Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

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

 

For the quarterly period ended June 30, 2015

 

or

 

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 July 17, 2015 was 311,205,624.

 

 

 



Table of Contents

 

The Travelers Companies, Inc.

 

Quarterly Report on Form 10-Q

 

For Quarterly Period Ended June 30, 2015

 


 

TABLE OF CONTENTS

 

 

 

 

Page

 

Part I — Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

 

 

Consolidated Statement of Income (Unaudited) — Three Months and Six Months Ended June 30, 2015 and 2014

 

3

 

 

 

 

 

Consolidated Statement of Comprehensive Income (Unaudited) — Three Months and Six Months Ended June 30, 2015 and 2014

 

4

 

 

 

 

 

Consolidated Balance Sheet — June 30, 2015 (Unaudited) and December 31, 2014

 

5

 

 

 

 

 

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) — Six Months Ended June 30, 2015 and 2014

 

6

 

 

 

 

 

Consolidated Statement of Cash Flows (Unaudited) — Six Months Ended June 30, 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

 

39

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

73

 

 

 

 

Item 4.

Controls and Procedures

 

73

 

 

 

 

 

Part II — Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

74

 

 

 

 

Item 1A.

Risk Factors

 

74

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

74

 

 

 

 

Item 5.

Other Information

 

75

 

 

 

 

Item 6.

Exhibits

 

75

 

 

 

 

 

SIGNATURES

 

75

 

 

 

 

 

EXHIBIT INDEX

 

76

 

2



Table of Contents

 

PART 1 — FINANCIAL INFORMATION

 

Item 1.  FINANCIAL STATEMENTS

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

(in millions, except per share amounts)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Premiums

 

$

5,931

 

$

5,928

 

$

11,819

 

$

11,751

 

Net investment income

 

632

 

695

 

1,224

 

1,431

 

Fee income

 

111

 

112

 

222

 

219

 

Net realized investment gains (1)

 

10

 

16

 

20

 

17

 

Other revenues

 

22

 

34

 

47

 

75

 

Total revenues

 

6,706

 

6,785

 

13,332

 

13,493

 

 

 

 

 

 

 

 

 

 

 

Claims and expenses

 

 

 

 

 

 

 

 

 

Claims and claim adjustment expenses

 

3,547

 

3,826

 

6,978

 

7,141

 

Amortization of deferred acquisition costs

 

963

 

965

 

1,926

 

1,915

 

General and administrative expenses

 

1,028

 

1,001

 

2,020

 

1,882

 

Interest expense

 

92

 

92

 

184

 

184

 

Total claims and expenses

 

5,630

 

5,884

 

11,108

 

11,122

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

1,076

 

901

 

2,224

 

2,371

 

Income tax expense

 

264

 

218

 

579

 

636

 

Net income

 

$

812

 

$

683

 

$

1,645

 

$

1,735

 

 

 

 

 

 

 

 

 

 

 

Net income per share

 

 

 

 

 

 

 

 

 

Basic

 

$

2.56

 

$

1.98

 

$

5.14

 

$

4.97

 

Diluted

 

$

2.53

 

$

1.95

 

$

5.08

 

$

4.91

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

314.8

 

343.0

 

317.7

 

346.9

 

Diluted

 

318.0

 

346.7

 

321.2

 

350.5

 

Cash dividends declared per common share

 

$

0.61

 

$

0.55

 

$

1.16

 

$

1.05

 

 


(1)         Total other-than-temporary impairment (OTTI) losses were $(8) million and $(1) million for the three months ended June 30, 2015 and 2014, respectively, and $(12) million and $(8) million for the six months ended June 30, 2015 and 2014, respectively.  Of total OTTI, credit losses of $(6) million and $(1) million for the three months ended June 30, 2015 and 2014, respectively, and $(9) million and $(10) million for the six months ended June 30, 2015 and 2014, respectively, were recognized in net realized investment gains.  In addition, unrealized gains (losses) from other changes in total OTTI of $(2) million and $0 million for the three months ended June 30, 2015 and 2014, respectively, and $(3) million and $2 million for the six months ended June 30, 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.

 

3



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

(in millions)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

812

 

$

683

 

$

1,645

 

$

1,735

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Changes in net unrealized gains on investment securities:

 

 

 

 

 

 

 

 

 

Having no credit losses recognized in the consolidated statement of income

 

(1,065

)

518

 

(896

)

1,055

 

Having credit losses recognized in the consolidated statement of income

 

(5

)

1

 

(10

)

3

 

Net changes in benefit plan assets and obligations

 

23

 

15

 

47

 

30

 

Net changes in unrealized foreign currency translation

 

94

 

97

 

(180

)

54

 

Other comprehensive income (loss) before income taxes

 

(953

)

631

 

(1,039

)

1,142

 

Income tax expense (benefit)

 

(353

)

196

 

(328

)

390

 

Other comprehensive income (loss), net of taxes

 

(600

)

435

 

(711

)

752

 

Comprehensive income

 

$

212

 

$

1,118

 

$

934

 

$

2,487

 

 

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

 

4



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in millions)

 

 

 

June 30,
2015

 

December  31,
2014

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Fixed maturities, available for sale, at fair value (amortized cost $60,103 and $60,801)

 

$

61,933

 

$

63,474

 

Equity securities, available for sale, at fair value (cost $573 and $579)

 

828

 

899

 

Real estate investments

 

980

 

938

 

Short-term securities

 

3,924

 

4,364

 

Other investments

 

3,565

 

3,586

 

Total investments

 

71,230

 

73,261

 

 

 

 

 

 

 

Cash

 

317

 

374

 

Investment income accrued

 

655

 

685

 

Premiums receivable

 

6,764

 

6,298

 

Reinsurance recoverables

 

8,965

 

9,260

 

Ceded unearned premiums

 

782

 

678

 

Deferred acquisition costs

 

1,891

 

1,835

 

Deferred taxes

 

216

 

33

 

Contractholder receivables

 

4,473

 

4,362

 

Goodwill

 

3,594

 

3,611

 

Other intangible assets

 

284

 

304

 

Other assets

 

2,493

 

2,377

 

Total assets

 

$

101,664

 

$

103,078

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Claims and claim adjustment expense reserves

 

$

48,833

 

$

49,850

 

Unearned premium reserves

 

12,153

 

11,839

 

Contractholder payables

 

4,473

 

4,362

 

Payables for reinsurance premiums

 

428

 

336

 

Debt

 

6,350

 

6,349

 

Other liabilities

 

5,306

 

5,506

 

Total liabilities

 

77,543

 

78,242

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Common stock (1,750.0 shares authorized; 311.2 and 322.2 shares issued and outstanding)

 

22,039

 

21,843

 

Retained earnings

 

28,524

 

27,251

 

Accumulated other comprehensive income

 

169

 

880

 

Treasury stock, at cost (451.5 and 437.3 shares)

 

(26,611

)

(25,138

)

Total shareholders’ equity

 

24,121

 

24,836

 

Total liabilities and shareholders’ equity

 

$

101,664

 

$

103,078

 

 

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

 

5



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(in millions)

 

For the six months ended June 30,

 

2015

 

2014

 

Common stock

 

 

 

 

 

Balance, beginning of year

 

$

21,843

 

$

21,500

 

Employee share-based compensation

 

87

 

94

 

Compensation amortization under share-based plans and other changes

 

109

 

100

 

Balance, end of period

 

22,039

 

21,694

 

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

Balance, beginning of year

 

27,251

 

24,291

 

Net income

 

1,645

 

1,735

 

Dividends

 

(372

)

(367

)

Other

 

 

3

 

Balance, end of period

 

28,524

 

25,662

 

 

 

 

 

 

 

Accumulated other comprehensive income, net of tax

 

 

 

 

 

Balance, beginning of year

 

880

 

810

 

Other comprehensive income (loss)

 

(711

)

752

 

Balance, end of period

 

169

 

1,562

 

 

 

 

 

 

 

Treasury stock, at cost

 

 

 

 

 

Balance, beginning of year

 

(25,138

)

(21,805

)

Treasury stock acquired — share repurchase authorization

 

(1,400

)

(1,525

)

Net shares acquired related to employee share-based compensation plans

 

(73

)

(56

)

Balance, end of period

 

(26,611

)

(23,386

)

Total shareholders’ equity

 

$

24,121

 

$

25,532

 

 

 

 

 

 

 

Common shares outstanding

 

 

 

 

 

Balance, beginning of year

 

322.2

 

353.5

 

Treasury stock acquired — share repurchase authorization

 

(13.5

)

(17.3

)

Net shares issued under employee share-based compensation plans

 

2.5

 

2.8

 

Balance, end of period

 

311.2

 

339.0

 

 

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

 

6



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

(in millions)

 

For the six months ended June 30,

 

2015

 

2014

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

1,645

 

$

1,735

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Net realized investment gains

 

(20

)

(17

)

Depreciation and amortization

 

429

 

442

 

Deferred federal income tax expense

 

142

 

131

 

Amortization of deferred acquisition costs

 

1,926

 

1,915

 

Equity in income from other investments

 

(134

)

(257

)

Premiums receivable

 

(486

)

(463

)

Reinsurance recoverables

 

263

 

206

 

Deferred acquisition costs

 

(1,991

)

(1,989

)

Claims and claim adjustment expense reserves

 

(826

)

(60

)

Unearned premium reserves

 

362

 

235

 

Other

 

(435

)

(550

)

Net cash provided by operating activities

 

875

 

1,328

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Proceeds from maturities of fixed maturities

 

5,314

 

4,915

 

Proceeds from sales of investments:

 

 

 

 

 

Fixed maturities

 

1,226

 

785

 

Equity securities

 

28

 

95

 

Real estate investments

 

10

 

5

 

Other investments

 

354

 

338

 

Purchases of investments:

 

 

 

 

 

Fixed maturities

 

(6,239

)

(5,449

)

Equity securities

 

(22

)

(40

)

Real estate investments

 

(69

)

(36

)

Other investments

 

(275

)

(226

)

Net sales of short-term securities

 

433

 

60

 

Securities transactions in course of settlement

 

183

 

204

 

Acquisition, net of cash acquired

 

 

(12

)

Other

 

(178

)

(152

)

Net cash provided by investing activities

 

765

 

487

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Treasury stock acquired — share repurchase authorization

 

(1,400

)

(1,525

)

Treasury stock acquired — net employee share-based compensation

 

(72

)

(55

)

Dividends paid to shareholders

 

(369

)

(365

)

Issuance of common stock — employee share options

 

117

 

122

 

Excess tax benefits from share-based payment arrangements

 

31

 

24

 

Net cash used in financing activities

 

(1,693

)

(1,799

)

Effect of exchange rate changes on cash

 

(4

)

1

 

Net increase (decrease) in cash

 

(57

)

17

 

Cash at beginning of year

 

374

 

294

 

Cash at end of period

 

$

317

 

$

311

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

Income taxes paid

 

$

597

 

$

727

 

Interest paid

 

$

183

 

$

183

 

 

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

 

7



Table of Contents

 

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.

