		$	1,402
Other changes in equity from nonowner sources, net of tax	471			1,229
Total changes in equity from nonowner sources	$	1,788		$	2,631

See notes to consolidated financial statements (unaudited).

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

(in millions)

For the six months ended June 30,	2010			2009
Cash flows from operating activities
Net income	$	1,317		$	1,402
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment losses	6			201
Depreciation and amortization	411			415
Deferred federal income tax expense (benefit)	51			(31		)
Amortization of deferred acquisition costs	1,879			1,897
Equity in (income) loss from other investments	(116		)	252
Premiums receivable	(382		)	(194		)
Reinsurance recoverables	528			538
Deferred acquisition costs	(1,930		)	(1,945		)
Claims and claim adjustment expense reserves	(692		)	(351		)
Unearned premium reserves	270			227
Other	(291		)	(622		)
Net cash provided by operating activities	1,051			1,789

Cash flows from investing activities
Proceeds from maturities of fixed maturities	2,478			2,389
Proceeds from sales of investments:
Fixed maturities	2,781			1,864
Equity securities	27			31
Real estate	10			—
Other investments	189			140
Purchases of investments:
Fixed maturities	(3,940		)	(4,271		)
Equity securities	(19		)	(18		)
Real estate	(8		)	(9		)
Other investments	(227		)	(186		)
Net (purchases) sales of short-term securities	1,050			(1,223		)
Securities transactions in course of settlement	2			366
Other	(145		)	(205		)
Net cash provided by (used in) investing activities	2,198			(1,122		)

Cash flows from financing activities
Payment of debt	(250		)	(141		)
Issuance of debt	—			494
Dividends paid to shareholders	(343		)	(350		)
Issuance of common stock — employee share options	199			28
Treasury stock acquired — share repurchase authorization	(2,804		)	(750		)
Treasury stock acquired — net employee share-based compensation	(40		)	(28		)
Excess tax benefits from share-based payment arrangements	5			2
Net cash used in financing activities	(3,233		)	(745		)
Effect of exchange rate changes on cash	(5		)	10
Net increase (decrease) in cash	11			(68		)
Cash at beginning of year	255			350
Cash at end of period	$	266		$	282

Supplemental disclosure of cash flow information
Income taxes paid	$	309		$	363
Interest paid	$	200		$	185

See notes to consolidated financial statements (unaudited).

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THE 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 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 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. All material intercompany transactions and balances have been eliminated. Certain reclassifications have been made to the 2009 financial statements and notes to conform to the 2010 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 2009 Annual Report on Form 10-K.

The preparation of the interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and claims and expenses during the reporting period. Actual results could differ from those estimates.

Adoption of Accounting Standards Updates

Amendments to Accounting for Variable Interest Entities

In June 2009, the FASB issued updated guidance on the accounting for variable interest entities that eliminates the concept of a qualifying special-purpose entity and the quantitative-based risks and rewards calculation for determining which company, if any, has a controlling financial interest in a variable interest entity. The updated guidance requires an analysis of whether a company has: (1) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (2) the obligation to absorb the losses that could potentially be significant to the entity or the right to receive benefits from the entity that could potentially be significant to the entity. An entity is required to be re-evaluated as a variable interest entity when the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights to direct the activities that most significantly impact the entity’s economic performance. Additional disclosures are required about a company’s involvement in variable interest entities and an ongoing assessment of whether a company is the primary beneficiary.

The updated guidance is effective for all variable interest entities owned on or formed after January 1, 2010. The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.

Nature of Operations

The Company is organized into three reportable business segments: Business Insurance; Financial, Professional & International Insurance; and Personal Insurance. These segments reflect the manner in which the Company’s businesses are currently managed and represent an aggregation of products and services based on type of customer, how the business is marketed and the manner in which risks are underwritten. The specific business segments are as follows:

Business Insurance

The Business Insurance segment offers a broad array of property and casualty insurance and insurance-related services to its clients primarily in the United States. Business Insurance is organized into the following six groups, which collectively comprise Business Insurance Core operations: Select Accounts; Commercial Accounts; National Accounts; Industry-Focused Underwriting; Target Risk Underwriting; and Specialized Distribution.

