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, 2015

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 April 17, 2015 was 318,698,313.

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The Travelers Companies, Inc.

Quarterly Report on Form 10-Q

For Quarterly Period Ended March 31, 2015

TABLE OF CONTENTS

		Page
	Part I — Financial Information

Item 1.	Financial Statements:

	Consolidated Statement of Income (Unaudited) — Three Months Ended March 31, 2015 and 2014	3

	Consolidated Statement of Comprehensive Income (Unaudited) — Three Months Ended March 31, 2015 and 2014	4

	Consolidated Balance Sheet — March 31, 2015 (Unaudited) and December 31, 2014	5

	Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) — Three Months Ended March 31, 2015 and 2014	6

	Consolidated Statement of Cash Flows (Unaudited) — Three Months Ended March 31, 2015 and 2014	7

	Notes to Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61

Item 4.	Controls and Procedures	61

	Part II — Other Information

Item 1.	Legal Proceedings	61

Item 1A.	Risk Factors	61

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61

Item 5.	Other Information	62

Item 6.	Exhibits	63

	SIGNATURES	63

	EXHIBIT INDEX	64

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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,	2015		2014
Revenues
Premiums	$	5,888	$	5,823
Net investment income	592		736
Fee income	111		107
Net realized investment gains (1)	10		1
Other revenues	25		41

Total revenues	6,626		6,708

Claims and expenses
Claims and claim adjustment expenses	3,431		3,315
Amortization of deferred acquisition costs	963		950
General and administrative expenses	992		881
Interest expense	92		92

Total claims and expenses	5,478		5,238

Income before income taxes	1,148		1,470
Income tax expense	315		418

Net income	$	833	$	1,052

Net income per share
Basic	$	2.58	$	2.98
Diluted	$	2.55	$	2.95

Weighted average number of common shares outstanding
Basic	320.8		350.9
Diluted	324.5		354.6

(1) Total other-than-temporary impairment (OTTI) losses were $(4) million and $(7) million for the three months ended March 31, 2015 and 2014, respectively. Of total OTTI, credit losses of $(3) million and $(9) million for the three months ended March 31, 2015 and 2014, respectively, were recognized in net realized investment gains. In addition, unrealized gains (losses) from other changes in total OTTI of $(1) million and $2 million for the three months ended March 31, 2015 and 2014, respectively, were recognized in other comprehensive income (loss) as part of changes 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)

For the three months ended March 31,	2015			2014

Net income	$	833		$	1,052

Other comprehensive income (loss):
Changes in net unrealized gains on investment securities:
Having no credit losses recognized in the consolidated statement of income	169			537
Having credit losses recognized in the consolidated statement of income	(5		)	2
Net changes in benefit plan assets and obligations	24			15
Net changes in unrealized foreign currency translation	(274		)	(43		)

Other comprehensive income (loss) before income taxes	(86		)	511
Income tax expense	25			194

Other comprehensive income (loss), net of taxes	(111		)	317

Comprehensive income	$	722		$	1,369

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)

	March 31, 2015			December 31, 2014
	(Unaudited)
Assets
Fixed maturities, available for sale, at fair value (amortized cost $59,916 and $60,801)	$	62,769		$	63,474
Equity securities, available for sale, at fair value (cost $563 and $579)	866			899
Real estate investments	929			938
Short-term securities	4,490			4,364
Other investments	3,565			3,586

Total investments	72,619			73,261

Cash	308			374
Investment income accrued	628			685
Premiums receivable	6,528			6,298
Reinsurance recoverables	9,142			9,260
Ceded unearned premiums	830			678
Deferred acquisition costs	1,847			1,835
Deferred taxes	—			33
Contractholder receivables	4,396			4,362
Goodwill	3,590			3,611
Other intangible assets	292			304
Other assets	2,511			2,377

Total assets	$	102,691		$	103,078

Liabilities
Claims and claim adjustment expense reserves	$	48,994		$	49,850
Unearned premium reserves	11,954			11,839
Contractholder payables	4,396			4,362
Payables for reinsurance premiums	485			336
Deferred taxes	126			—
Debt	6,349			6,349
Other liabilities	5,540			5,506