 

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

 

8



Table of Contents

 

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

 

Revenue from Contracts with Customers

 

In July 2015, the FASB deferred the effective date of the updated guidance on revenue recognition by one year to the quarter ending March 31, 2018.  The adoption of this guidance is not expected to have a material effect on the Company’s result of operations, financial position or liquidity.

 

For additional information regarding Revenue from Contracts with Customers and other accounting standards that the Company has not yet adopted, see the “Accounting Standards Not Yet Adoptedsection 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 June 30,
in millions)

 

Business and
International
Insurance

 

Bond & Specialty
Insurance

 

Personal
Insurance

 

Total
Reportable
Segments

 

2015

 

 

 

 

 

 

 

 

 

Premiums

 

$

3,609

 

$

524

 

$

1,798

 

$

5,931

 

Net investment income

 

487

 

57

 

88

 

632

 

Fee income

 

111

 

 

 

111

 

Other revenues

 

5

 

5

 

12

 

22

 

Total operating revenues (1)

 

$

4,212

 

$

586

 

$

1,898

 

$

6,696

 

Operating income (1)

 

$

543

 

$

151

 

$

174

 

$

868

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

Premiums

 

$

3,631

 

$

524

 

$

1,773

 

$

5,928

 

Net investment income

 

539

 

62

 

94

 

695

 

Fee income

 

112

 

 

 

112

 

Other revenues

 

10

 

6

 

17

 

33

 

Total operating revenues (1)

 

$

4,292

 

$

592

 

$

1,884

 

$

6,768

 

Operating income (1)

 

$

471

 

$

192

 

$

75

 

$

738

 

 


(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).

 

9



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

2.                       SEGMENT INFORMATION, Continued

 

(for the six months
ended June 30,
in millions)

 

Business and
International
Insurance

 

Bond & Specialty
Insurance

 

Personal
Insurance

 

Total
Reportable
Segments

 

2015

 

 

 

 

 

 

 

 

 

Premiums

 

$

7,229

 

$

1,028

 

$

3,562

 

$

11,819

 

Net investment income

 

941

 

113

 

170

 

1,224

 

Fee income

 

222

 

 

 

222

 

Other revenues

 

13

 

10

 

24

 

47

 

Total operating revenues (1)

 

$

8,405

 

$

1,151

 

$

3,756

 

$

13,312

 

Operating income (1)

 

$

1,058

 

$

275

 

$

426

 

$

1,759

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

Premiums

 

$

7,189

 

$

1,027

 

$

3,535

 

$

11,751

 

Net investment income

 

1,109

 

128

 

194

 

1,431

 

Fee income

 

219

 

 

 

219

 

Other revenues

 

22

 

10

 

43

 

75

 

Total operating revenues (1)

 

$

8,539

 

$

1,165

 

$

3,772

 

$

13,476

 

Operating income (1)

 

$

1,165

 

$

346

 

$

343

 

$

1,854

 

 


(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).

 

10



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

2.                       SEGMENT INFORMATION, Continued

 

Business Segment Reconciliations

 

 

 

Three Months Ended
June  30,

 

Six Months Ended
June 30,

 

(in millions)

 

2015

 

2014

 

2015

 

2014

 

Revenue reconciliation

 

 

 

 

 

 

 

 

 

Earned premiums

 

 

 

 

 

 

 

 

 

Business and International Insurance:

 

 

 

 

 

 

 

 

 

Domestic:

 

 

 

 

 

 

 

 

 

Workers’ compensation

 

$

957

 

$

923

 

$

1,919

 

$

1,831

 

Commercial automobile

 

477

 

473

 

946

 

941

 

Commercial property

 

442

 

440

 

883

 

868

 

General liability

 

473

 

457

 

945

 

904

 

Commercial multi-peril

 

779

 

763

 

1,554

 

1,518

 

Other

 

10

 

11

 

20

 

21

 

Total Domestic

 

3,138

 

3,067

 

6,267

 

6,083

 

International

 

471

 

564

 

962

 

1,106

 

Total Business and International Insurance

 

3,609

 

3,631

 

7,229

 

7,189

 

 

 

 

 

 

 

 

 

 

 

Bond & Specialty Insurance:

 

 

 

 

 

 

 

 

 

Fidelity and surety

 

240

 

238

 

465

 

460

 

General liability

 

240

 

241

 

476

 

478

 

Other

 

44

 

45

 

87

 

89

 

Total Bond & Specialty Insurance

 

524

 

524

 

1,028

 

1,027

 

 

 

 

 

 

 

 

 

 

 

Personal Insurance:

 

 

 

 

 

 

 

 

 

Automobile

 

863

 

821

 

1,699

 

1,636

 

Homeowners and other

 

935

 

952

 

1,863

 

1,899

 

Total Personal Insurance

 

1,798

 

1,773

 

3,562

 

3,535

 

Total earned premiums

 

5,931

 

5,928

 

11,819

 

11,751

 

Net investment income

 

632

 

695

 

1,224

 

1,431

 

Fee income

 

111

 

112

 

222

 

219

 

Other revenues

 

22

 

33

 

47

 

75

 

Total operating revenues for reportable segments

 

6,696

 

6,768

 

13,312

 

13,476

 

Other revenues

 

 

1

 

 

 

Net realized investment gains

 

10

 

16

 

20

 

17

 

Total consolidated revenues

 

$

6,706

 

$

6,785

 

$

13,332

 

$

13,493

 

 

 

 

 

 

 

 

 

 

 

Income reconciliation, net of tax

 

 

 

 

 

 

 

 

 

Total operating income for reportable segments

 

$

868

 

$

738

 

$

1,759

 

$

1,854

 

Interest Expense and Other (1)

 

(62

)

(65

)

(126

)

(129

)

Total operating income

 

806

 

673

 

1,633

 

1,725

 

Net realized investment gains

 

6

 

10

 

12

 

10

 

Total consolidated net income

 

$

812

 

$

683

 

$

1,645

 

$

1,735

 

 


(1)          The primary component of Interest Expense and Other was after-tax interest expense of $60 million in each of the three months ended June 30, 2015 and 2014, and $120 million in each of the six months ended June 30, 2015 and 2014.

 

11



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

2.                       SEGMENT INFORMATION, Continued

 

(in millions)

 

June 30,
2015

 

December 31,
2014

 

Asset reconciliation:

 

 

 

 

 

Business and International Insurance

 

$

80,839

 

$

82,309

 

Bond & Specialty Insurance

 

7,585

 

7,525

 

Personal Insurance

 

12,692

 

12,798

 

Total assets for reportable segments

 

101,116

 

102,632

 

Other assets (1)

 

548

 

446

 

Total consolidated assets

 

$

101,664

 

$

103,078

 

 


(1)                  The primary components of other assets at June 30, 2015 and 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 June 30, 2015, in millions)

 

Cost

 

Gains

 

Losses

 

Value

 

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

 

$

2,025

 

$

28

 

$

7

 

$

2,046

 

Obligations of states, municipalities and political subdivisions:

 

 

 

 

 

 

 

 

 

Pre-refunded

 

6,966

 

306

 

1

 

7,271

 

All other

 

24,704

 

888

 

153

 

25,439

 

Total obligations of states, municipalities and political subdivisions

 

31,670

 

1,194

 

154

 

32,710

 

Debt securities issued by foreign governments

 

2,049

 

52

 

1

 

2,100

 

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

 

1,905

 

147

 

6

 

2,046

 

All other corporate bonds

 

22,341

 

714

 

147

 

22,908

 

Redeemable preferred stock

 

113

 

10

 

 

123

 

Total

 

$

60,103

 

$

2,145

 

$

315

 

$

61,933

 

 

 

 

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

 

 

12



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

3.                       INVESTMENTS, Continued

 

Pre-refunded bonds of $7.27 billion and $7.56 billion at June 30, 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 $1.23 billion and $785 million during the six months ended June 30, 2015 and 2014, respectively.  Gross gains of $40 million and $23 million and gross losses of $3 million and $4 million were realized on those sales during the six months ended June 30, 2015 and 2014, respectively.

 

Equity Securities

 

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

 

 

 

 

 

Gross Unrealized

 

Fair

 

(at June 30, 2015, in millions)

 

Cost

 

Gains

 

Losses

 

Value

 

Public common stock

 

$

410

 

$

235

 

$

6

 

$

639

 

Non-redeemable preferred stock

 

163

 

29

 

3

 

189

 

Total

 

$

573

 

$

264

 

$

9

 

$

828

 

 

 

 

 

 

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 $28 million and $95 million during the six months ended June 30, 2015 and 2014, respectively.  Gross gains of $5 million and $19 million and gross losses of $3 million and $3 million were realized on those sales during the six months ended June 30, 2015 and 2014, respectively.