Business Insurance also includes the Special Liability Group (which manages the Company’s asbestos and environmental liabilities) and the assumed reinsurance and certain international and other runoff operations, which collectively are referred to as Business Insurance Other.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES, Continued

Financial, Professional & International Insurance

The Financial, Professional & International Insurance segment includes surety and management liability coverages, which primarily use credit-based underwriting processes, as well as property and casualty products that are primarily marketed on a domestic basis in the United Kingdom, the Republic of Ireland and Canada, and on an international basis through Lloyd’s. The segment includes the Bond & Financial Products group as well as the International group.

Personal Insurance

The Personal Insurance segment writes virtually all types of property and casualty insurance covering personal risks. The primary coverages in Personal Insurance are automobile and homeowners insurance sold to individuals.

2. SEGMENT INFORMATION

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

(for the three months ended June 30, in millions)	Business Insurance		Financial, Professional & International Insurance		Personal Insurance		Total Reportable Segments
2010
Premiums	$	2,663	$	855	$	1,822	$	5,340
Net investment income	537		110		115		762
Fee income	76		—		—		76
Other revenues	7		7		18		32
Total operating revenues (1)	$	3,283	$	972	$	1,955	$	6,210
Operating income (1)	$	567	$	172	$	19	$	758

2009
Premiums	$	2,770	$	810	$	1,773	$	5,353
Net investment income	451		107		100		658
Fee income	89		—		—		89
Other revenues	12		7		21		40
Total operating revenues (1)	$	3,322	$	924	$	1,894	$	6,140
Operating income (1)	$	560	$	133	$	88	$	781

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

2. SEGMENT INFORMATION, Continued

(for the six months ended June 30, in millions)	Business Insurance		Financial, Professional & International Insurance		Personal Insurance		Total Reportable Segments
2010
Premiums	$	5,291	$	1,679	$	3,600	$	10,570
Net investment income	1,065		221		229		1,515
Fee income	155		—		—		155
Other revenues	13		13		38		64
Total operating revenues (1)	$	6,524	$	1,913	$	3,867	$	12,304
Operating income (1)	$	1,134	$	258	$	78	$	1,470

2009
Premiums	$	5,527	$	1,611	$	3,516	$	10,654
Net investment income	806		211		183		1,200
Fee income	162		—		—		162
Other revenues	18		13		42		73
Total operating revenues (1)	$	6,513	$	1,835	$	3,741	$	12,089
Operating income (1)	$	1,107	$	281	$	242	$	1,630

(1) Operating revenues for reportable business segments exclude net realized investment gains (losses). Operating income for reportable business segments equals net income excluding the after-tax impact of net realized investment gains (losses).

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

2. SEGMENT INFORMATION, Continued

Business Segment Reconciliations

	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2010			2009			2010			2009
Revenue reconciliation
Earned premiums
Business Insurance:
Commercial multi-peril	$	730		$	727		$	1,440		$	1,445
Workers’ compensation	605			623			1,205			1,256
Commercial automobile	471			490			942			969
Property	423			446			846			892
General liability	433			484			858			966
Other	1			—			—			(1		)
Total Business Insurance	2,663			2,770			5,291			5,527

Financial, Professional & International Insurance:
Fidelity and surety	286			252			533			500
General liability	222			233			448			461
International	313			293			631			585
Other	34			32			67			65
Total Financial, Professional & International Insurance	855			810			1,679			1,611

Personal Insurance:
Automobile	921			925			1,825			1,843
Homeowners and other	901			848			1,775			1,673
Total Personal Insurance	1,822			1,773			3,600			3,516
Total earned premiums	5,340			5,353			10,570			10,654
Net investment income	762			658			1,515			1,200
Fee income	76			89			155			162
Other revenues	32			40			64			73
Total operating revenues for reportable segments	6,210			6,140			12,304			12,089
Other revenues	—			9			—			9
Net realized investment gains (losses)	(31		)	13			(6		)	(201		)
Total consolidated revenues	$	6,179		$	6,162		$	12,298		$	11,897

Income reconciliation, net of tax
Total operating income for reportable segments	$	758		$	781		$	1,470		$	1,630
Interest Expense and Other (1)	(68		)	(49		)	(149		)	(99		)
Total operating income	690			732			1,321			1,531
Net realized investment gains (losses)	(20		)	8			(4		)	(129		)
Total consolidated net income	$	670		$	740		$	1,317		$	1,402