Total liabilities	77,844			78,242

Shareholders’ equity
Common stock (1,750.0 shares authorized; 318.7 and 322.2 shares issued and outstanding)	21,982			21,843
Retained earnings	27,906			27,251
Accumulated other comprehensive income	769			880
Treasury stock, at cost (443.6 and 437.3 shares)	(25,810		)	(25,138		)

Total shareholders’ equity	24,847			24,836

Total liabilities and shareholders’ equity	$	102,691		$	103,078

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 three months ended March 31,	2015			2014
Common stock
Balance, beginning of year	$	21,843		$	21,500
Employee share-based compensation	66			45
Compensation amortization under share-based plans and other changes	73			58

Balance, end of period	21,982			21,603

Retained earnings
Balance, beginning of year	27,251			24,291
Net income	833			1,052
Dividends	(178		)	(177		)
Other	—			1

Balance, end of period	27,906			25,167

Accumulated other comprehensive income, net of tax
Balance, beginning of year	880			810
Other comprehensive income (loss)	(111		)	317

Balance, end of period	769			1,127

Treasury stock (at cost)
Balance, beginning of year	(25,138		)	(21,805		)
Treasury stock acquired — share repurchase authorization	(600		)	(650		)
Net shares acquired related to employee share-based compensation plans	(72		)	(55		)

Balance, end of period	(25,810		)	(22,510		)

Total shareholders’ equity	$	24,847		$	25,387

Common shares outstanding
Balance, beginning of year	322.2			353.5
Treasury stock acquired — share repurchase authorization	(5.6		)	(7.8		)
Net shares issued under employee share-based compensation plans	2.1			1.8

Balance, end of period	318.7			347.5

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 three months ended March 31,	2015			2014
Cash flows from operating activities
Net income	$	833		$	1,052
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment gains	(10		)	(1		)
Depreciation and amortization	225			227
Deferred federal income tax expense	133			153
Amortization of deferred acquisition costs	963			950
Equity in income from other investments	(43		)	(139		)
Premiums receivable	(258		)	(189		)
Reinsurance recoverables	69			106
Deferred acquisition costs	(987		)	(986		)
Claims and claim adjustment expense reserves	(561		)	(209		)
Unearned premium reserves	185			94
Other	(350		)	(355		)

Net cash provided by operating activities	199			703

Cash flows from investing activities
Proceeds from maturities of fixed maturities	2,830			2,312
Proceeds from sales of investments:
Fixed maturities	906			406
Equity securities	11			36
Real estate investments	7			1
Other investments	146			167
Purchases of investments:
Fixed maturities	(3,325		)	(2,715		)
Equity securities	(8		)	(18		)
Real estate investments	(6		)	(9		)
Other investments	(168		)	(113		)
Net purchases of short-term securities	(134		)	(160		)
Securities transactions in course of settlement	305			240
Acquisition, net of cash acquired	—			(12		)
Other	(90		)	(60		)

Net cash provided by investing activities	474			75

Cash flows from financing activities
Treasury stock acquired — share repurchase authorization	(600		)	(650		)
Treasury stock acquired — net employee share-based compensation	(71		)	(54		)
Dividends paid to shareholders	(177		)	(176		)
Issuance of common stock — employee share options	90			57
Excess tax benefits from share-based payment arrangements	27			13

Net cash used in financing activities	(731		)	(810		)

Effect of exchange rate changes on cash	(8		)	(2		)

Net decrease in cash	(66		)	(34		)
Cash at beginning of year	374			294

Cash at end of period	$	308		$	260

Supplemental disclosure of cash flow information
Income taxes paid	$	126		$	93
Interest paid	$	34		$	34

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 Annual Report on Form 10-K for the year ended December 31, 2014 (the Company’s 2014 Annual Report).