 

Unrealized Investment Losses

 

The following tables summarize, for all investments in an unrealized loss position at June 30, 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.

 

13



Table of Contents

 

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 June 30, 2015, 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

 

$

507

 

$

7

 

$

24

 

$

 

$

531

 

$

7

 

Obligations of states, municipalities and political subdivisions

 

7,737

 

147

 

135

 

7

 

7,872

 

154

 

Debt securities issued by foreign governments

 

154

 

1

 

 

 

154

 

1

 

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

 

274

 

2

 

126

 

4

 

400

 

6

 

All other corporate bonds

 

5,509

 

114

 

570

 

33

 

6,079

 

147

 

Redeemable preferred stock

 

2

 

 

 

 

2

 

 

Total fixed maturities

 

14,183

 

271

 

855

 

44

 

15,038

 

315

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Public common stock

 

51

 

6

 

29

 

 

80

 

6

 

Non-redeemable preferred stock

 

55

 

1

 

50

 

2

 

105

 

3

 

Total equity securities

 

106

 

7

 

79

 

2

 

185

 

9

 

Total

 

$

14,289

 

$

278

 

$

934

 

$

46

 

$

15,223

 

$

324

 

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

(at December 31, 2014, 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

 

$

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

 

 

14



Table of Contents

 

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 June 30, 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 $6 million and $1 million for the three months ended June 30, 2015 and 2014, respectively, and $9 million and $10 million for the six months ended June 30, 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 June 30, 2015 and 2014 totaled $88 million and $109 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 and six months ended June 30, 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 June 30, 2015 and December 31, 2014, the Company had $450 million and $350 million notional value of open U.S. Treasury futures contracts, respectively.  Net realized investment gains in the three months ended June 30, 2015 and 2014 and the six months ended June 30, 2015 and 2014 related to U.S. Treasury futures contracts were not significant.

 

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.

 

15



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

4.     FAIR VALUE MEASUREMENTS, Continued

 

Valuation of Investments Reported at Fair Value in Financial Statements

 

The Company utilized a pricing service to estimate fair value measurements for approximately 98% of its fixed maturities at both June 30, 2015 and December 31, 2014.

 

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 $103 million and $92 million at June 30, 2015 and December 31, 2014, respectively.  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 $111 million and $140 million at June 30, 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 June 30, 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 June 30, 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

 

$

2,046

 

$

2,043

 

$

3

 

$

 

Obligations of states, municipalities and political subdivisions

 

32,710

 

7

 

32,689

 

14

 

Debt securities issued by foreign governments

 

2,100

 

 

2,100

 

 

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

 

2,046

 

 

2,010

 

36

 

All other corporate bonds

 

22,908

 

 

22,751

 

157

 

Redeemable preferred stock

 

123

 

3

 

113

 

7

 

Total fixed maturities

 

61,933

 

2,053

 

59,666

 

214

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

Public common stock

 

639

 

637

 

 

2

 

Non-redeemable preferred stock

 

189

 

71

 

118

 

 

Total equity securities

 

828

 

708

 

118

 

2

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

58

 

18

 

 

40

 

Total

 

$

62,819

 

$

2,779

 

$

59,784

 

$

256

 

 

During the six months ended June 30, 2015, the Company’s transfers between Level 1 and Level 2 were not significant.

 

16



Table of Contents

 

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 six months ended June 30, 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 June 30, 2015 and December 31, 2014, and the level within the fair value hierarchy at which such assets and liabilities are categorized.

 

(at June 30, 2015, in millions)

 

Carrying
Value

 

Fair
Value

 

Level 1

 

Level 2

 

Level 3

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Short-term securities

 

$

3,924

 

$

3,924

 

$

1,387

 

$

2,497

 

$

40

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Debt

 

$

6,250

 

$

7,237

 

$

 

$

7,237

 

$

 

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

 

$

 

 

17



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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 98% of short-term securities at both June 30, 2015 and December 31, 2014.  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 June 30, 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 six months ended June 30, 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 June 30, 2015 and December 31, 2014:

 

(in millions)

 

June 30,
2015

 

December 31,
2014

 

Business and International Insurance (1)

 

$

2,459

 

$

2,476

 

Bond & Specialty Insurance

 

495

 

495

 

Personal Insurance

 

613

 

613

 

Other

 

27

 

27

 

Total

 

$

3,594

 

$

3,611

 

 


(1)  Includes goodwill associated with the Company’s international business which is 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 June 30, 2015 and December 31, 2014:

 

(at June 30, 2015, in millions)

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Intangibles subject to amortization

 

 

 

 

 

 

 

Customer-related (1)

 

$

5

 

$

4

 

$

1

 

Fair value adjustment on claims and claim adjustment expense reserves, reinsurance recoverables and other contract-related intangibles (2)

 

208

 

142

 

66

 

Total intangible assets subject to amortization

 

213

 

146

 

67

 

Intangible assets not subject to amortization

 

217

 

 

217

 

Total other intangible assets

 

$

430

 

$

146

 

$

284

 

 

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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 (2)

 

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)         Certain customer-related intangible assets became fully amortized during the second quarter of 2015.

 

(2)  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:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in millions)

 

2015

 

2014

 

2015

 

2014

 

Customer-related

 

$

6

 

$

7

 

$

14

 

$

15

 

Fair value adjustment on claims and claim adjustment expense reserves, reinsurance recoverables and other contract-related intangibles

 

3

 

4

 

6

 

8

 

Total amortization expense

 

$

9

 

$

11

 

$

20

 

$

23

 

 

Intangible asset amortization expense is estimated to be $7 million for the remainder of 2015, $10 million in 2016, $9 million in 2017, $7 million in 2018 and $6 million in 2019.

 

6.                                      OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The following table presents the changes in the Company’s accumulated other comprehensive income (AOCI) for the six months ended June 30, 2015.

 

(in millions)

 

Changes in Net
Unrealized Gains on
Investment
Securities Having No
Credit Losses
Recognized in the
Consolidated
Statement of Income

 

Changes in Net
Unrealized Gains on
Investment
Securities Having
Credit Losses
Recognized in the
Consolidated
Statement of Income

 

Net Benefit Plan
Assets and
Obligations
Recognized in
Shareholders’ Equity

 

Net Unrealized
Foreign Currency
Translation

 

Total Accumulated
Other
Comprehensive
Income

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

 

$

1,768

 

$

198

 

$

(755

)

$

(331

)

$

880

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) (OCI) before reclassifications

 

(561

)

(8

)

1

 

(152

)

(720

)

Amounts reclassified from AOCI

 

(23

)

2

 

30

 

 

9

 

Net OCI, current period

 

(584

)

(6

)

31

 

(152

)

(711

)

Balance, June 30, 2015

 

$

1,184

 

$

192

 

$

(724

)

$

(483

)

$

169

 

 

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

6.                                      OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME, Continued

 

The following tables present the pretax components of the Company’s other comprehensive income (loss) and the related income tax expense (benefit) for the three months and six months ended June 30, 2015 and 2014.

 

(for the three months ended June 30, in millions)

 

2015

 

2014

 

 

 

 

 

 

 

Changes in net unrealized gains on investment securities:

 

 

 

 

 

Having no credit losses recognized in the consolidated statement of income

 

$

(1,065

)

$

518

 

Income tax expense (benefit)

 

(368

)

180

 

Net of taxes

 

(697

)

338

 

 

 

 

 

 

 

Having credit losses recognized in the consolidated statement of income

 

(5

)

1

 

Income tax expense (benefit)

 

(2

)

 

Net of taxes

 

(3

)

1

 

 

 

 

 

 

 

Net changes in benefit plan assets and obligations

 

23

 

15

 

Income tax expense

 

8

 

5

 

Net of taxes

 

15

 

10

 

 

 

 

 

 

 

Net changes in unrealized foreign currency translation

 

94

 

97

 

Income tax expense

 

9

 

11

 

Net of taxes

 

85

 

86

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

(953

)

631

 

Total income tax expense (benefit)

 

(353

)

196

 

Total other comprehensive income (loss), net of taxes

 

$

(600

)

$

435

 

 

20



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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

6.                                      OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME, Continued

 

(for the six months ended June 30, in millions)

 

2015

 

2014

 

 

 

 

 

 

 

Changes in net unrealized gains on investment securities:

 

 

 

 

 

Having no credit losses recognized in the consolidated statement of income

 

$

(896

)

$

1,055

 

Income tax expense (benefit)

 

(312

)

366

 

Net of taxes

 

(584

)

689

 

 

 

 

 

 

 

 

 

 

 

 

 

Having credit losses recognized in the consolidated statement of income

 

(10

)

3

 

Income tax expense (benefit)

 

(4

)

1

 

Net of taxes

 

(6

)

2

 

 

 

 

 

 

 

 

 

 

 

 

 

Net changes in benefit plan assets and obligations

 

47

 

30

 

Income tax expense

 

16

 

12

 

Net of taxes

 

31

 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

Net changes in unrealized foreign currency translation

 

(180

)

54

 

Income tax expense (benefit)

 

(28

)

11

 

Net of taxes

 

(152

)

43

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

(1,039

)

1,142

 

Total income tax expense (benefit)

 

(328

)

390

 

Total other comprehensive income (loss), net of taxes

 

$

(711

)

$

752

 

 

21



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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

6.                                      OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME, Continued

 

The following tables present the pretax and related income tax (expense) benefit components of the amounts reclassified from the Company’s AOCI to the Company’s consolidated statement of income for the three months and six months ended June 30, 2015 and 2014.