(1) The primary component of Interest Expense and Other is after-tax interest expense of $63 million and $61 million for the three months ended June 30, 2010 and 2009, respectively, and $127 million and $121 million for the six months ended June 30, 2010 and 2009, respectively. The totals for the three months and six months ended June 30, 2009 included benefits of $14 million and $28 million, respectively, from the favorable resolution of various prior year tax matters.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

2. SEGMENT INFORMATION, Continued

(in millions)	June 30, 2010		December 31, 2009
Asset reconciliation:
Business Insurance	$	79,429	$	81,705
Financial, Professional & International Insurance	13,931		13,920
Personal Insurance	13,069		13,328
Total assets for reportable segments	106,429		108,953
Other assets (1)	594		607
Total consolidated assets	$	107,023	$	109,560

(1) The primary components of other assets at both dates were other intangible assets and deferred taxes.

3. INVESTMENTS

Fixed Maturities

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

Amortized

Gross Unrealized

Fair

(at June 30, 2010, in millions)

Cost

Gains

Losses

Value

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

2,053

111

—

2,164

Obligations of states, municipalities and political subdivisions

39,090

2,149

41,222

Debt securities issued by foreign governments

1,742

1,802

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

4,612

277

4,810

All other corporate bonds

14,023

889

14,851

Redeemable preferred stock

Total

61,561

3,489

159

64,891

	Amortized		Gross Unrealized				Fair
(at December 31, 2009, in millions)	Cost		Gains		Losses		Value
U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities	$	2,490	$	85	$	1	$	2,574
Obligations of states, municipalities and political subdivisions	39,459		1,915		41		41,333
Debt securities issued by foreign governments	1,912		48		3		1,957
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	5,182		190		165		5,207
All other corporate bonds	14,221		623		116		14,728
Redeemable preferred stock	47		2		1		48
Total	$	63,311	$	2,863	$	327	$	65,847

Equity Securities

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

			Gross Unrealized				Fair
(at June 30, 2010, in millions)	Cost		Gains		Losses		Value
Common stock	$	198	$	161	$	6	$	353
Non-redeemable preferred stock	191		49		8		232
Total	$	389	$	210	$	14	$	585

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

3. INVESTMENTS, Continued

			Gross Unrealized				Fair
(at December 31, 2009, in millions)	Cost		Gains		Losses		Value
Common stock	$	175	$	46	$	2	$	219
Non-redeemable preferred stock	198		48		14		232
Total	$	373	$	94	$	16	$	451

Variable Interest Entities

Entities which do not have sufficient equity at risk to allow the entity to finance its activities without additional financial support or in which the equity investors, as a group, do not have the characteristic of a controlling financial interest are referred to as variable interest entities (VIE). A VIE is consolidated by the variable interest holder that is determined to have the controlling financial interest (primary beneficiary) as a result of having both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. The Company determines whether it is the primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE’s capital structure, contractual terms, nature of the VIE’s operations and purpose and the Company’s relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE. The Company reassesses its VIE determination with respect to an entity on an ongoing basis.

The Company is involved in the normal course of business with VIEs primarily as a passive investor in limited partner equity interests issued by third party VIEs. These include investments in private equity limited partnerships, hedge funds and real estate partnerships where the Company is not related to the general partner. These investments are generally accounted for under the equity method and reported in the Company’s consolidated balance sheet as other investments unless the Company is deemed the primary beneficiary. These equity interests generally cannot be redeemed. Distributions from these investments are received by the Company as a result of liquidation of the underlying investments of the funds and/or as income distribution. The Company’s maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in the Company’s consolidated balance sheet and any unfunded commitment. Neither the carrying amounts nor the unfunded commitments related to these VIEs are material.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

3. INVESTMENTS, Continued

Unrealized Investment Losses

The following tables summarize, for all investments in an unrealized loss position at June 30, 2010 and December 31, 2009, the aggregate fair value and gross unrealized losses by length of time those securities have been continuously in an unrealized loss position.