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. Certain reclassifications have been made to the 2014 financial statements to conform to the 2015 presentation, including reclassifications related to the realignment of the Company’s reportable business segments in July 2014 described in the Company’s 2014 Annual Report.

Adoption of Accounting Standards Updates

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity

In April 2014, the Financial Accounting Standards Board (FASB) issued revised guidance to reduce diversity in practice for reporting discontinued operations. Under the previous guidance, any component of an entity that was a reportable segment, an operating segment, a reporting unit, a subsidiary or an asset group was eligible for discontinued operations presentation. The revised guidance only allows disposals of components of an entity that represent a strategic shift (e.g., disposal of a major geographical area, a major line of business, a major equity method investment or other major parts of an entity) and that have a major effect on a reporting entity’s operations and financial results to be reported as discontinued operations. The revised guidance also requires expanded disclosure in the financial statements for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. The updated guidance was effective for the quarter ending March 31, 2015. The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.

Accounting Standards Not Yet Adopted

Amendments to the Consolidation Analysis

In February 2015, the FASB issued updated guidance that makes targeted amendments to the current consolidation accounting guidance. The update is in response to accounting complexity concerns, particularly from the asset management industry. The guidance simplifies consolidation accounting by reducing the number of approaches to consolidation, provides a scope exception to registered money market funds and similar unregistered money market funds and ends the indefinite deferral granted to investment companies from applying the variable interest entity guidance.

The updated guidance is effective for annual and interim periods beginning after December 15, 2015. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

Simplifying the Presentation of Debt Issuance Costs

In April 2015, the FASB issued updated guidance to clarify the required presentation of debt issuance costs. The amended guidance requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying amount of the recognized debt liability, consistent with the treatment of debt discounts. Amortization of debt issuance costs is to be

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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

reported as interest expense. The recognition and measurement guidance for debt issuance costs are not affected by the updated guidance.

The updated guidance is effective for reporting periods beginning after December 15, 2015. Early adoption is permitted. The adoption of this guidance will not have any effect on the Company’s results of operations, financial position or liquidity.

Additional Accounting Standards Not Yet Adopted

For information regarding additional accounting standards that the Company has not yet adopted, see the “Accounting Standards Not Yet Adopted” section of note 1 of notes to the consolidated financial statements in the Company’s 2014 Annual Report.

Nature of Operations

The Company is organized into three reportable business segments: Business and International Insurance; Bond & Specialty 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. For more information regarding the Company’s nature of operations, see the “Nature of Operations” section of note 1 of notes to the consolidated financial statements in the Company’s 2014 Annual Report.

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 and International Insurance		Bond & Specialty Insurance		Personal Insurance		Total Reportable Segments
2015
Premiums	$	3,620	$	504	$	1,764	$	5,888
Net investment income	454		56		82		592
Fee income	111		—		—		111
Other revenues	8		5		12		25

Total operating revenues (1)	$	4,193	$	565	$	1,858	$	6,616

Operating income (1)	$	515	$	124	$	252	$	891

2014
Premiums	$	3,558	$	503	$	1,762	$	5,823
Net investment income	570		66		100		736
Fee income	107		—		—		107
Other revenues	12		4		26		42

Total operating revenues (1)	$	4,247	$	573	$	1,888	$	6,708

Operating income (1)	$	694	$	154	$	268	$	1,116

(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)	2015			2014
Revenue reconciliation
Earned premiums
Business and International Insurance:
Domestic:
Workers’ compensation	$	962		$	908
Commercial automobile	469			468
Commercial property	441			428
General liability	472			447
Commercial multi-peril	775			755
Other	10			10

Total Domestic	3,129			3,016
International	491			542

Total Business and International Insurance	3,620			3,558

Bond & Specialty Insurance:
Fidelity and surety	225			222
General liability	236			237
Other	43			44

Total Bond & Specialty Insurance	504			503

Personal Insurance:
Automobile	836			815
Homeowners and Other	928			947

Total Personal Insurance	1,764			1,762

Total earned premiums	5,888			5,823
Net investment income	592			736
Fee income	111			107
Other revenues	25			42