 

(for the three months ended June 30, in millions)

 

2015

 

2014

 

 

 

 

 

 

 

Reclassification adjustments related to unrealized gains on investment securities:

 

 

 

 

 

Having no credit losses recognized in the consolidated statement of income (1)

 

$

(17

)

$

(24

)

Income tax expense (2)

 

(6

)

(8

)

Net of taxes

 

(11

)

(16

)

 

 

 

 

 

 

 

 

 

 

 

 

Having credit losses recognized in the consolidated statement of income (1)

 

2

 

1

 

Income tax benefit (2)

 

 

1

 

Net of taxes

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment related to benefit plan assets and obligations (3)

 

24

 

15

 

Income tax benefit (2)

 

9

 

5

 

Net of taxes

 

15

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment related to foreign currency translation (1)

 

 

 

Income tax benefit (2)

 

 

 

Net of taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total reclassifications

 

9

 

(8

)

Total income tax (expense) benefit

 

3

 

(2

)

Total reclassifications, net of taxes

 

$

6

 

$

(6

)

 


(1)               (Increases) decreases net realized investment gains on the consolidated statement of income.

(2)               (Increases) decreases income tax expense on the consolidated statement of income.

(3)               Increases (decreases) general and administrative expenses on the consolidated statement of income.

 

22



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

6.                                      OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME, Continued

 

(for the six months ended June 30, in millions)

 

2015

 

2014

 

 

 

 

 

 

 

Reclassification adjustments related to unrealized gains on investment securities:

 

 

 

 

 

Having no credit losses recognized in the consolidated statement of income (1)

 

$

(35

)

$

(29

)

Income tax expense (2)

 

(12

)

(10

)

Net of taxes

 

(23

)

(19

)

 

 

 

 

 

 

 

 

 

 

 

 

Having credit losses recognized in the consolidated statement of income (1)

 

2

 

4

 

Income tax benefit (2)

 

 

2

 

Net of taxes

 

2

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment related to benefit plan assets and obligations (3)

 

47

 

30

 

Income tax benefit (2)

 

17

 

12

 

Net of taxes

 

30

 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment related to foreign currency translation (1)

 

 

 

Income tax benefit (2)

 

 

 

Net of taxes

 

 

 

 

 

 

 

 

 

Total reclassifications

 

14

 

5

 

Total income tax benefit

 

5

 

4

 

Total reclassifications, net of taxes

 

$

9

 

$

1

 

 


(1)               (Increases) decreases net realized investment gains on the consolidated statement of income.

(2)               (Increases) decreases income tax expense on the consolidated statement of income.

(3)               Increases (decreases) general and administrative expenses on the consolidated statement of income.

 

7.                          COMMON SHARE REPURCHASES

 

During the three months and six months ended June 30, 2015, the Company repurchased 7.9 million and 13.5 million shares, respectively, under its share repurchase authorization, for a total cost of $800 million and $1.40 billion, respectively.  The average cost per share repurchased was $101.62 and $103.85, respectively.  On April 21, 2015, the Company’s board of directors approved a share repurchase authorization that added an additional $5.0 billion of repurchase capacity.  At June 30, 2015, the Company had $5.08 billion of capacity remaining under its share repurchase authorization.  In addition, the Company acquired 4,448 and 0.7 million shares for a total cost of $0.5 million and $73 million during the three months and six months ended June 30, 2015, respectively, that were not part of the publicly announced share repurchase authorization.  These shares consisted of shares retained to cover payroll withholding taxes in connection with the vesting of restricted stock awards and shares used by employees to cover the exercise price of certain stock options that were exercised.

 

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

8.                       EARNINGS PER SHARE

 

The following is a reconciliation of the net income and share data used in the basic and diluted earnings per share computations for the periods presented:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in millions, except per share amounts)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

 

 

 

 

 

 

 

 

Net income, as reported

 

$

812

 

$

683

 

$

1,645

 

$

1,735

 

Participating share-based awards — allocated income

 

(6

)

(5

)

(12

)

(12

)

Net income available to common shareholders — basic and diluted

 

$

806

 

$

678

 

$

1,633

 

$

1,723

 

 

 

 

 

 

 

 

 

 

 

Common Shares

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

314.8

 

343.0

 

317.7

 

346.9

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

314.8

 

343.0

 

317.7

 

346.9

 

Weighted average effects of dilutive securities — stock options and performance shares

 

3.2

 

3.7

 

3.5

 

3.6

 

Total

 

318.0

 

346.7

 

321.2

 

350.5

 

 

 

 

 

 

 

 

 

 

 

Net Income per Common Share

 

 

 

 

 

 

 

 

 

Basic

 

$

2.56

 

$

1.98

 

$

5.14

 

$

4.97

 

Diluted

 

$

2.53

 

$

1.95

 

$

5.08

 

$

4.91

 

 

9.                                      SHARE-BASED INCENTIVE COMPENSATION

 

The following information relates to fully vested stock option awards at June 30, 2015:

 

Stock Options

 

Number

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Contractual
Life
Remaining

 

Aggregate
Intrinsic
Value
($ in millions)

 

Vested at end of period (1)

 

7,882,636

 

$

66.99

 

6.3 years

 

$

244

 

 

 

 

 

 

 

 

 

 

 

Exercisable at end of period

 

4,899,904

 

$

53.29

 

4.9 years

 

$

213

 

 


(1)  Represents awards for which the requisite service has been rendered, including those that are retirement eligible.

 

The total compensation cost for all share-based incentive compensation awards recognized in earnings was $31 million for each of the three months ended June 30, 2015 and 2014, and $78 million and $75 million for the six months ended June 30, 2015 and 2014, respectively.  The related tax benefits recognized in the consolidated statement of income were $10 million and $11 million for the three months ended June 30, 2015 and 2014, respectively, and $26 million for each of the six months ended June 30, 2015 and 2014.

 

The total unrecognized compensation cost related to all nonvested share-based incentive compensation awards at June 30, 2015 was $181 million, which is expected to be recognized over a weighted-average period of 2.0 years. The total unrecognized compensation cost related to all nonvested share-based incentive compensation awards at December 31, 2014 was $123 million, which was expected to be recognized over a weighted-average period of 1.7 years.

 

24



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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

10.                PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS

 

The following tables summarize the components of net periodic benefit cost for the Company’s pension and postretirement benefit plans recognized in the consolidated statement of income.

 

 

 

Pension Plans

 

Postretirement Benefit Plans

 

(for the three months ended June 30, in millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net Periodic Benefit Cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

32

 

$

28

 

$

 

$

 

Interest cost on benefit obligation

 

36

 

37

 

2

 

3

 

Expected return on plan assets

 

(57

)

(55

)

 

 

Amortization of unrecognized:

 

 

 

 

 

 

 

 

 

Prior service benefit

 

 

 

 

 

Net actuarial (gain) loss

 

24

 

16

 

 

(1

)

Net periodic benefit cost

 

$

35

 

$

26

 

$

2

 

$

2

 

 

 

 

Pension Plans

 

Postretirement Benefit Plans

 

(for the six months ended June 30, in millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net Periodic Benefit Cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

65

 

$

55

 

$

 

$

 

Interest cost on benefit obligation

 

72

 

75

 

5

 

5

 

Expected return on plan assets

 

(115

)

(109

)

 

 

Amortization of unrecognized:

 

 

 

 

 

 

 

 

 

Prior service benefit

 

 

 

(1

)

(1

)

Net actuarial (gain) loss

 

48

 

32

 

 

(1

)

Net periodic benefit cost

 

$

70

 

$

53

 

$

4

 

$

3

 

 

11.                               CONTINGENCIES, COMMITMENTS AND GUARANTEES

 

Contingencies

 

The major pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or to which any of the Company’s properties is subject are described below.

 

Asbestos and Environmental Claims and Litigation

 

In the ordinary course of its insurance business, the Company has received and continues to receive claims for insurance arising under policies issued by the Company asserting alleged injuries and damages from asbestos- and environmental-related exposures that are the subject of related coverage litigation.  The Company is defending asbestos- and environmental-related litigation vigorously and believes that it has meritorious defenses; however, the outcomes of these disputes are uncertain.  In this regard, the Company employs dedicated specialists and aggressive resolution strategies to manage asbestos and environmental loss exposure, including settling litigation under appropriate circumstances.  Currently, it is not possible to predict legal outcomes and their impact on the future development of claims and litigation relating to asbestos and environmental claims. Any such development will be affected by future court decisions and interpretations, as well as changes in applicable legislation. Because of these uncertainties, additional liabilities may arise for amounts in excess of the Company’s current reserves. In addition, the Company’s estimate of ultimate claims and claim adjustment expenses may change. These additional liabilities or increases in estimates, or a range of either, cannot now be reasonably estimated and could result in income statement charges that could be material to the Company’s results of operations in future periods.

 

Settlement of Asbestos Direct Action Litigation

 

In January 2015, pursuant to an order issued by the federal bankruptcy court, the Company made a payment in the amount of $579 million for the settlement of litigation that had commenced in 2001 related to the handling and settlement of

 

25



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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

11.                               CONTINGENCIES, COMMITMENTS AND GUARANTEES, Continued

 

asbestos claims. The payment was fully accrued in the Company’s financial statements at December 31, 2014 and was comprised of the $502 million settlement amounts, plus pre- and post-judgment interest totaling $77 million. For further information related to this litigation, see “Settlement of Asbestos Direct Action Litigation” in note 16 of notes to the consolidated financial statements in the Company’s 2014 Annual Report.

 

Other Proceedings Not Arising Under Insurance Contracts or Reinsurance Agreements

 

The Company is involved in other lawsuits, including lawsuits alleging extra-contractual damages relating to insurance contracts or reinsurance agreements, that do not arise under insurance contracts or reinsurance agreements.  The legal costs associated with such lawsuits are expensed in the period in which the costs are incurred.  Based upon currently available information, the Company does not believe it is reasonably possible that any such lawsuit or related lawsuits would be material to the Company’s results of operations or would have a material adverse effect on the Company’s financial position or liquidity.