	Less than 12 months				12 months or longer				Total
(at June 30, 2010, in millions)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Fixed maturities
U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities	$	50	$	—	$	—	$	—	$	50	$	—
Obligations of states, municipalities and political subdivisions	1,309		8		160		9		1,469		17
Debt securities issued by foreign governments	56		—		43		1		99		1
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	104		1		806		78		910		79
All other corporate bonds	536		19		505		42		1,041		61
Redeemable preferred stock	5		1		3		—		8		1
Total fixed maturities	2,060		29		1,517		130		3,577		159
Equity securities
Common stock	55		6		7		—		62		6
Non-redeemable preferred stock	13		—		89		8		102		8
Total equity securities	68		6		96		8		164		14
Total	$	2,128	$	35	$	1,613	$	138	$	3,741	$	173

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

3. INVESTMENTS, Continued

	Less than 12 months				12 months or longer				Total
(at December 31, 2009, in millions)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Fixed maturities
U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities	$	1,018	$	1	$	—	$	—	$	1,018	$	1
Obligations of states, municipalities and political subdivisions	1,901		24		250		17		2,151		41
Debt securities issued by foreign governments	282		3		—		—		282		3
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	313		4		988		161		1,301		165
All other corporate bonds	1,079		22		1,100		94		2,179		116
Redeemable preferred stock	6		1		3		—		9		1
Total fixed maturities	4,599		55		2,341		272		6,940		327
Equity securities
Common stock	59		1		17		1		76		2
Non-redeemable preferred stock	9		—		83		14		92		14
Total equity securities	68		1		100		15		168		16
Total	$	4,667	$	56	$	2,441	$	287	$	7,108	$	343

The following table summarizes, for all fixed maturities and equity securities reported at fair value for which fair value is less than 80% of amortized cost at June 30, 2010, the gross unrealized investment loss by length of time those securities have continuously been in an unrealized loss position of greater than 20% of amortized cost:

	Period For Which Fair Value Is Less Than 80% of Amortized Cost
(in millions)	3 Months or Less		Greater Than 3 Months, 6 Months or Less		Greater Than 6 Months, 12 Months or Less		Greater Than 12 Months		Total
Fixed maturities
Mortgage-backed securities	$	1	$	—	$	—	$	21	$	22
Other	1		—		—		23		24
Total fixed maturities	2		—		—		44		46
Equity securities	6		—		—		—		6
Total	$	8	$	—	$	—	$	44	$	52

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

3. INVESTMENTS, Continued

Impairment Charges

Impairment charges included in net realized investment gains (losses) in the consolidated statement of income were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2010		2009		2010		2009
Fixed maturities
U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities	$	—	$	—	$	—	$	—
Obligations of states, municipalities and political subdivisions	—		—		—		—
Debt securities issued by foreign governments	—		—		—		—
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	1		7		2		58
All other corporate bonds	—		16		5		72
Redeemable preferred stock	—		—		—		—
Total fixed maturities	1		23		7		130
Equity securities
Common stock	1		—		2		15
Non-redeemable preferred stock	—		5		—		64
Total equity securities	1		5		2		79
Other investments	2		2		5		5
Total	$	4	$	30	$	14	$	214

In the second quarter of 2009, the Company adopted updated accounting guidance that changed the reporting of other-than-temporary impairments (OTTI). As a result, the credit component of OTTI on fixed maturities was reported separately effective April 1, 2009, the date of adoption.

The following tables present a roll-forward of the credit component of other-than-temporary impairments (OTTI) on fixed maturities recognized in the consolidated statement of income for which a portion of the other-than-temporary impairment was recognized in accumulated other changes in equity from nonowner sources for the periods April 1 through June 30, 2010 and 2009, and January 1, 2010 through June 30, 2010:

April 1, 2010 through June 30, 2010 (in millions)	Cumulative OTTI Credit Losses Recognized for Securities Held, Beginning of Period		Additions for OTTI Securities Where No Credit Losses Were Previously Recognized		Additions for OTTI Securities Where Credit Losses Have Been Previously Recognized		Reductions Due to Sales/Defaults of Credit- Impaired Securities			Adjustments to Book Value of Credit- Impaired Securities due to Changes in Cash Flows		Cumulative OTTI Credit Losses Recognized for Securities Still Held, End of Period
Fixed maturities
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	$	47	$	—	$	1	$	(3	)	$	—	$	45
All other corporate bonds	92		—		—		(7		)	—		85
Total fixed maturities	$	139	$	—	$	1	$	(10	)	$	—	$	130