Total operating revenues for reportable segments	6,616			6,708
Other revenues	—			(1		)
Net realized investment gains	10			1

Total consolidated revenues	$	6,626		$	6,708

Income reconciliation, net of tax
Total operating income for reportable segments	$	891		$	1,116
Interest Expense and Other (1)	(64		)	(64		)

Total operating income	827			1,052
Net realized investment gains	6			—

Total consolidated net income	$	833		$	1,052

(1) The primary component of Interest Expense and Other for the three months ended March 31, 2015 and 2014 was after-tax interest expense of $60 million.

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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, 2015		December 31, 2014
Asset reconciliation:
Business and International Insurance	$	81,892	$	82,309
Bond & Specialty Insurance	7,637		7,525
Personal Insurance	12,859		12,798

Total assets for reportable segments	102,388		102,632
Other assets (1)	303		446

Total consolidated assets	$	102,691	$	103,078

(1) The primary component of other assets at March 31, 2015 was other intangible assets. The primary components of other assets at December 31, 2014 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 March 31, 2015, in millions)

Cost

Gains

Losses

Value

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

2,036

2,079

Obligations of states, municipalities and political subdivisions:

Pre-refunded

6,893

324

—

7,217

All other

24,591

1,276

25,843

Total obligations of states, municipalities and political subdivisions

31,484

1,600

33,060

Debt securities issued by foreign governments

2,117

—

2,182

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

1,986

170

2,153

All other corporate bonds

22,180

1,036

23,171

Redeemable preferred stock

113

—

124

Total

59,916

2,927

62,769

	Amortized		Gross Unrealized				Fair
(at December 31, 2014, in millions)	Cost		Gains		Losses		Value
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities	$	2,022	$	36	$	5	$	2,053
Obligations of states, municipalities and political subdivisions:
Pre-refunded	7,229		332		—		7,561
All other	24,666		1,356		10		26,012

Total obligations of states, municipalities and political subdivisions	31,895		1,688		10		33,573
Debt securities issued by foreign governments	2,320		48		—		2,368
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	2,052		165		4		2,213
All other corporate bonds	22,390		844		99		23,135
Redeemable preferred stock	122		10		—		132

Total	$	60,801	$	2,791	$	118	$	63,474

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

3. INVESTMENTS, Continued

Pre-refunded bonds of $7.22 billion and $7.56 billion at March 31, 2015 and December 31, 2014, respectively, were 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.

Proceeds from sales of fixed maturities classified as available for sale were $906 million and $406 million during the three months ended March 31, 2015 and 2014, respectively. Gross gains of $19 million and $13 million and gross losses of $1 million and $4 million were realized on those sales during the three months ended March 31, 2015 and 2014, respectively.

Equity Securities

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

			Gross Unrealized				Fair
(at March 31, 2015, in millions)	Cost		Gains		Losses		Value
Public common stock	$	399	$	278	$	3	$	674
Non-redeemable preferred stock	164		30		2		192

Total	$	563	$	308	$	5	$	866

			Gross Unrealized				Fair
(at December 31, 2014, in millions)	Cost		Gains		Losses		Value
Public common stock	$	400	$	295	$	4	$	691
Non-redeemable preferred stock	179		31		2		208

Total	$	579	$	326	$	6	$	899

Proceeds from sales of equity securities were $11 million and $36 million during the three months ended March 31, 2015 and 2014, respectively. Gross gains and losses realized on those sales during the three months ended March 31, 2015 and 2014 were insignificant in both periods.

Unrealized Investment Losses

The following tables summarize, for all investments in an unrealized loss position at March 31, 2015 and December 31, 2014, 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 herein and in note 4 of notes to the consolidated financial statements in the Company’s 2014 Annual Report.