 

Gain Contingency

 

On August 17, 2010, in a reinsurance dispute in New York state court captioned United States Fidelity & Guaranty Company v. American Re-Insurance Company, et al., the trial court granted summary judgment for United States Fidelity and Guaranty Company (USF&G), a subsidiary of the Company, and denied summary judgment for American Re-Insurance Company, a subsidiary of Munich Re (American Re), and three other reinsurers. That summary judgment was largely affirmed on appeal, but the Court of Appeals remanded the case for trial on two discrete issues.  On June 3, 2015, the trial court entered orders on pretrial motions filed by all parties and determined that the issues for trial will be limited to those remanded by the Court of Appeals.  The reinsurers filed notice of their intent to appeal the trial court’s orders to the Appellate Division, First Department and on June 5, 2015, requested a stay of the August 3, 2015 trial date while their appeal is pending.  On July 10, 2015, the Appellate Division granted the reinsurers’ request for a stay of the August 3, 2015 trial date.  At June 30, 2015, the claim totaled $498 million, comprising the $238 million of reinsurance recoverable plus interest amounting to $260 million as of that date.  Interest will continue to accrue at an annual rate of 9% until the claim is paid. The $238 million of reinsurance recoverable owed to USF&G under the terms of the disputed reinsurance contract has been reported as part of reinsurance recoverables in the Company’s consolidated balance sheet.  The interest that would be owed as part of any judgment ultimately entered in favor of USF&G is treated for accounting purposes as a gain contingency in accordance with FASB Topic 450, Contingencies, and accordingly has not been recognized in the Company’s consolidated financial statements.  For additional discussion of this gain contingency, see note 16 of notes to the consolidated financial statements in the Company’s 2014 Annual Report.

 

Other Commitments and Guarantees

 

Commitments

 

Investment Commitments — The Company has unfunded commitments to private equity limited partnerships and real estate partnerships in which it invests.  These commitments totaled $1.65 billion and $1.63 billion at June 30, 2015 and December 31, 2014, respectively.

 

Guarantees

 

The maximum amount of the Company’s contingent obligation for indemnifications related to the sale of businesses that are quantifiable was $455 million at June 30, 2015, of which $2 million was recognized on the balance sheet at that date.

 

The maximum amount of the Company’s obligation for guarantees of certain investments and third-party loans related to certain investments that are quantifiable was $150 million at June 30, 2015, approximately $75 million of which is indemnified by a third party.  The maximum amount of the Company’s obligation related to the guarantee of certain insurance policy obligations of a former insurance subsidiary was $480 million at June 30, 2015, all of which is indemnified by a third party.

 

For more information regarding Company guarantees, see note 16 of notes to the consolidated financial statements in the Company’s 2014 Annual Report.

 

26



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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

12.                                 CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

The following consolidating financial statements of the Company have been prepared pursuant to Rule 3-10 of Regulation S-X. These consolidating financial statements have been prepared from the Company’s financial information on the same basis of accounting as the consolidated financial statements. The Travelers Companies, Inc. has fully and unconditionally guaranteed certain debt obligations of Travelers Property Casualty Corp. (TPC), which totaled $700 million at June 30, 2015.

 

Prior to the merger of TPC and The St. Paul Companies, Inc. in 2004, TPC fully and unconditionally guaranteed the payment of all principal, premiums, if any, and interest on certain debt obligations of its wholly-owned subsidiary, Travelers Insurance Group Holdings, Inc. (TIGHI). Concurrent with the merger, The Travelers Companies, Inc. fully and unconditionally assumed such guarantee obligations of TPC. TPC is deemed to have no assets or operations independent of TIGHI.  Consolidating financial information for TIGHI has not been presented herein because such financial information would be substantially the same as the financial information provided for TPC.

 

CONSOLIDATING STATEMENT OF INCOME (Unaudited)

For the three months ended June 30, 2015

 

(in millions)

 

TPC

 

Other
Subsidiaries

 

Travelers (2)

 

Eliminations

 

Consolidated

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

Premiums

 

$

4,044

 

$

1,887

 

$

 

$

 

$

5,931

 

Net investment income

 

424

 

206

 

2

 

 

632

 

Fee income

 

111

 

 

 

 

111

 

Net realized investment gains (losses) (1)

 

17

 

(7

)

 

 

10

 

Other revenues

 

19

 

3

 

 

 

22

 

Total revenues

 

4,615

 

2,089

 

2

 

 

6,706

 

 

 

 

 

 

 

 

 

 

 

 

 

Claims and expenses

 

 

 

 

 

 

 

 

 

 

 

Claims and claim adjustment expenses

 

2,409

 

1,138

 

 

 

3,547

 

Amortization of deferred acquisition costs

 

651

 

312

 

 

 

963

 

General and administrative expenses

 

717

 

308

 

3

 

 

1,028

 

Interest expense

 

12

 

 

80

 

 

92

 

Total claims and expenses

 

3,789

 

1,758

 

83

 

 

5,630

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

826

 

331

 

(81

)

 

1,076

 

Income tax expense (benefit)

 

198

 

86

 

(20

)

 

264

 

Net income of subsidiaries

 

 

 

873

 

(873

)

 

Net income

 

$

628

 

$

245

 

$

812

 

$

(873

)

$

812

 

 


(1)    Total other-than-temporary impairment (OTTI) for the three months ended June 30, 2015, and the amounts comprising total OTTI that were recognized in net realized investment gains (losses) and in other comprehensive income (OCI) were as follows:

 

(in millions)

 

TPC

 

Other 
Subsidiaries

 

Travelers (2)

 

Eliminations

 

Consolidated

 

Total OTTI gains (losses)

 

$

(7

)

$

(1

)

$

 

$

 

$

(8

)

OTTI losses recognized in net realized investment gains

 

$

(5

)

$

(1

)

$

 

$

 

$

(6

)

OTTI gains (losses) recognized in OCI

 

$

(2

)

$

 

$

 

$

 

$

(2

)

 


(2)       The Travelers Companies, Inc., excluding its subsidiaries.

 

27



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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

12.                CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

 

CONSOLIDATING STATEMENT OF INCOME (Unaudited)

For the three months ended June 30, 2014

 

(in millions)

 

TPC

 

Other
Subsidiaries

 

Travelers (2)

 

Eliminations

 

Consolidated

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

Premiums

 

$

4,020

 

$

1,908

 

$

 

$

 

$

5,928

 

Net investment income

 

472

 

221

 

2

 

 

695

 

Fee income

 

111

 

1

 

 

 

112

 

Net realized investment gains (1)

 

5

 

11

 

 

 

16

 

Other revenues

 

32

 

2

 

 

 

34

 

Total revenues

 

4,640

 

2,143

 

2

 

 

6,785

 

 

 

 

 

 

 

 

 

 

 

 

 

Claims and expenses

 

 

 

 

 

 

 

 

 

 

 

Claims and claim adjustment expenses

 

2,569

 

1,257

 

 

 

3,826

 

Amortization of deferred acquisition costs

 

650

 

315

 

 

 

965

 

General and administrative expenses

 

697

 

300

 

4

 

 

1,001

 

Interest expense

 

12

 

 

80

 

 

92

 

Total claims and expenses

 

3,928

 

1,872

 

84

 

 

5,884

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

712

 

271

 

(82

)

 

901

 

Income tax expense (benefit)

 

186

 

60

 

(28

)

 

218

 

Net income of subsidiaries

 

 

 

737

 

(737

)

 

Net income

 

$

526

 

$

211

 

$

683

 

$

(737

)

$

683

 

 


(1)          Total other-than-temporary impairment (OTTI) for the three months ended June 30, 2014, and the amounts comprising total OTTI that were recognized in net realized investment gains (losses) and in other comprehensive income (OCI) were as follows:

 

(in millions)

 

TPC

 

Other
Subsidiaries

 

Travelers (2)

 

Eliminations

 

Consolidated

 

Total OTTI gains (losses)

 

$

(1

)

$

 

$

 

$

 

$

(1

)

OTTI losses recognized in net realized investment gains

 

$

(1

)

$

 

$

 

$

 

$

(1

)

OTTI gains (losses) recognized in OCI

 

$

 

$

 

$

 

$

 

$

 

 


(2)       The Travelers Companies, Inc., excluding its subsidiaries.

 

28



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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

12.                CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

 

CONSOLIDATING STATEMENT OF INCOME (Unaudited)

For the six months ended June 30, 2015

 

(in millions)

 

TPC

 

Other
Subsidiaries

 

Travelers (2)

 

Eliminations

 

Consolidated

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

Premiums

 

$

8,040

 

$

3,779

 

$

 

$

 

$

11,819

 

Net investment income

 

835

 

386

 

3

 

 

1,224

 

Fee income

 

222

 

 

 

 

222

 

Net realized investment gains (1)

 

19

 

 

1

 

 

20

 

Other revenues

 

40

 

7

 

 

 

47

 

Total revenues

 

9,156

 

4,172

 

4

 

 

13,332

 

 

 

 

 

 

 

 

 

 

 

 

 

Claims and expenses

 

 

 

 

 

 

 

 

 

 

 

Claims and claim adjustment expenses

 

4,718

 

2,260

 

 

 

6,978

 

Amortization of deferred acquisition costs

 

1,293

 

633

 

 

 

1,926

 

General and administrative expenses

 

1,412

 

600

 

8

 

 

2,020

 

Interest expense

 

24

 

 

160

 

 

184

 

Total claims and expenses

 

7,447

 

3,493

 

168

 

 

11,108

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

1,709

 

679

 

(164

)

 

2,224

 

Income tax expense (benefit)

 

449

 

179

 

(49

)

 

579

 

Net income of subsidiaries

 

 

 

1,760

 

(1,760

)

 

Net income

 

$

1,260

 

$

500

 

$

1,645

 

$

(1,760

)

$

1,645

 

 


(1)          Total other-than-temporary impairment (OTTI) for the six months ended June 30, 2015, and the amounts comprising total OTTI that were recognized in net realized investment gains (losses) and in other comprehensive income (OCI) were as follows:

 

(in millions)

 

TPC

 

Other
Subsidiaries

 

Travelers (2)

 

Eliminations

 

Consolidated

 

Total OTTI gains (losses)

 

$

(8

)

$

(4

)

$

 

$

 

$

(12

)

OTTI losses recognized in net realized investment gains

 

$

(6

)

$

(3

)

$

 

$

 

$

(9

)

OTTI gains (losses) recognized in OCI

 

$

(2

)

$

(1

)

$

 

$

 

$

(3

)

 


(2)       The Travelers Companies, Inc., excluding its subsidiaries.