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

3. INVESTMENTS, Continued

January 1, 2010 through June 30, 2010 (in millions)	Cumulative OTTI Credit Losses Recognized for Securities Held, Beginning of Period		Additions for OTTI Securities Where No Credit Losses Were Previously Recognized		Additions for OTTI Securities Where Credit Losses Have Been Previously Recognized		Reductions Due to Sales/Defaults of Credit- Impaired Securities			Adjustments to Book Value of Credit- Impaired Securities due to Changes in Cash Flows		Cumulative OTTI Credit Losses Recognized for Securities Still Held, End of Period
Fixed maturities
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	$	46	$	—	$	2	$	(3	)	$	—	$	45
All other corporate bonds	93		—		2		(11		)	1		85
Total fixed maturities	$	139	$	—	$	4	$	(14	)	$	1	$	130

April 1, 2009 through June 30, 2009 (in millions)	Cumulative OTTI Credit Losses Recognized for Securities Held, Beginning of Period		Additions for OTTI Securities Where No Credit Losses Were Previously Recognized		Additions for OTTI Securities Where Credit Losses Have Been Previously Recognized		Reductions Due to Sales/Defaults of Credit- Impaired Securities		Adjustments to Book Value of Credit- Impaired Securities due to Changes in Cash Flows		Cumulative OTTI Credit Losses Recognized for Securities Still Held, End of Period
Fixed maturities
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	$	13	$	2	$	5	$	—	$	—	$	20
All other corporate bonds	82		4		9		—		—		95
Total fixed maturities	$	95	$	6	$	14	$	—	$	—	$	115

4. FAIR VALUE MEASUREMENTS

The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets, and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the fair value accounting guidance hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions. The three levels of the hierarchy are as follows:

· Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.

· Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

· Level 3 - Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the inputs that market participants would use.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

4. FAIR VALUE MEASUREMENTS, Continued

Valuation of Investments Reported at Fair Value in Financial Statements

The fair value of a financial instrument is the estimated amount at which the instrument could be exchanged in an orderly transaction between knowledgeable, unrelated, willing parties, i.e., not in a forced transaction. The estimated fair value of a financial instrument may differ from the amount that could be realized if the security was sold in an immediate sale, e.g., a forced transaction. Additionally, the valuation of fixed maturity investments is more subjective when markets are less liquid due to the lack of market based inputs, which may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur.

For investments that have quoted market prices in active markets, the Company uses the quoted market prices as fair value and includes these prices in the amounts disclosed in Level 1 of the hierarchy. The Company receives the quoted market prices from a third party, nationally recognized pricing service (pricing service). When quoted market prices are unavailable, the Company utilizes a pricing service to determine an estimate of fair value, which is mainly used for its fixed maturity investments. The fair value estimates provided from this pricing service are included in the amount disclosed in Level 2 of the hierarchy. If quoted market prices and an estimate from a pricing service are unavailable, the Company produces an estimate of fair value based on internally developed valuation techniques, which, depending on the level of observable market inputs, will render the fair value estimate as Level 2 or Level 3. The Company bases all of its estimates of fair value for assets on the bid price as it represents what a third-party market participant would be willing to pay in an arm’s length transaction.

Fixed Maturities

The Company utilizes a pricing service to estimate fair value measurements for approximately 99% of its fixed maturities. The pricing service utilizes market quotations for fixed maturity securities that have quoted prices in active markets. Since fixed maturities other than U.S. Treasury securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value measurements for these securities using its proprietary pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Additionally, the pricing service uses an Option Adjusted Spread model to develop prepayment and interest rate scenarios.

The pricing service evaluates each asset class based on relevant market information, relevant credit information, perceived market movements and sector news. The market inputs utilized in the pricing evaluation, listed in the approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. The extent of the use of each market input depends on the asset class and the market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities, additional inputs may be necessary.

The pricing service utilized by the Company has indicated that they will only produce an estimate of fair value if there is objectively verifiable information to produce a valuation. If the pricing service discontinues pricing an investment, the Company would be required to produce an estimate of fair value using some of the same methodologies as the pricing service but would have to make assumptions for market-based inputs that are unavailable due to market conditions.