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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
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(at March 31, 2015, in millions)	Value		Losses		Value		Losses		Value		Losses
Fixed maturities
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities	$	500	$	2	$	15	$	—	$	515	$	2
Obligations of states, municipalities and political subdivisions	1,884		20		143		4		2,027		24
Debt securities issued by foreign governments	75		—		—		—		75		—
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	60		—		133		3		193		3
All other corporate bonds	1,494		27		593		18		2,087		45
Redeemable preferred stock	1		—		—		—		1		—

Total fixed maturities	4,014		49		884		25		4,898		74

Equity securities
Public common stock	74		3		1		—		75		3
Non-redeemable preferred stock	72		1		30		1		102		2

Total equity securities	146		4		31		1		177		5

Total	$	4,160	$	53	$	915	$	26	$	5,075	$	79

	Less than 12 months				12 months or longer				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(at December 31, 2014, in millions)	Value		Losses		Value		Losses		Value		Losses
Fixed maturities
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities	$	180	$	2	$	125	$	3	$	305	$	5
Obligations of states, municipalities and political subdivisions	173		1		797		9		970		10
Debt securities issued by foreign governments	50		—		24		—		74		—
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	68		—		192		4		260		4
All other corporate bonds	2,148		38		2,355		61		4,503		99

Total fixed maturities	2,619		41		3,493		77		6,112		118

Equity securities
Public common stock	81		4		1		—		82		4
Non-redeemable preferred stock	44		1		42		1		86		2

Total equity securities	125		5		43		1		168		6

Total	$	2,744	$	46	$	3,536	$	78	$	6,280	$	124

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

3. INVESTMENTS, Continued

Unrealized losses 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, 2015 totaled $9 million, representing 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.

Impairment Charges

Impairment charges included in net realized investment gains in the consolidated statement of income were $3 million and $9 million for the three months ended March 31, 2015 and 2014, respectively.

The cumulative 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 for fixed maturities held at March 31, 2015 and 2014 totaled $94 million and $111 million, respectively, representing less than 1% of the fixed maturity portfolio on a pretax basis and less than 1% of shareholders’ equity on an after-tax basis at both dates. There were no significant changes in the credit component of OTTI during the three months ended March 31, 2015 and 2014 from that disclosed in note 3 of notes to the consolidated financial statements in the Company’s 2014 Annual Report.

Derivative Financial Instruments

From time to time, the Company enters into U.S. Treasury note 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 March 31, 2015 and December 31, 2014, the Company had $400 million and $350 million notional value of open U.S. Treasury futures contracts, respectively. Net realized investment gains in the three months ended March 31, 2015 and 2014 included net losses of $10 million and net gains of $1 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 Company utilized a pricing service to estimate fair value measurements for approximately 98% of its fixed maturities at both March 31, 2015 and December 31, 2014.

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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 fixed maturities 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 $92 million at both March 31, 2015 and December 31, 2014. 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 $120 million and $140 million at March 31, 2015 and December 31, 2014, 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.

For more information regarding the valuation of the Company’s fixed maturities, equity securities and other investments, see note 4 of notes to the consolidated financial statements in the Company’s 2014 Annual Report.

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, 2015 and December 31, 2014. An investment transferred between levels during a period is transferred at its fair value as of the beginning of that period.

(at March 31, 2015, 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

2,079

2,075

—

Obligations of states, municipalities and political subdivisions

33,060

32,980

Debt securities issued by foreign governments

2,182

—

2,182

—

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

2,153

—

2,135

All other corporate bonds

23,171

22,985

174

Redeemable preferred stock

124

—

117

Total fixed maturities

62,769

2,154

60,403

212

Equity securities

Public common stock

674

—

Non-redeemable preferred stock

192

119

—

Total equity securities

866

747

119

—

Other investments

—

Total

63,691

2,919

60,522

250

During the quarter ended March 31, 2015, the Company’s transfers between Level 1 and Level 2 were not significant.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

4. FAIR VALUE MEASUREMENTS, Continued

(at December 31, 2014, 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	$	2,053	$	2,049	$	4	$	—
Obligations of states, municipalities and political subdivisions	33,573		—		33,560		13
Debt securities issued by foreign governments	2,368		—		2,368		—
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	2,213		—		2,203		10
All other corporate bonds	23,135		—		22,934		201
Redeemable preferred stock	132		2		122		8
Total fixed maturities	63,474		2,051		61,191		232

Equity securities
Public common stock	691		691		—		—
Non-redeemable preferred stock	208		82		126		—
Total equity securities	899		773		126		—

Other investments	55		19		—		36
Total	$	64,428	$	2,843	$	61,317	$	268

During the year ended December 31, 2014, the Company’s transfers between Level 1 and Level 2 were not significant.