 

29



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

12.                CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

 

CONSOLIDATING STATEMENT OF INCOME (Unaudited)

For the six months ended June 30, 2014

 

(in millions)

 

TPC

 

Other
Subsidiaries

 

Travelers (2)

 

Eliminations

 

Consolidated

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

Premiums

 

$

7,964

 

$

3,787

 

$

 

$

 

$

11,751

 

Net investment income

 

972

 

456

 

3

 

 

1,431

 

Fee income

 

218

 

1

 

 

 

219

 

Net realized investment gains (1)

 

6

 

9

 

2

 

 

17

 

Other revenues

 

65

 

10

 

 

 

75

 

Total revenues

 

9,225

 

4,263

 

5

 

 

13,493

 

 

 

 

 

 

 

 

 

 

 

 

 

Claims and expenses

 

 

 

 

 

 

 

 

 

 

 

Claims and claim adjustment expenses

 

4,790

 

2,351

 

 

 

7,141

 

Amortization of deferred acquisition costs

 

1,285

 

630

 

 

 

1,915

 

General and administrative expenses

 

1,310

 

565

 

7

 

 

1,882

 

Interest expense

 

24

 

 

160

 

 

184

 

Total claims and expenses

 

7,409

 

3,546

 

167

 

 

11,122

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

1,816

 

717

 

(162

)

 

2,371

 

Income tax expense (benefit)

 

507

 

185

 

(56

)

 

636

 

Net income of subsidiaries

 

 

 

1,841

 

(1,841

)

 

Net income

 

$

1,309

 

$

532

 

$

1,735

 

$

(1,841

)

$

1,735

 

 


(1)       Total other-than-temporary impairment (OTTI) for the six months ended June 30, 2014, and the amounts comprising total OTTI that were recognized in net realized investment gains (losses) and in other comprehensive income (OCI) were as follows:

 

(in millions)

 

TPC

 

Other
Subsidiaries

 

Travelers (2)

 

Eliminations

 

Consolidated

 

Total OTTI gains (losses)

 

$

(3

)

$

(5

)

$

 

$

 

$

(8

)

OTTI losses recognized in net realized investment gains

 

$

(5

)

$

(5

)

$

 

$

 

$

(10

)

OTTI gains (losses) recognized in OCI

 

$

2

 

$

 

$

 

$

 

$

2

 

 


(2)       The Travelers Companies, Inc., excluding its subsidiaries.

 

30



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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

12.                CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

 

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

For the three months ended June 30, 2015

 

(in millions)

 

TPC

 

Other
Subsidiaries

 

Travelers (1)

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

628

 

$

245

 

$

812

 

$

(873

)

$

812

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Changes in net unrealized gains on investment securities:

 

 

 

 

 

 

 

 

 

 

 

Having no credit losses recognized in the consolidated statement of income

 

(719

)

(345

)

(1

)

 

(1,065

)

Having credit losses recognized in the consolidated statement of income

 

(5

)

 

 

 

(5

)

Net changes in benefit plan assets and obligations

 

1

 

 

22

 

 

23

 

Net changes in unrealized foreign currency translation

 

34

 

60

 

 

 

94

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before income taxes and other comprehensive loss of subsidiaries

 

(689

)

(285

)

21

 

 

(953

)

Income tax expense (benefit)

 

(246

)

(115

)

8

 

 

(353

)

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of taxes, before other comprehensive loss of subsidiaries

 

(443

)

(170

)

13

 

 

(600

)

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss of subsidiaries

 

 

 

(613

)

613

 

 

Other comprehensive loss

 

(443

)

(170

)

(600

)

613

 

(600

)

Comprehensive income

 

$

185

 

$

75

 

$

212

 

$

(260

)

$

212

 

 


(1)      The Travelers Companies, Inc., excluding its subsidiaries.

 

31



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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

12.                CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

 

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

For the three months ended June 30, 2014

 

(in millions)

 

TPC

 

Other
Subsidiaries

 

Travelers (1)

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

526

 

$

211

 

$

683

 

$

(737

)

$

683

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Changes in net unrealized gains on investment securities:

 

 

 

 

 

 

 

 

 

 

 

Having no credit losses recognized in the consolidated statement of income

 

359

 

155

 

4

 

 

518

 

Having credit losses recognized in the consolidated statement of income

 

2

 

(1

)

 

 

1

 

Net changes in benefit plan assets and obligations

 

 

 

15

 

 

15

 

Net changes in unrealized foreign currency translation

 

51

 

46

 

 

 

97

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income before income taxes and other comprehensive income of subsidiaries

 

412

 

200

 

19

 

 

631

 

Income tax expense

 

129

 

61

 

6

 

 

196

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of taxes, before other comprehensive income of subsidiaries

 

283

 

139

 

13

 

 

435

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income of subsidiaries

 

 

 

422

 

(422

)

 

Other comprehensive income

 

283

 

139

 

435

 

(422

)

435

 

Comprehensive income

 

$

809

 

$

350

 

$

1,118

 

$

(1,159

)

$

1,118

 

 


(1)      The Travelers Companies, Inc., excluding its subsidiaries.

 

32



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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

12.                CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

 

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

For the six months ended June 30, 2015

 

(in millions)

 

TPC

 

Other
Subsidiaries

 

Travelers (1)

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,260

 

$

500

 

$

1,645

 

$

(1,760

)

$

1,645

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Changes in net unrealized gains on investment securities:

 

 

 

 

 

 

 

 

 

 

 

Having no credit losses recognized in the consolidated statement of income

 

(585

)

(312

)

1

 

 

(896

)

Having credit losses recognized in the consolidated statement of income

 

(9

)

(1

)

 

 

(10

)

Net changes in benefit plan assets and obligations

 

1

 

1

 

45

 

 

47

 

Net changes in unrealized foreign currency translation

 

(145

)

(35

)

 

 

(180

)

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before income taxes and other comprehensive loss of subsidiaries

 

(738

)

(347

)

46

 

 

(1,039

)

Income tax expense (benefit)

 

(232

)

(112

)

16

 

 

(328

)

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of taxes, before other comprehensive loss of subsidiaries

 

(506

)

(235

)

30

 

 

(711

)

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss of subsidiaries

 

 

 

(741

)

741

 

 

Other comprehensive loss

 

(506

)

(235

)

(711

)

741

 

(711

)

Comprehensive income

 

$

754

 

$

265

 

$

934

 

$

(1,019

)

$

934

 

 


(1)      The Travelers Companies, Inc., excluding its subsidiaries.

 

33



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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

12.                CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

 

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

For the six months ended June 30, 2014

 

(in millions)

 

TPC

 

Other
Subsidiaries

 

Travelers (1)

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,309

 

$

532

 

$

1,735

 

$

(1,841

)

$

1,735

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Changes in net unrealized gains on investment securities:

 

 

 

 

 

 

 

 

 

 

 

Having no credit losses recognized in the consolidated statement of income

 

750

 

301

 

4

 

 

1,055

 

Having credit losses recognized in the consolidated statement of income

 

9

 

(6

)

 

 

3

 

Net changes in benefit plan assets and obligations

 

 

 

30

 

 

30

 

Net changes in unrealized foreign currency translation

 

26

 

28

 

 

 

54

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income before income taxes and other comprehensive income of subsidiaries

 

785

 

323

 

34

 

 

1,142

 

Income tax expense

 

272

 

106

 

12

 

 

390

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of taxes, before other comprehensive income of subsidiaries

 

513

 

217

 

22

 

 

752

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income of subsidiaries

 

 

 

730

 

(730

)

 

Other comprehensive income

 

513

 

217

 

752

 

(730

)

752

 

Comprehensive income

 

$

1,822

 

$

749

 

$

2,487

 

$

(2,571

)

$

2,487

 

 


(1)         The Travelers Companies, Inc., excluding its subsidiaries.

