Edgar Filing: TRAVELERS COMPANIES, INC.

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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 March 31, 2011

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 April 15, 2011 was 418,872,308.

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The Travelers Companies, Inc.

Quarterly Report on Form 10-Q

For Quarterly Period Ended March 31, 2011

TABLE OF CONTENTS

		Page
	Part I — Financial Information

Item 1.	Financial Statements:

	Consolidated Statement of Income (Unaudited) — Three Months Ended March 31, 2011 and 2010	3

	Consolidated Balance Sheet — March 31, 2011 (Unaudited) and December 31, 2010	4

	Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) — Three Months Ended March 31, 2011 and 2010	5

	Consolidated Statement of Cash Flows (Unaudited) — Three Months Ended March 31, 2011 and 2010	6

	Notes to Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	63

Item 4.	Controls and Procedures	63

	Part II — Other Information

Item 1.	Legal Proceedings	64

Item 1A.	Risk Factors	64

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64

Item 5.	Other Information	65

Item 6.	Exhibits	65

	SIGNATURES	65

	EXHIBIT INDEX	66

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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)

For the three months ended March 31,	2011		20l0
Revenues
Premiums	$	5,371	$	5,230
Net investment income	779		753
Fee income	74		79
Net realized investment gains	20		25
Other revenues	34		32

Total revenues	6,278		6,119

Claims and expenses
Claims and claim adjustment expenses	3,382		3,388
Amortization of deferred acquisition costs	948		929
General and administrative expenses	883		847
Interest expense	96		98

Total claims and expenses	5,309		5,262

Income before income taxes	969		857
Income tax expense	130		210

Net income	$	839	$	647

Net income per share
Basic	$	1.94	$	1.26

Diluted	$	1.92	$	1.25

Weighted average number of common shares outstanding
Basic	428.2		508.4

Diluted	434.4		515.1

For the three months ended March 31,	2011			2010
Net Realized Investment Gains (Losses)
Other-than-temporary impairment losses:
Total gains (losses)	$	2		$	(1	)
Non-credit component of impairments recognized in accumulated other changes in equity from nonowner sources	(6		)	(9		)

Other-than-temporary impairment losses	(4		)	(10		)

Other net realized investment gains	24			35

Net realized investment gains	$	20		$	25

See notes to consolidated financial statements (unaudited).

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in millions)

	March 31, 2011			December 31, 2010
	(Unaudited)
Assets
Fixed maturities, available for sale, at fair value (including $164 and $186 subject to securities lending) (amortized cost $59,720 and $60,170)	$	62,276		$	62,820
Equity securities, available for sale, at fair value (cost $421 and $372)	583			519
Real estate	866			838
Short-term securities	5,652			5,616
Other investments	3,014			2,929

Total investments	72,391			72,722

Cash	239			200
Investment income accrued	736			791
Premiums receivable	5,668			5,497
Reinsurance recoverables	11,786			11,994
Ceded unearned premiums	911			813
Deferred acquisition costs	1,801			1,782
Deferred tax asset	357			493
Contractholder receivables	5,271			5,343
Goodwill	3,365			3,365
Other intangible assets	482			502
Other assets	2,245			2,154

Total assets	$	105,252		$	105,656

Liabilities
Claims and claim adjustment expense reserves	$	51,440		$	51,606
Unearned premium reserves	11,116			10,921
Contractholder payables	5,271			5,343
Payables for reinsurance premiums	513			407
Debt	6,611			6,611
Other liabilities	5,058			5,293

Total liabilities	80,009			80,181

Shareholders’ equity
Preferred Stock Savings Plan—convertible preferred stock (0.2 shares issued and outstanding)	66			68
Common stock (1,748.6 shares authorized; 420.3 and 434.6 shares issued and outstanding)	20,370			20,162
Retained earnings	19,538			18,847
Accumulated other changes in equity from nonowner sources	1,272			1,255
Treasury stock, at cost (316.3 and 296.6 shares)	(16,003		)	(14,857		)

Total shareholders’ equity	25,243			25,475

Total liabilities and shareholders’ equity	$	105,252		$	105,656

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 three months ended March 31,	2011			2010
Convertible preferred stock—savings plan
Balance, beginning of year	$	68		$	79
Redemptions during period	(2		)	(2		)