There was no significant activity in Level 3 of the hierarchy during the three months ended March 31, 2015 or the year ended December 31, 2014.

Financial Instruments Disclosed, But Not Carried, At Fair Value

The Company uses various financial instruments in the normal course of its business. The following tables present the carrying value and fair value of the Company’s financial assets and financial liabilities disclosed, but not carried, at fair value at March 31, 2015 and December 31, 2014, and the level within the fair value hierarchy at which such assets and liabilities are categorized.

(at March 31, 2015, in millions)	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Short-term securities	$	4,490	$	4,490	$	1,238	$	3,215	$	37

Financial liabilities:
Debt	$	6,249	$	7,654	$	—	$	7,654	$	—
Commercial paper	$	100	$	100	$	—	$	100	$	—

(at December 31, 2014, in millions)	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Short-term securities	$	4,364	$	4,364	$	1,283	$	3,042	$	39

Financial liabilities:
Debt	$	6,249	$	7,522	$	—	$	7,522	$	—
Commercial paper	$	100	$	100	$	—	$	100	$	—

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

4. FAIR VALUE MEASUREMENTS, Continued

The Company utilized a pricing service to estimate fair value for approximately 99% and 98% of short-term securities at March 31, 2015 and December 31, 2014, respectively. For a description of the process and inputs used by the pricing service to estimate fair value, see the “Fixed Maturities” section in note 4 of notes to the consolidated financial statements in the Company’s 2014 Annual Report.

The Company utilized a pricing service to estimate fair value for 100% of its debt, including commercial paper, at March 31, 2015 and December 31, 2014.

The Company had no material assets or liabilities that were measured at fair value on a non-recurring basis during the three months ended March 31, 2015 or twelve months ended December 31, 2014.

5. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The following table presents the carrying amount of the Company’s goodwill by segment at March 31, 2015 and December 31, 2014:

(in millions)	March 31, 2015		December 31, 2014
Business and International Insurance (1)	$	2,455	$	2,476
Bond & Specialty Insurance	495		495
Personal Insurance	613		613
Other	27		27
Total	$	3,590	$	3,611

(1) Includes goodwill associated with the Company’s international businesses, which are subject to the impact of changes in foreign currency exchange rates.

Other Intangible Assets

The following tables present a summary of the Company’s other intangible assets by major asset class at March 31, 2015 and December 31, 2014:

(at March 31, 2015, in millions)	Gross Carrying Amount		Accumulated Amortization		Net
Intangibles subject to amortization
Customer-related	$	460	$	454	$	6
Fair value adjustment on claims and claim adjustment expense reserves, reinsurance recoverables and other contract-related intangibles (1)	208		139		69
Total intangible assets subject to amortization	668		593		75
Intangible assets not subject to amortization	217		—		217
Total other intangible assets	$	885	$	593	$	292

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

5. GOODWILL AND OTHER INTANGIBLE ASSETS, Continued

(at December 31, 2014, in millions)	Gross Carrying Amount		Accumulated Amortization		Net
Intangibles subject to amortization
Customer-related	$	460	$	446	$	14
Fair value adjustment on claims and claim adjustment expense reserves, reinsurance recoverables and other contract-related intangibles (1)	209		136		73
Total intangible assets subject to amortization	669		582		87
Intangible assets not subject to amortization	217		—		217
Total other intangible assets	$	886	$	582	$	304

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

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

(for the three months ended March 31, in millions)		2015			2014
Customer-related		$	8