 

34



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

12.                CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

 

CONSOLIDATING BALANCE SHEET (Unaudited)

At June 30, 2015

 

(in millions)

 

TPC

 

Other
Subsidiaries

 

Travelers (1)

 

Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available for sale, at fair value (amortized cost $60,103)

 

$

42,549

 

$

19,340

 

$

44

 

$

 

$

61,933

 

Equity securities, available for sale, at fair value (cost $573)

 

224

 

460

 

144

 

 

828

 

Real estate investments

 

56

 

924

 

 

 

980

 

Short-term securities

 

1,798

 

478

 

1,648

 

 

3,924

 

Other investments

 

2,628

 

936

 

1

 

 

3,565

 

Total investments

 

47,255

 

22,138

 

1,837

 

 

71,230

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

184

 

131

 

2

 

 

317

 

Investment income accrued

 

451

 

201

 

3

 

 

655

 

Premiums receivable

 

4,504

 

2,260

 

 

 

6,764

 

Reinsurance recoverables

 

5,721

 

3,244

 

 

 

8,965

 

Ceded unearned premiums

 

690

 

92

 

 

 

782

 

Deferred acquisition costs

 

1,672

 

219

 

 

 

1,891

 

Deferred taxes

 

117

 

55

 

44

 

 

216

 

Contractholder receivables

 

3,417

 

1,056

 

 

 

4,473

 

Goodwill

 

2,589

 

1,005

 

 

 

3,594

 

Other intangible assets

 

202

 

82

 

 

 

284

 

Investment in subsidiaries

 

 

 

28,057

 

(28,057

)

 

Other assets

 

2,170

 

(32

)

355

 

 

2,493

 

Total assets

 

$

68,972

 

$

30,451

 

$

30,298

 

$

(28,057

)

$

101,664

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Claims and claim adjustment expense reserves

 

$

32,161

 

$

16,672

 

$

 

$

 

$

48,833

 

Unearned premium reserves

 

8,414

 

3,739

 

 

 

12,153

 

Contractholder payables

 

3,417

 

1,056

 

 

 

4,473

 

Payables for reinsurance premiums

 

243

 

185

 

 

 

428

 

Debt

 

692

 

 

5,658

 

 

6,350

 

Other liabilities

 

4,145

 

630

 

531

 

 

5,306

 

Total liabilities

 

49,072

 

22,282

 

6,189

 

 

77,543

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

Common stock (1,750.0 shares authorized; 311.2 shares issued and outstanding)

 

 

390

 

22,039

 

(390

)

22,039

 

Additional paid-in capital

 

11,634

 

6,502

 

 

(18,136

)

 

Retained earnings

 

7,711

 

1,012

 

28,512

 

(8,711

)

28,524

 

Accumulated other comprehensive income

 

555

 

265

 

169

 

(820

)

169

 

Treasury stock, at cost (451.5 shares)

 

 

 

(26,611

)

 

(26,611

)

Total shareholders’ equity

 

19,900

 

8,169

 

24,109

 

(28,057

)

24,121

 

Total liabilities and shareholders’ equity

 

$

68,972

 

$

30,451

 

$

30,298

 

$

(28,057

)

$

101,664

 

 


(1)      The Travelers Companies, Inc., excluding its subsidiaries.

 

35



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

12.                CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES (Continued)

 

CONSOLIDATING BALANCE SHEET (Unaudited)

At December 31, 2014

 

(in millions)

 

TPC

 

Other
Subsidiaries

 

Travelers (1)

 

Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available for sale, at fair value (amortized cost $60,801)

 

$

43,401

 

$

20,043

 

$

30

 

$

 

$

63,474

 

Equity securities, available for sale, at fair value (cost $579)

 

236

 

522

 

141

 

 

899

 

Real estate investments

 

56

 

882

 

 

 

938

 

Short-term securities

 

2,128

 

706

 

1,530

 

 

4,364

 

Other investments

 

2,630

 

955

 

1

 

 

3,586

 

Total investments

 

48,451

 

23,108

 

1,702

 

 

73,261

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

221

 

151

 

2

 

 

374

 

Investment income accrued

 

468

 

215

 

2

 

 

685

 

Premiums receivable

 

4,241

 

2,057

 

 

 

6,298

 

Reinsurance recoverables

 

6,156

 

3,104

 

 

 

9,260

 

Ceded unearned premiums

 

608

 

70

 

 

 

678

 

Deferred acquisition costs

 

1,622

 

213

 

 

 

1,835

 

Deferred taxes

 

23

 

(40

)

50

 

 

33

 

Contractholder receivables

 

3,306

 

1,056

 

 

 

4,362

 

Goodwill

 

2,602

 

1,009

 

 

 

3,611

 

Other intangible assets

 

216

 

88

 

 

 

304

 

Investment in subsidiaries

 

 

 

28,821

 

(28,821

)

 

Other assets

 

1,931

 

429

 

17

 

 

2,377

 

Total assets

 

$

69,845

 

$

31,460

 

$

30,594

 

$

(28,821

)

$

103,078

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Claims and claim adjustment expense reserves

 

$

32,999

 

$

16,851

 

$

 

$

 

$

49,850

 

Unearned premium reserves

 

8,201

 

3,638

 

 

 

11,839

 

Contractholder payables

 

3,306

 

1,056

 

 

 

4,362

 

Payables for reinsurance premiums

 

194

 

142

 

 

 

336

 

Debt

 

692

 

 

5,657

 

 

6,349

 

Other liabilities

 

4,084

 

1,308

 

114

 

 

5,506

 

Total liabilities

 

49,476

 

22,995

 

5,771

 

 

78,242

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

Common stock (1,750.0 shares authorized; 322.2 shares issued and outstanding)

 

 

390

 

21,843

 

(390

)

21,843

 

Additional paid-in capital

 

11,634

 

6,502

 

 

(18,136

)

 

Retained earnings

 

7,673

 

1,073

 

27,238

 

(8,733

)

27,251

 

Accumulated other comprehensive income

 

1,062

 

500

 

880

 

(1,562

)

880

 

Treasury stock, at cost (437.3 shares)

 

 

 

(25,138

)

 

(25,138

)

Total shareholders’ equity

 

20,369

 

8,465

 

24,823

 

(28,821

)

24,836

 

Total liabilities and shareholders’ equity

 

$

69,845

 

$

31,460

 

$

30,594

 

$

(28,821

)

$

103,078

 

 


(1)         The Travelers Companies, Inc., excluding its subsidiaries.

 

36



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

12.                CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

 

CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

For the six months ended June 30, 2015

 

(in millions)

 

TPC

 

Other
Subsidiaries

 

Travelers (1)

 

Eliminations

 

Consolidated

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,260

 

$

500

 

$

1,645

 

$

(1,760

)

$

1,645

 

Net adjustments to reconcile net income to net cash provided by (used in) operating activities

 

(410

)

(520

)

182

 

(22

)

(770

)

Net cash provided by (used in) operating activities

 

850

 

(20

)

1,827

 

(1,782

)

875

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

Proceeds from maturities of fixed maturities

 

3,604

 

1,707

 

3

 

 

5,314

 

Proceeds from sales of investments:

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

 

710

 

516

 

 

 

1,226

 

Equity securities

 

11

 

17

 

 

 

28

 

Real estate investments

 

 

10

 

 

 

10

 

Other investments

 

244

 

110

 

 

 

354

 

Purchases of investments:

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

 

(4,352

)

(1,869

)

(18

)

 

(6,239

)

Equity securities

 

(2

)

(19

)

(1

)

 

(22

)

Real estate investments

 

 

(69

)

 

 

(69

)

Other investments

 

(222

)

(53

)

 

 

(275

)

Net (purchases) sales of short-term securities

 

327

 

224

 

(118

)

 

433

 

Securities transactions in course of settlement

 

190

 

(7

)

 

 

183

 

Other

 

(175

)

(3

)

 

 

(178

)

Net cash provided by (used in) investing activities

 

335

 

564

 

(134

)

 

765

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

Treasury stock acquired — share repurchase authorization

 

 

 

(1,400

)

 

(1,400

)

Treasury stock acquired — net employee share-based compensation

 

 

 

(72

)

 

(72

)

Dividends paid to shareholders

 

 

 

(369

)

 

(369

)

Issuance of common stock — employee share options

 

 

 

117

 

 

117

 

Excess tax benefits from share-based payment arrangements

 

 

 

31

 

 

31

 

Dividends paid to parent company

 

(1,222

)

(560

)

 

1,782

 

 

Net cash used in financing activities

 

(1,222

)

(560

)

(1,693

)

1,782

 

(1,693

)

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(4

)

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

Net decrease in cash

 

(37

)

(20

)

 

 

(57

)

Cash at beginning of year

 

221

 

151

 

2

 

 

374

 

Cash at end of period

 

$

184

 

$

131

 

$

2

 

$

 

$

317

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

 

 

 

Income taxes paid (received)

 

$

534

 

$

197

 

$

(134

)

$

 

$

597

 

Interest paid

 

$

24

 

$

 

$

159

 

$

 

$

183

 

 


(1)         The Travelers Companies, Inc., excluding its subsidiaries.

 

37



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

12.                CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

 

CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

For the six months ended June 30, 2014

 

(in millions)

 

TPC

 

Other
Subsidiaries

 

Travelers (1)

 

Eliminations

 

Consolidated

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,309

 

$

532

 

$

1,735

 

$

(1,841

)

$

1,735

 

Net adjustments to reconcile net income to net cash provided by operating activities

 

(154

)

(317

)

305

 

(241

)

(407

)

Net cash provided by operating activities

 

1,155

 

215

 

2,040

 

(2,082

)

1,328

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

Proceeds from maturities of fixed maturities

 

3,005

 

1,909

 

1

 

 

4,915

 

Proceeds from sales of investments:

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

 

415

 

369

 

1

 

 

785

 

Equity securities

 

57

 

34

 

4

 

 

95

 

Real estate investments

 

 

5

 

 

 

5

 

Other investments

 

196

 

142

 

 

 

338

 

Purchases of investments:

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

 

(3,399

)

(2,046

)

(4

)

 

(5,449

)

Equity securities

 

(3

)

(32

)

(5

)

 

(40

)

Real estate investments

 

(21

)

(15

)

 

 

(36

)

Other investments

 

(154

)

(72

)

 

 

(226

)

Net sales (purchases) of short-term securities

 

347

 

(47

)

(240

)

 

60

 

Securities transactions in course of settlement

 

113

 

91

 

 

 

204

 

Acquisition, net of cash acquired

 

(9

)

(3

)

 

 

(12

)

Other

 

(147

)

(5

)

 

 

(152

)

Net cash provided by (used in) investing activities

 

400

 

330

 

(243

)

 

487

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

Treasury stock acquired — share repurchase authorization

 

 

 

(1,525

)

 

(1,525

)

Treasury stock acquired — net employee share-based compensation

 

 

 

(55

)

 

(55

)

Dividends paid to shareholders

 

 

 

(365

)

 

(365

)

Issuance of common stock — employee share options

 

 

 

122

 

 

122

 

Excess tax benefits from share-based payment arrangements

 

 

 

24

 

 

24

 

Dividends paid to parent company

 

(1,525

)

(557

)

 

2,082

 

 

Net cash used in financing activities

 

(1,525

)

(557

)

(1,799

)

2,082

 

(1,799

)

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

30

 

(11

)

(2

)

 

17

 

Cash at beginning of year

 

137

 

154

 

3

 

 

294

 

Cash at end of period

 

$

167

 

$

143

 

$

1

 

$

 

$

311

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

 

 

 

Income taxes paid (received)

 

$

570

 

$

205

 

$

(48

)

$

 

$

727

 

Interest paid

 

$

24

 

$

 

$

159

 

$

 

$

183

 

 


(1)      The Travelers Companies, Inc., excluding its subsidiaries.