Balance, end of period	66			77

Common stock
Balance, beginning of year	20,162			19,593
Employee share-based compensation	156			119
Compensation amortization under share-based plans and other changes	52			50

Balance, end of period	20,370			19,762

Retained earnings
Balance, beginning of year	18,847			16,315
Net income	839			647
Dividends	(156		)	(169		)
Other	8			(1		)

Balance, end of period	19,538			16,792

Accumulated other changes in equity from nonowner sources, net of tax
Balance, beginning of year	1,255			1,219
Change in net unrealized gain on investment securities:
Having no credit losses recognized in the consolidated statement of income	(60		)	54
Having credit losses recognized in the consolidated statement of income	18			23
Net change in unrealized foreign currency translation and other changes	59			(25		)

Balance, end of period	1,272			1,271

Treasury stock (at cost)
Balance, beginning of year	(14,857		)	(9,791		)
Treasury shares acquired — share repurchase authorization	(1,100		)	(1,400		)
Net shares acquired related to employee share-based compensation plans	(46		)	(40		)

Balance, end of period	(16,003		)	(11,231		)

Total common shareholders’ equity	25,177			26,594

Total shareholders’ equity	$	25,243		$	26,671

Common shares outstanding
Balance, beginning of year	434.6			520.3
Treasury shares acquired — share repurchase authorization	(18.9		)	(27.0		)
Net shares issued under employee share-based compensation plans	4.6			3.7

Balance, end of period	420.3			497.0

Summary of changes in equity from nonowner sources
Net income	$	839		$	647
Other changes in equity from nonowner sources, net of tax	17			52

Total changes in equity from nonowner sources	$	856		$	699

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 three months ended March 31,	2011			2010
Cash flows from operating activities
Net income	$	839		$	647
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment gains	(20		)	(25		)
Depreciation and amortization	208			216
Deferred federal income tax expense	153			76
Amortization of deferred acquisition costs	948			929
Equity in income from other investments	(122		)	(45		)
Premiums receivable	(167		)	(97		)
Reinsurance recoverables	218			86
Deferred acquisition costs	(964		)	(939		)
Claims and claim adjustment expense reserves	(251		)	(224		)
Unearned premium reserves	175			86
Other	(384		)	(179		)

Net cash provided by operating activities	633			531

Cash flows from investing activities
Proceeds from maturities of fixed maturities	1,849			1,229
Proceeds from sales of investments:
Fixed maturities	490			1,646
Equity securities	8			19
Real estate	—			9
Other investments	161			114
Purchases of investments:
Fixed maturities	(1,824		)	(2,175		)
Equity securities	(51		)	(5		)
Real estate	(30		)	(3		)
Other investments	(107		)	(104		)
Net (purchases) sales of short-term securities	(31		)	202
Securities transactions in course of settlement	134			95
Other	(69		)	(75		)

Net cash provided by investing activities	530			952

Cash flows from financing activities
Dividends paid to shareholders	(155		)	(168		)
Issuance of common stock — employee share options	168			123
Treasury stock acquired — share repurchase authorization	(1,104		)	(1,407		)
Treasury stock acquired — net employee share-based compensation	(44		)	(38		)
Excess tax benefits from share-based payment arrangements	7			4

Net cash used in financing activities	(1,128		)	(1,486		)

Effect of exchange rate changes on cash	4			(1		)

Net increase (decrease) in cash	39			(4		)
Cash at beginning of year	200			255

Cash at end of period	$	239		$	251

Supplemental disclosure of cash flow information
Income taxes paid	$	112		$	44
Interest paid	$	35		$	63

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 2010 consolidated financial statements and notes to conform to the 2011 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 2010 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 interim 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

Intangibles — Goodwill and Other

In December 2010, the Financial Accounting Standards Board (FASB) issued updated guidance that modifies the goodwill impairment test. Under the updated guidance, goodwill is tested for impairment using a two-step process. The first step is to identify potential impairments by comparing the estimated fair value of a reporting unit to its carrying value, including goodwill. If the carrying value of a reporting unit exceeds the estimated fair value, a second step is performed to measure the amount of impairment, if any. The second step is to determine the implied fair value of the reporting unit’s goodwill, measured in the same manner as goodwill is recognized in a business combination, and compare the implied fair value with the carrying amount of the goodwill. If the carrying amount exceeds the implied fair value of the reporting unit’s goodwill, an impairment loss is recognized in an amount equal to that excess.

The updated guidance requires that, if the carrying amount of a reporting unit becomes zero or negative, the second step of the impairment test must be performed when it is more likely than not that a goodwill impairment loss exists. In considering whether it is more likely than not that an impairment loss exists, a company is required to evaluate qualitative factors, including the factors presented in existing guidance that trigger an interim impairment test of goodwill (e.g., a significant adverse change in business climate or an anticipated sale of a reporting unit). The provisions of the guidance were effective for annual and interim periods beginning after December 15, 2010. The adoption of this guidance in January 2011 did not have any effect on the Company’s results of operations, financial position or liquidity.

Accounting Standards Not Yet Adopted

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

In October 2010, the FASB issued updated guidance to address diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred. If application of this guidance would result in the capitalization of acquisition costs that had not previously been capitalized by a reporting entity, the entity may elect not to capitalize those costs.

The updated guidance is effective for periods beginning after December 15, 2011. The adoption of this guidance is not expected to have any impact on the Company’s results of operations, financial position or liquidity.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (Unaudited), Continued

Creditors’ Evaluation of Whether a Restructuring is a Troubled Debt Restructuring

In April 2011, the FASB issued updated guidance to clarify whether a modification or restructuring of a receivable is considered a troubled debt restructuring, i.e., whether the creditor has granted a concession and whether the debtor is experiencing financial difficulties. A modification or restructuring that is considered a troubled debt restructuring will result in the creditor having to account for the receivable as being impaired and will also result in additional disclosure of the creditors’ troubled debt restructuring activities. The updated guidance is effective for the first interim period beginning on or after June 15, 2011 and is to be applied on a retrospective basis to the beginning of the annual period of adoption.

The adoption of this guidance is not expected to have a material impact 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.

Financial, Professional & International Insurance

The Financial, Professional & International Insurance segment includes surety and financial 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, Canada and the Republic of Ireland, and on an international basis through Lloyd’s. The segment includes Bond & Financial Products as well as International.

On November 3, 2010, an indirect subsidiary of the Company entered into a definitive agreement to commence a joint venture with J. Malucelli Participações em Seguros e Resseguros S.A, a Brazilian company (“J. Malucelli”), through the acquisition of approximately 43% of J. Malucelli’s common stock. J. Malucelli is currently the market leader in surety in Brazil based on market share. The transaction is subject to customary closing conditions and is expected to be finalized in the second quarter of 2011.

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.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 March 31, in millions)	Business Insurance		Financial, Professional & International Insurance		Personal Insurance		Total Reportable Segments
2011
Premiums	$	2,745	$	773	$	1,853	$	5,371
Net investment income	556		106		117		779
Fee income	74		—		—		74
Other revenues	9		7		18		34

Total operating revenues (1)	$	3,384	$	886	$	1,988	$	6,258

Operating income (1)	$	604	$	120	$	170	$	894


2010
Premiums	$	2,628	$	824	$	1,778	$	5,230
Net investment income	528		111		114		753
Fee income	79		—		—		79
Other revenues	6		6		20		32

Total operating revenues (1)	$	3,241	$	941	$	1,912	$	6,094

Operating income (1)	$	567	$	86	$	59	$	712

(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 March 31,
(in millions)	2011			2010
Revenue reconciliation
Earned premiums
Business Insurance:
Workers’ compensation	$	680		$	600
Commercial automobile	473			471
Property	401			423
General liability	428			425
Commercial multi-peril	762			710
Other	1			(1		)

Total Business Insurance	2,745			2,628

Financial, Professional & International Insurance:
Fidelity and surety	234			247
General liability	208			226
International	298			318
Other	33			33

Total Financial, Professional & International Insurance	773			824

Personal Insurance:
Automobile	915			904
Homeowners and other	938			874

Total Personal Insurance	1,853			1,778

Total earned premiums	5,371			5,230
Net investment income	779			753
Fee income	74			79
Other revenues	34			32

Total operating revenues for reportable segments	6,258			6,094
Net realized investment gains	20			25

Total consolidated revenues	$	6,278		$	6,119

Income reconciliation, net of tax
Total operating income for reportable segments	$	894		$	712
Interest Expense and Other (1)	(68		)	(81		)

Total operating income	826			631
Net realized investment gains	13			16

Total consolidated net income	$	839		$	647

(1) The primary component of Interest Expense and Other is after-tax interest expense of $62 million and $64 million for the three months ended March 31, 2011 and 2010, respectively.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

2. SEGMENT INFORMATION, Continued

(in millions)	March 31, 2011		December 31, 2010
Asset reconciliation:
Business Insurance	$	77,687	$	78,165
Financial, Professional & International Insurance	13,702		13,461
Personal Insurance	13,271		13,423

Total assets for reportable segments	104,660		105,049
Other assets (1)	592		607

Total consolidated assets	$	105,252	$	105,656

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

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 March 31, 2011, in millions)

Cost

Gains

Losses

Value

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

2,112

—

2,194

Obligations of states, municipalities and political subdivisions:

Pre-refunded

6,678

490

7,167

All other

30,831

1,079

129

31,781

Total obligations of states, municipalities and political subdivisions

37,509

1,569

130

38,948

Debt securities issued by foreign governments

2,013

2,049

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

3,701

240

3,929

All other corporate bonds

14,352

822

15,120

Redeemable preferred stock

—

Total

59,720

2,758

202

62,276

	Amortized		Gross Unrealized				Fair
(at December 31, 2010, in millions)	Cost		Gains		Losses		Value
U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities	$	1,914	$	94	$	—	$	2,008
Obligations of states, municipalities and political subdivisions:
Pre-refunded	6,787		505		1		7,291
All other	31,277		1,121		154		32,244

Total obligations of states, municipalities and political subdivisions	38,064		1,626		155		39,535
Debt securities issued by foreign governments	2,156		50		4		2,202
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	3,952		248		36		4,164
All other corporate bonds	14,051		876		51		14,876
Redeemable preferred stock	33		2		—		35

Total	$	60,170	$	2,896	$	246	$	62,820

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

3. INVESTMENTS, Continued

Pre-refunded bonds of $7.17 billion and $7.29 billion at March 31, 2011 and December 31, 2010, respectively, were bonds for which an irrevocable trust has been established to fund the remaining payments of principal and interest.

Equity Securities

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

			Gross Unrealized				Fair
(at March 31, 2011, in millions)	Cost		Gains		Losses		Value
Common stock	$	247	$	116	$	—	$	363
Non-redeemable preferred stock	174		49		3		220

Total	$	421	$	165	$	3	$	583

			Gross Unrealized				Fair
(at December 31, 2010, in millions)	Cost		Gains		Losses		Value
Common stock	$	198	$	106	$	—	$	304
Non-redeemable preferred stock	174		46		5		215

Total	$	372	$	152	$	5	$	519

Unrealized Investment Losses

The following tables summarize, for all investments in an unrealized loss position at March 31, 2011 and December 31, 2010, 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 March 31, 2011, 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	$	473	$	—	$	—	$	—	$	473	$	—
Obligations of states, municipalities and political subdivisions	5,359		122		141		8		5,500		130
Debt securities issued by foreign governments	444		6		6		—		450		6
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	149		1		196		11		345		12
All other corporate bonds	1,678		37		111		17		1,789		54
Redeemable preferred stock	—		—		—		—		—		—

Total fixed maturities	8,103		166		454		36		8,557		202

Equity securities
Common stock	33		—		1		—		34		—
Non-redeemable preferred stock	21		—		48		3		69		3

Total equity securities	54		—		49		3		103		3

Total	$	8,157	$	166	$	503	$	39	$	8,660	$	205

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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, 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	$	155	$	—	$	—	$	—	$	155	$	—
Obligations of states, municipalities and political subdivisions	5,854		149		139		6		5,993		155
Debt securities issued by foreign governments	419		4		13		—		432		4
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	77		1		420		35		497		36
All other corporate bonds	1,255		32		185		19		1,440		51
Redeemable preferred stock	—		—		3		—		3		—