The fair value estimates of most fixed maturity investments are based on observable market information rather than market quotes. Accordingly, the estimates of fair value for such fixed maturities, other than U.S. Treasury securities, provided by the pricing service are included in the amount disclosed in Level 2 of the hierarchy. The estimated fair value of U.S. Treasury securities is included in the amount disclosed in Level 1 as the estimates are based on unadjusted market prices.

The Company holds privately placed corporate bonds and estimates the fair value of these bonds using an internal matrix that is based on market information regarding interest rates, credit spreads and liquidity. The underlying source data for calculating the matrix of credit spreads relative to the U.S. Treasury curve are the Merrill Lynch U.S. Corporate Index and the Merrill Lynch High Yield BB Rated Index. The Company includes the fair value estimates of these corporate bonds in Level 2, since all significant inputs are market observable. As many of these securities are issued by public companies, the Company compares the estimates of fair value to the fair values of these companies’ publicly traded debt to test the validity of the internal pricing matrix.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

4. FAIR VALUE MEASUREMENTS, Continued

While the vast majority of the Company’s municipal bonds are included in Level 2, the Company holds a small number of municipal bonds which are not valued by the pricing service and estimates the fair value of these bonds using an internal pricing matrix with some unobservable inputs that are significant to the valuation. Due to the limited amount of observable market information, the Company includes the fair value estimates for these particular bonds in Level 3. Additionally, the Company holds a small amount of fixed maturities that have characteristics that make them unsuitable for matrix pricing. For these fixed maturities, the Company obtains a quote from a broker (typically a market maker). Due to the disclaimers on the quotes that indicate that the price is indicative only, the Company includes these fair value estimates in Level 3.

Equities — Public Common and Preferred

For public common and preferred stocks, the Company receives prices from a nationally recognized pricing service that are based on observable market transactions and includes these estimates in the amount disclosed in Level 1. The estimated fair value of stocks having transfer restrictions that expire within one year was determined by adjusting the observed market price of the securities for a liquidity discount which takes into consideration the restrictions that existed at June 30, 2010 and is based on market observable inputs. As a result of adjusting the market price to reflect the impact of the transfer restrictions on estimated fair value, the Company discloses these holdings in Level 2. Infrequently, current market quotes in active markets are unavailable for certain non-redeemable preferred stocks held by the Company. In these instances, the Company receives an estimate of fair value from the pricing service that provides fair value estimates for the Company’s fixed maturities. The service utilizes some of the same methodologies to price the non-redeemable preferred stocks as it does for the fixed maturities. The Company includes the fair value estimate for these non-redeemable preferred stocks in the amount disclosed in Level 2.

Other Investments

Common Stock with Transfer Restrictions and Other

The estimated fair value of stocks having transfer restrictions that expire after one year was determined using the same methodology described above, and is disclosed in Level 2. The Company holds investments in non-public common and preferred equity securities, with a fair value estimate of $48 million at June 30, 2010, reported in other investments, where the fair value estimate is determined either internally or by an external fund manager based on recent filings, operating results, balance sheet stability, growth and other business and market sector fundamentals. Due to the significant unobservable inputs in these valuations, the Company includes the total fair value estimate for all of these investments at June 30, 2010 in the amount disclosed in Level 3. The Company holds investments in various publicly-traded securities which are reported in other investments. The $38 million fair value of these investments at June 30, 2010 is disclosed in Level 1. These investments include securities in the Company’s trading portfolio ($20 million), mutual funds ($16 million) and other small holdings ($2 million).

Derivatives

The Company holds non-public warrants in a public company and has convertible bonds containing embedded conversion options that are valued separately from the host bond contract. The Company estimates fair value for the warrants using an option pricing model with observable market inputs. Because the warrants are not market traded and information concerning market participants is not available, the Company includes the fair value estimate of $70 million at June 30, 2010 in the amount disclosed in Level 3 - other investments.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

4. FAIR VALUE MEASUREMENTS, Continued

Fair Value Hierarchy

The following tables present the level within the fair value hierarchy at which the Company’s financial assets and financial liabilities are measured on a recurring basis at June 30, 2010 and December 31, 2009.

(at June 30, 2010, in millions)

Total

Level 1

Level 2

Level 3

Invested assets: