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 September 30, 2013

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

incorporation or organization)

(I.R.S. Employer

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 October 18, 2013 was 364,067,675.

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The Travelers Companies, Inc.

Quarterly Report on Form 10-Q

For Quarterly Period Ended September 30, 2013

TABLE OF CONTENTS

		Page
	Part I — Financial Information

Item 1.	Financial Statements:

	Consolidated Statement of Income (Unaudited) — Three Months and Nine Months Ended September 30, 2013 and 2012	3

	Consolidated Statement of Comprehensive Income (Unaudited) — Three Months and Nine Months Ended September 30, 2013 and 2012	4

	Consolidated Balance Sheet — September 30, 2013 (Unaudited) and December 31, 2012	5

	Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) — Nine Months Ended September 30, 2013 and 2012	6

	Consolidated Statement of Cash Flows (Unaudited) — Nine Months Ended September 30, 2013 and 2012	7

	Notes to Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	82

Item 4.	Controls and Procedures	82

	Part II — Other Information

Item 1.	Legal Proceedings	82

Item 1A.	Risk Factors	82

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	82

Item 5.	Other Information	83

Item 6.	Exhibits	84

	SIGNATURES	84

	EXHIBIT INDEX	85

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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)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013		2012

Revenues
Premiums	$	5,666		$	5,666		$	16,786	$	16,718
Net investment income	657			722			2,014		2,200
Fee income	107			92			286		233
Net realized investment gains (losses) (1)	(22		)	(2		)	155		12
Other revenues	44			34			213		100
Total revenues	6,452			6,512			19,454		19,263

Claims and expenses
Claims and claim adjustment expenses	3,297			3,359			9,980		10,509
Amortization of deferred acquisition costs	953			986			2,851		2,933
General and administrative expenses	934			904			2,780		2,681
Interest expense	91			93			269		285
Total claims and expenses	5,275			5,342			15,880		16,408

Income before income taxes	1,177			1,170			3,574		2,855
Income tax expense	313			306			889		686
Net income	$	864		$	864		$	2,685	$	2,169

Net income per share
Basic	$	2.33		$	2.23		$	7.12	$	5.55
Diluted	$	2.30		$	2.21		$	7.05	$	5.50

Weighted average number of common shares outstanding
Basic	368.9			384.0			374.1		388.0
Diluted	372.9			387.9			378.1		391.5

(1) Total other-than-temporary impairment (OTTI) gains (losses) were $0 million and $17 million for the three months ended September 30, 2013 and 2012, respectively, and $(1) million and $28 million for the nine months ended September 30, 2013 and 2012, respectively. Of total OTTI, credit losses of $(3) million for each of the three months ended September 30, 2013 and 2012, and $(10) million and $(11) million for the nine months ended September 30, 2013 and 2012, respectively, were recognized in net realized investment gains (losses). In addition, unrealized gains from other changes in total OTTI of $3 million and $20 million for the three months ended September 30, 2013 and 2012, respectively, and $9 million and $39 million for the nine months ended September 30, 2013 and 2012, respectively, were recognized in other comprehensive income (loss) as part of change in net unrealized gains on investment securities having credit losses recognized in the consolidated statement of income.

The accompanying notes are an integral part of the consolidated financial statements.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

(in millions)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012

Net income	$	864		$	864	$	2,685		$	2,169

Other comprehensive income (loss):
Changes in net unrealized gains on investment securities:
Having no credit losses recognized in the consolidated statement of income	(204		)	470		(2,370		)	609
Having credit losses recognized in the consolidated statement of income	(2		)	41		2			71
Net changes in benefit plan assets and obligations	24			22		78			64
Net changes in unrealized foreign currency translation	112			65		(57		)	43
Other comprehensive income (loss) before income taxes	(70		)	598		(2,347		)	787
Income tax expense (benefit)	(55		)	192		(816		)	256
Other comprehensive income (loss), net of taxes	(15		)	406		(1,531		)	531
Comprehensive income	$	849		$	1,270	$	1,154		$	2,700

The accompanying notes are an integral part of the consolidated financial statements.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in millions)

	September 30, 2013			December 31, 2012
	(Unaudited)
Assets
Fixed maturities, available for sale, at fair value (amortized cost $59,960 and $60,829)	$	62,102		$	65,393
Equity securities, available for sale, at fair value (cost $470 and $462)	708			645
Real estate investments	917			883
Short-term securities	5,379			3,483
Other investments	3,425			3,434
Total investments	72,531			73,838

Cash	295			330
Investment income accrued	673			752
Premiums receivable	6,113			5,872
Reinsurance recoverables	9,544			10,712
Ceded unearned premiums	1,015			856
Deferred acquisition costs	1,802			1,792
Deferred taxes	321			—
Contractholder receivables	4,450			4,806
Goodwill	3,365			3,365
Other intangible assets	347			381
Other assets	2,229			2,234
Total assets	$	102,685		$	104,938

Liabilities
Claims and claim adjustment expense reserves	$	49,153		$	50,922
Unearned premium reserves	11,716			11,241
Contractholder payables	4,450			4,806
Payables for reinsurance premiums	438			346
Deferred taxes	—			338
Debt	6,346			6,350
Other liabilities	5,771			5,530
Total liabilities	77,874			79,533

Shareholders’ equity
Common stock (1,750.0 shares authorized; 364.1 and 377.4 shares issued and outstanding)	21,425			21,161
Retained earnings	23,485			21,352
Accumulated other comprehensive income	705			2,236
Treasury stock, at cost (390.1 and 372.3 shares)	(20,804		)	(19,344		)
Total shareholders’ equity	24,811			25,405
Total liabilities and shareholders’ equity	$	102,685		$	104,938

The accompanying notes are an integral part of the consolidated financial statements.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(in millions)

For the nine months ended September 30,	2013			2012
Common stock
Balance, beginning of year	$	21,161		$	20,732
Employee share-based compensation	122			219
Compensation amortization under share-based plans and other changes	142			134
Balance, end of period	21,425			21,085
Retained earnings
Balance, beginning of year	21,352			19,579
Net income	2,685			2,169
Dividends	(552		)	(522		)
Balance, end of period	23,485			21,226
Accumulated other comprehensive income, net of tax
Balance, beginning of year	2,236			2,005
Other comprehensive income (loss)	(1,531		)	531
Balance, end of period	705			2,536
Treasury stock (at cost)
Balance, beginning of year	(19,344		)	(17,839		)
Treasury stock acquired — share repurchase authorization	(1,400		)	(1,050		)
Net shares acquired related to employee share-based compensation plans	(60		)	(53		)
Balance, end of period	(20,804		)	(18,942		)
Total shareholders’ equity	$	24,811		$	25,905
Common shares outstanding
Balance, beginning of year	377.4			392.8
Treasury stock acquired — share repurchase authorization	(17.0		)	(17.0		)
Net shares issued under employee share-based compensation plans	3.7			6.2
Balance, end of period	364.1			382.0

The accompanying notes are an integral part of the consolidated financial statements.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

(in millions)

For the nine months ended September 30,	2013			2012
Cash flows from operating activities
Net income	$	2,685		$	2,169
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment gains	(155		)	(12		)
Depreciation and amortization	642			618
Deferred federal income tax expense	132			221
Amortization of deferred acquisition costs	2,851			2,933
Equity in income from other investments	(247		)	(271		)
Premiums receivable	(242		)	(307		)
Reinsurance recoverables	1,102			926
Deferred acquisition costs	(2,862		)	(3,005		)
Claims and claim adjustment expense reserves	(1,684		)	(1,196		)
Unearned premium reserves	483			506
Other	184			184
Net cash provided by operating activities	2,889			2,766

Cash flows from investing activities
Proceeds from maturities of fixed maturities	5,917			5,855
Proceeds from sales of investments:
Fixed maturities	1,160			724
Equity securities	57			31
Real estate investments	—			3
Other investments	545			516
Purchases of investments:
Fixed maturities	(6,492		)	(7,677		)
Equity securities	(50		)	(39		)
Real estate investments	(65		)	(62		)
Other investments	(312		)	(292		)
Net purchases of short-term securities	(1,893		)	(41		)
Securities transactions in course of settlement	280			53
Other	(254		)	(229		)
Net cash used in investing activities	(1,107		)	(1,158		)

Cash flows from financing activities
Payment of debt	(500		)	(258		)
Issuance of debt	494			—
Dividends paid to shareholders	(549		)	(519		)
Issuance of common stock — employee share options	158			247
Treasury stock acquired — share repurchase authorization	(1,400		)	(1,056		)
Treasury stock acquired — net employee share-based compensation	(60		)	(52		)
Excess tax benefits from share-based payment arrangements	43			32
Net cash used in financing activities	(1,814		)	(1,606		)
Effect of exchange rate changes on cash	(3		)	4
Net increase (decrease) in cash	(35		)	6
Cash at beginning of year	330			214
Cash at end of period	$	295		$	220

Supplemental disclosure of cash flow information
Income taxes paid	$	724		$	310
Interest paid	$	206		$	226

The accompanying notes are an integral part of the consolidated financial statements.

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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. 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 2012 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

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

In February 2013, the Financial Accounting Standards Board (FASB) issued updated guidance to improve the reporting of reclassifications out of accumulated other comprehensive income. The guidance requires an entity to present, either on the face of the statement of income or in the notes, separately for each component of comprehensive income, the current period reclassifications out of accumulated other comprehensive income by the respective line items of net income affected by the reclassification.

The updated guidance is effective prospectively for reporting periods beginning after December 15, 2012. The Company adopted the updated guidance effective March 31, 2013, and such adoption did not have any effect on the Company’s results of operations, financial position or liquidity.

Accounting Standard Not Yet Adopted

Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity

In March 2013, the FASB issued updated guidance to resolve diversity in practice concerning the release of the cumulative foreign currency translation adjustment into net income when a parent sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. When a company ceases to have a controlling financial interest in a subsidiary within a foreign entity, the company should recognize any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary had resided. Upon the partial sale of an equity method investment that is a foreign entity, the company should release into earnings a pro rata portion of the cumulative translation adjustment. Upon the partial sale of an equity method investment that is not a foreign entity, the company should release into earnings the cumulative translation adjustment if the partial sale represents a complete or substantially complete liquidation of the foreign entity that holds the equity method investment. The updated guidance is effective for the quarter ending March 31, 2014. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect 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 (Unaudited), (Continued)

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES, Continued

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 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. In addition, the Company owns 49.5% of the common stock of J. Malucelli Participações em Seguros e Resseguros S.A. (JMalucelli), its joint venture in Brazil. JMalucelli is currently the market leader in surety in Brazil based on market share, and commenced writing other property and casualty insurance business in 2012. The Company’s investment in JMalucelli is accounted for using the equity method and is included in “other investments” on the consolidated balance sheet.

On June 10, 2013, the Company entered into a definitive agreement to acquire all of the issued and outstanding shares of The Dominion of Canada General Insurance Company (The Dominion) from E-L Financial Corporation Limited (E-L Financial) for an aggregate purchase price of C$1.125 billion (approximately US$1.092 billion at September 30, 2013), subject to adjustment to reflect changes in shareholder’s equity prior to the closing, including a downward adjustment to reflect an anticipated pre-closing dividend. The purchase price is expected to be funded through a combination of internal funds and proceeds from the Company’s issuance of senior debt. While the Company has not received final regulatory approvals for its acquisition of The Dominion, the Company expects to receive the remaining approvals and, subject to the satisfaction of customary closing conditions, to close the transaction in the fourth quarter of 2013. The Dominion primarily markets personal lines and small commercial insurance business in Canada. The results of operations of the acquired business will be reported in the Company’s Financial, Professional & International Insurance segment from the date of closing.

Personal Insurance

The Personal Insurance segment writes a broad range of property and casualty insurance covering individuals’ personal risks. The primary products of automobile and homeowners insurance are complemented by a broad suite of related coverages.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), (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 September 30, in millions)	Business Insurance		Financial, Professional & International Insurance		Personal Insurance		Total Reportable Segments
2013
Premiums	$	3,046	$	785	$	1,835	$	5,666
Net investment income	479		88		90		657
Fee income	106		1		—		107
Other revenues	8		5		34		47
Total operating revenues (1)	$	3,639	$	879	$	1,959	$	6,477
Operating income (1)	$	526	$	160	$	262	$	948

2012
Premiums	$	2,982	$	772	$	1,912	$	5,666
Net investment income	524		97		101		722
Fee income	92		—		—		92
Other revenues	9		8		17		34
Total operating revenues (1)	$	3,607	$	877	$	2,030	$	6,514
Operating income (1)	$	543	$	180	$	206	$	929

(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).

(for the nine months ended September 30, in millions)	Business Insurance		Financial, Professional & International Insurance		Personal Insurance		Total Reportable Segments
2013
Premiums	$	9,006	$	2,271	$	5,509	$	16,786
Net investment income	1,468		271		275		2,014
Fee income	285		1		—		286
Other revenues	135		15		67		217
Total operating revenues (1)	$	10,894	$	2,558	$	5,851	$	19,303
Operating income (1)	$	1,695	$	477	$	601	$	2,773

2012
Premiums	$	8,718	$	2,275	$	5,725	$	16,718
Net investment income	1,592		300		308		2,200
Fee income	232		1		—		233
Other revenues	31		21		52		104
Total operating revenues (1)	$	10,573	$	2,597	$	6,085	$	19,255
Operating income (1)	$	1,517	$	511	$	331	$	2,359

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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 September 30,						Nine Months Ended September 30,
(in millions)	2013			2012			2013			2012
Revenue reconciliation
Earned premiums
Business Insurance:
Workers’ compensation	$	896		$	841		$	2,640		$	2,378
Commercial automobile	476			488			1,425			1,462
Commercial property	432			414			1,259			1,207
General liability	452			444			1,333			1,313
Commercial multi-peril	779			785			2,320			2,333
Other	11			10			29			25
Total Business Insurance	3,046			2,982			9,006			8,718

Financial, Professional & International Insurance:
Fidelity and surety	235			240			683			699
General liability	227			216			661			633
International	279			274			795			818
Other	44			42			132			125
Total Financial, Professional & International Insurance	785			772			2,271			2,275

Personal Insurance:
Automobile	855			916			2,591			2,762
Homeowners and other	980			996			2,918			2,963
Total Personal Insurance	1,835			1,912			5,509			5,725
Total earned premiums	5,666			5,666			16,786			16,718
Net investment income	657			722			2,014			2,200
Fee income	107			92			286			233
Other revenues	47			34			217			104
Total operating revenues for reportable segments	6,477			6,514			19,303			19,255
Other revenues	(3		)	—			(4		)	(4		)
Net realized investment gains (losses)	(22		)	(2		)	155			12
Total consolidated revenues	$	6,452		$	6,512		$	19,454		$	19,263

Income reconciliation, net of tax
Total operating income for reportable segments	$	948		$	929		$	2,773		$	2,359
Interest Expense and Other (1)	(65		)	(62		)	(187		)	(196		)
Total operating income	883			867			2,586			2,163
Net realized investment gains (losses)	(19		)	(3		)	99			6
Total consolidated net income	$	864		$	864		$	2,685		$	2,169

(1) The primary component of Interest Expense and Other is after-tax interest expense of $59 million and $60 million in the three months ended September 30, 2013 and 2012, respectively, and $175 million and $185 million in the nine months ended September 30, 2013 and 2012, respectively.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

2. SEGMENT INFORMATION, Continued

(in millions)	September 30, 2013		December 31, 2012
Asset reconciliation:
Business Insurance	$	74,931	$	76,972
Financial, Professional & International Insurance	14,084		13,452
Personal Insurance	13,173		14,195
Total assets for reportable segments	102,188		104,619
Other assets (1)	497		319
Total consolidated assets	$	102,685	$	104,938

(1) The primary components of other assets at September 30, 2013 were deferred taxes and other intangible assets. The primary component of other assets at December 31, 2012 was other intangible 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 September 30, 2013, in millions)

Cost

Gains

Losses

Value

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

2,069

2,109

Obligations of states, municipalities and political subdivisions:

Pre-refunded

9,141

489

9,629

All other

25,817

1,137

333

26,621

Total obligations of states, municipalities and political subdivisions

34,958

1,626

334

36,250

Debt securities issued by foreign governments

1,937

1,974

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

2,337

191

2,516

All other corporate bonds

18,633

833

245

19,221

Redeemable preferred stock

—

Total

59,960

2,744

602

62,102

	Amortized		Gross Unrealized				Fair
(at December 31, 2012, in millions)	Cost		Gains		Losses		Value
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities	$	2,148	$	75	$	1	$	2,222
Obligations of states, municipalities and political subdivisions:
Pre-refunded	8,458		567		—		9,025
All other	27,405		2,262		11		29,656
Total obligations of states, municipalities and political subdivisions	35,863		2,829		11		38,681
Debt securities issued by foreign governments	2,185		72		—		2,257
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	2,744		255		2		2,997
All other corporate bonds	17,863		1,360		20		19,203
Redeemable preferred stock	26		7		—		33
Total	$	60,829	$	4,598	$	34	$	65,393

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

3. INVESTMENTS, Continued

Pre-refunded bonds of $9.63 billion and $9.03 billion at September 30, 2013 and December 31, 2012, respectively, are bonds for which states or municipalities have established irrevocable trusts, almost exclusively comprised of U.S. Treasury securities, which were created to satisfy their responsibility for payments of principal and interest.

Equity Securities

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

			Gross Unrealized				Fair
(at September 30, 2013, in millions)	Cost		Gains		Losses		Value
Common stock	$	380	$	205	$	1	$	584
Non-redeemable preferred stock	90		35		1		124
Total	$	470	$	240	$	2	$	708

			Gross Unrealized				Fair
(at December 31, 2012, in millions)	Cost		Gains		Losses		Value
Common stock	$	366	$	148	$	4	$	510
Non-redeemable preferred stock	96		39		—		135
Total	$	462	$	187	$	4	$	645

Unrealized Investment Losses

The following tables summarize, for all investments in an unrealized loss position at September 30, 2013 and December 31, 2012, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position. The fair value amounts reported in the tables are estimates that are prepared using the process described in note 4.

	Less than 12 months				12 months or longer				Total
(at September 30, 2013, 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	$	238	$	8	$	—	$	—	$	238	$	8
Obligations of states, municipalities and political subdivisions	4,852		333		11		1		4,863		334
Debt securities issued by foreign governments	420		3		—		—		420		3
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	436		10		22		2		458		12
All other corporate bonds	5,481		231		107		14		5,588		245
Total fixed maturities	11,427		585		140		17		11,567		602

Equity securities
Common stock	37		1		—		—		37		1
Non-redeemable preferred stock	28		1		—		—		28		1
Total equity securities	65		2		—		—		65		2
Total	$	11,492	$	587	$	140	$	17	$	11,632	$	604

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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, 2012, 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	$	589	$	1	$	—	$	—	$	589	$	1
Obligations of states, municipalities and political subdivisions	611		9		45		2		656		11
Debt securities issued by foreign governments	186		—		2		—		188		—
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	70		—		36		2		106		2
All other corporate bonds	1,097		13		89		7		1,186		20
Total fixed maturities	2,553		23		172		11		2,725		34
Equity securities
Common stock	40		4		—		—		40		4
Non-redeemable preferred stock	13		—		—		—		13		—
Total equity securities	53		4		—		—		53		4
Total	$	2,606	$	27	$	172	$	11	$	2,778	$	38

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 September 30, 2013, 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	5		2		—		4		11
Total fixed maturities	5		2		—		4		11
Equity securities	1		—		—		—		1
Total	$	6	$	2	$	—	$	4	$	12

These unrealized losses at September 30, 2013 represented less than 1% of the combined fixed maturity and equity security portfolios on a pretax basis and less than 1% of shareholders’ equity on an after-tax basis.

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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 September 30,				Nine Months Ended September 30,
(in millions)	2013		2012		2013		2012

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		3
All other corporate bonds	—		1		—		4
Redeemable preferred stock	—		—		—		—
Total fixed maturities	—		1		2		7
Equity securities
Common stock	2		1		3		1
Non-redeemable preferred stock	—		1		—		1
Total equity securities	2		2		3		2
Other investments	1		—		5		2
Total	$	3	$	3	$	10	$	11

The following tables present the changes during the reporting period in 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 other comprehensive income:

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

3. INVESTMENTS, Continued

	2013
(for the three months ended September 30, 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	$	67	$	—	$	—	$	—	$	2	$	69
All other corporate bonds	104		—		—		—		1		105
Total fixed maturities	$	171	$	—	$	—	$	—	$	3	$	174

(for the nine months ended September 30, in millions)
Fixed maturities
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	$	63	$	—	$	2	$	—	$	4	$	69
All other corporate bonds	102		—		—		—		3		105
Total fixed maturities	$	165	$	—	$	2	$	—	$	7	$	174

	2012
(for the three months ended September 30, 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	$	61	$	—	$	—	$	(1	)	$	1	$	61
All other corporate bonds	99		—		1		—			1		101
Total fixed maturities	$	160	$	—	$	1	$	(1	)	$	2	$	162

(for the nine months ended September 30, in millions)
Fixed maturities
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	$	58	$	—	$	3	$	(1	)	$	1	$	61
All other corporate bonds	94		—		4		—			3		101
Total fixed maturities	$	152	$	—	$	7	$	(1	)	$	4	$	162

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

3. INVESTMENTS, Continued

Derivative Financial Instruments

From time to time, the Company enters into U.S. Treasury futures contracts to modify the effective duration of specific assets within the investment portfolio. U.S. Treasury futures contracts require a daily mark-to-market and settlement with the broker. At September 30, 2013 and December 31, 2012, the Company had $0 and $800 million notional value of open U.S. Treasury futures contracts, respectively. Net realized investment gains (losses) in the three months ended September 30, 2013 and 2012 included net gains of $0 and net losses of $8 million, respectively, related to U.S. Treasury futures contracts. Net realized investment gains (losses) in the nine months ended September 30, 2013 and 2012 included net gains of $115 million and net losses of $15 million, respectively, related to U.S. Treasury futures contracts.

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 level in the fair value hierarchy within which the fair value measurement is reported is based on the lowest level input that is significant to the measurement in its entirety. 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 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 unadjusted 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 utilized a pricing service to estimate fair value measurements for approximately 98% of its fixed maturities at both September 30, 2013 and December 31, 2012. 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 it 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 also holds certain fixed maturity investments which are not priced by the pricing service and, accordingly, estimates the fair value of such fixed maturities 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 and corporate bonds are included in Level 2, the Company holds a number of municipal bonds and corporate 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. The fair value of the fixed maturities for which the Company used an internal pricing matrix was $103 million at September 30, 2013 and $102 million at December 31, 2012. Additionally, the Company holds a small amount of other fixed maturity investments that have characteristics that make them unsuitable for matrix pricing. For these fixed maturities, the Company obtains a quote from a broker (primarily the market maker). The fair value of the fixed maturities for which the Company received a broker quote was $150 million and $128 million at September 30, 2013 and December 31, 2012, respectively. 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. When current market quotes in active markets are unavailable for certain non-redeemable preferred stocks held by the Company, 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

The Company holds investments in various publicly-traded securities which are reported in other investments. These investments include securities in the Company’s trading portfolio, mutual funds and other small holdings. The $18 million and $46 million fair value of these investments at September 30, 2013 and December 31, 2012, respectively, was disclosed in Level 1. At September 30, 2013 and December 31, 2012, the Company held investments in non-public common and preferred equity securities, with fair value estimates of $32 million and $54 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 September 30, 2013 and December 31, 2012 in the amount disclosed in Level 3.

Derivatives

At September 30, 2013 and December 31, 2012, the Company held $20 million and $21 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 reported at fair value are measured on a recurring basis at September 30, 2013 and December 31, 2012. An investment transferred between levels during a period is transferred at its fair value as of the beginning of that period.

(at September 30, 2013, in millions)

Total

Level 1

Level 2

Level 3

Invested assets:

Fixed maturities