Total fixed maturities	7,760		186		760		60		8,520		246

Equity securities
Common stock	3		—		3		—		6		—
Non-redeemable preferred stock	45		1		49		4		94		5

Total equity securities	48		1		52		4		100		5

Total	$	7,808	$	187	$	812	$	64	$	8,620	$	251

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 March 31, 2011, 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	$	—	$	—	$	—	$	—	$	—
Other	3		—		—		10		13

Total fixed maturities	3		—		—		10		13
Equity securities	—		—		—		—		—

Total	$	3	$	—	$	—	$	10	$	13

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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 in the consolidated statement of income were as follows:

(for the three months ended March 31, in millions)	2011		2010
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	2		1
All other corporate bonds	2		5
Redeemable preferred stock	—		—

Total fixed maturities	4		6

Equity securities
Common stock	—		1
Non-redeemable preferred stock	—		—

Total equity securities	—		1

Other investments	—		3

Total	$	4	$	10

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 OTTI was recognized in accumulated other changes in equity from nonowner sources:

(for the three months ended March 31, 2011, in millions)	Cumulative OTTI Credit Losses Recognized for Securities Held, Beginning of Year		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	$	—	$	2	$	—		$	—	$	49
All other corporate bonds	88		1		1		(1		)	1		90

Total fixed maturities	$	135	$	1	$	3	$	(1	)	$	1	$	139

Table of Contents

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

3. INVESTMENTS, Continued

(for the three months ended March 31, 2010, in millions)	Cumulative OTTI Credit Losses Recognized for Securities Held, Beginning of Year		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	$	—	$	1	$	—		$	—	$	47
All other corporate bonds	93		—		2		(4		)	1		92

Total fixed maturities	$	139	$	—	$	3	$	(4	)	$	1	$	139

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.

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.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

4. FAIR VALUE MEASUREMENTS, Continued

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 BofA Merrill Lynch U.S. Corporate Index and the BofA 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.

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. 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.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

4. FAIR VALUE MEASUREMENTS, Continued

Other Investments

At March 31, 2011 and December 31, 2010, the Company held investments in non-public common and preferred equity securities, with fair value estimates of $63 million and $57 million, respectively, 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 March 31, 2011 and December 31, 2010 in the amount disclosed in Level 3. The Company holds investments in various publicly-traded securities which are reported in other investments. The $43 million and $42 million fair value of these investments at March 31, 2011 and December 31, 2010, respectively, was disclosed in Level 1. These investments include securities in the Company’s trading portfolio, mutual funds and other small holdings.

Derivatives

At March 31, 2011 and December 31, 2010, the Company held $31 million and $37 million, respectively, of convertible bonds containing embedded conversion options that are valued separately from the host bond contract in the amount disclosed in Level 2 — fixed maturities.

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 March 31, 2011 and December 31, 2010.

(at March 31, 2011, in millions)

Total

Level 1

Level 2

Level 3

Invested assets:

Fixed maturities

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

2,194

2,182

—

Obligations of states, municipalities and political subdivisions

38,948

—

38,926

Debt securities issued by foreign governments

2,049

—

2,049

—

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

3,929

—

3,928

All other corporate bonds

15,120

—

14,973

147

Redeemable preferred stock

—

Total fixed maturities

62,276

2,217

59,889

170

Equity securities

Common stock

363

340

—

Non-redeemable preferred stock

220

133

—

Total equity securities

583

473

110

—

Other investments

106

—

Total

62,965

2,733

59,999

233

The Company did not have significant transfers between Levels 1 and 2 during the quarter ended March 31, 2011.

Table of Contents

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

4. FAIR VALUE MEASUREMENTS, Continued

(at December 31, 2010, in millions)	Total		Level 1		Level 2		Level 3

Invested assets:
Fixed maturities
U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities	$	2,008	$	1,991	$	17	$	—
Obligations of states, municipalities and political subdivisions	39,535		—		39,433		102
Debt securities issued by foreign governments	2,202