 

38



Table of Contents

 

Item 2.         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

FINANCIAL HIGHLIGHTS

 

2015 Second Quarter Consolidated Results of Operations

 

·                   Net income of $812 million, or $2.56 per share basic and $2.53 per share diluted

·                   Net earned premiums of $5.93 billion

·                   Catastrophe losses of $221 million ($143 million after-tax)

·                   Net favorable prior year reserve development of $207 million ($133 million after-tax)

·                   Combined ratio of 90.8%

·                   Net investment income of $632 million ($503 million after-tax)

 

2015 Second Quarter Consolidated Financial Condition

 

·                   Total investments of $71.23 billion; fixed maturities and short-term securities comprised 93% of total investments

·                   Total assets of $101.66 billion

·                   Total debt of $6.35 billion, resulting in a debt-to-total capital ratio of 20.8% (21.8% excluding net unrealized investment gains, net of tax)

·                   Repurchased 7.9 million common shares for total cost of $801 million and paid $192 million of dividends to shareholders

·                   Shareholders’ equity of $24.12 billion

·                   Net unrealized investment gains of $2.10 billion ($1.38 billion after-tax)

·                   Book value per common share of $77.51

·                   Holding company liquidity of $1.72 billion

 

39



Table of Contents

 

CONSOLIDATED OVERVIEW

 

Consolidated Results of Operations

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in millions, except ratio and per share amounts)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Premiums

 

$

5,931

 

$

5,928

 

$

11,819

 

$

11,751

 

Net investment income

 

632

 

695

 

1,224

 

1,431

 

Fee income

 

111

 

112

 

222

 

219

 

Net realized investment gains

 

10

 

16

 

20

 

17

 

Other revenues

 

22

 

34

 

47

 

75

 

Total revenues

 

6,706

 

6,785

 

13,332

 

13,493

 

 

 

 

 

 

 

 

 

 

 

Claims and expenses

 

 

 

 

 

 

 

 

 

Claims and claim adjustment expenses

 

3,547

 

3,826

 

6,978

 

7,141

 

Amortization of deferred acquisition costs

 

963

 

965

 

1,926

 

1,915

 

General and administrative expenses

 

1,028

 

1,001

 

2,020

 

1,882

 

Interest expense

 

92

 

92

 

184

 

184

 

Total claims and expenses

 

5,630

 

5,884

 

11,108

 

11,122

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

1,076

 

901

 

2,224

 

2,371

 

Income tax expense

 

264

 

218

 

579

 

636

 

Net income

 

$

812

 

$

683

 

$

1,645

 

$

1,735

 

 

 

 

 

 

 

 

 

 

 

Net income per share

 

 

 

 

 

 

 

 

 

Basic

 

$

2.56

 

$

1.98

 

$

5.14

 

$

4.97

 

Diluted

 

$

2.53

 

$

1.95

 

$

5.08

 

$

4.91

 

 

 

 

 

 

 

 

 

 

 

Combined ratio

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expense ratio

 

58.9

%

63.6

%

58.2

%

59.9

%

Underwriting expense ratio

 

31.9

 

31.5

 

31.7

 

30.6

 

Combined ratio

 

90.8

%

95.1

%

89.9

%

90.5

%

 

 

 

 

 

 

 

 

 

 

Incremental impact of direct to consumer initiative on combined ratio

 

0.5

%

0.5

%

0.5

%

0.5

%

 

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

 

Overview

 

Diluted net income per share of $2.53 in the second quarter of 2015 increased by 30% over diluted net income per share of $1.95 in the same period of 2014.  Net income of $812 million in the second quarter of 2015 increased by 19% over net income of $683 million in the same period of 2014.  The higher rate of increase in diluted net income per share reflected the impact of share repurchases in recent periods.  The increase in net income in the second quarter of 2015 compared with the same period of 2014 primarily reflected the pretax impacts of (i) lower catastrophe losses, (ii) higher net favorable prior year reserve development and (iii) slightly higher underwriting margins excluding catastrophe losses and prior year reserve development (“underlying underwriting margins”), partially offset by (iv) lower net investment income.  Catastrophe losses in the second quarters of 2015 and 2014 were $221 million and $436 million, respectively.  Net favorable prior year reserve development in the second quarters of 2015 and 2014 was $207 million and $183 million, respectively.  Partially offsetting

 

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this net pretax increase in income was a related increase in income tax expense.  Income tax expense in the second quarter of 2015 was reduced by $32 million as a result of the resolution of prior year tax matters.

 

Diluted net income per share of $5.08 in the first six months of 2015 increased by 3% over diluted net income per share of $4.91 in the same period of 2014.  Net income of $1.65 billion in the first six months of 2015 decreased by 5% from net income of $1.74 billion in the same period of 2014.  The increase in diluted net income per share versus the decrease in net income reflected the impact of share repurchases in recent periods.  The decrease in net income primarily reflected the pretax impacts of (i) lower net investment income, (ii) lower underlying underwriting margins and (iii) lower net favorable prior year reserve development, partially offset by (iv) lower catastrophe losses.  Catastrophe losses in the first six months of 2015 and 2014 were $383 million and $585 million, respectively.  Net favorable prior year reserve development in the first six months of 2015 and 2014 was $450 million and $477 million, respectively.  The lower underlying underwriting margins primarily resulted from the pretax impact of a first quarter 2014 reduction in the estimated liability for state assessments to be paid by the Company related to workers’ compensation premiums due to a change in state law.  Partially offsetting this net pretax decrease in income was a related decrease in income tax expense.  Income tax expense in the first six months of 2015 was also reduced as a result of the resolution of prior year tax matters in the second quarter of 2015.

 

Revenues

 

Earned Premiums

 

Earned premiums in the second quarter of 2015 were $5.93 billion, $3 million or less than 1% higher than in the same period of 2014.  Earned premiums in the first six months of 2015 were $11.82 billion, $68 million or 1% higher than in the same period of 2014.  In the Business and International Insurance segment, earned premiums in the second quarter and first six months of 2015 decreased by 1% and increased by 1%, respectively, compared with the same periods of 2014.  In the Bond & Specialty Insurance segment, earned premiums in the second quarter of 2015 were level with the same period of 2014, and in the first six months of 2015 increased by less than 1% over the same period of 2014.  In the Personal Insurance segment, earned premiums in the second quarter and first six months of 2015 both increased by 1% over the same periods of 2014.  Factors contributing to the changes in earned premiums in each segment are discussed in more detail in the segment discussions that follow.

 

Net Investment Income

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(dollars in millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Average investments (1)

 

$

70,291

 

$

71,880

 

$

70,548

 

$

72,010

 

Pretax net investment income

 

632

 

695

 

1,224

 

1,431

 

After-tax net investment income

 

503

 

553

 

981

 

1,135

 

Average pretax yield (2)

 

3.6

%

3.9

%

3.5

%

4.0

%

Average after-tax yield (2)

 

2.9

%

3.1

%

2.8

%

3.2

%

 


(1)                  Excludes net unrealized investment gains and losses, net of tax, and reflects cash, receivables from investment sales, payables on investment purchases and accrued investment income.

(2)                  Excludes net realized investment gains and losses and net unrealized investment gains and losses, net of tax.

 

Net investment income in the second quarter of 2015 was $632 million, $63 million or 9% lower than in the same period of 2014.  Net investment income in the first six months of 2015 was $1.22 billion, $207 million or 14% lower than in the same period of 2014.  Net investment income from fixed maturity investments in the second quarter and first six months of 2015 was $526 million and $1.06 billion, respectively, $36 million and $85 million lower, respectively, than in the same periods of 2014.  The decreases primarily resulted from lower long-term reinvestment rates available in the market and modestly lower fixed income investments that were impacted by the Company’s $579 million payment in the first quarter of 2015 related to the settlement of the Asbestos Direct Action Litigation.  Net investment income generated by non-fixed maturity investments in the second quarter and first six months of 2015 was $113 million and $182 million, respectively, $27 million and $121 million lower, respectively, than in the same periods of 2014.  Private equity returns were particularly high in the second quarter and first six months of 2014 and were impacted in the same periods of 2015 by lower valuations for energy-related investments.

 

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Fee Income

 

The National Accounts market in the Business and International Insurance segment is the primary source of the Company’s fee-based business.  The changes in fee income in the second quarter and first six months of 2015, respectively, compared with the same periods of 2014 are discussed in the Business and International Insurance segment discussion that follows.

 

Net Realized Investment Gains

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net Realized Investment Gains

 

 

 

 

 

 

 

 

 

Other-than-temporary impairment losses

 

$

(6

)

$

(1

)

$

(9

)

$

(10

)

Other net realized investment gains

 

16

 

17

 

29

 

27

 

Net realized investment gains

 

$

10

 

$

16

 

$

20

 

$

17

 

 

Other Revenues

 

Other revenues in all periods of 2015 and 2014 primarily consisted of installment premium charges.  The second quarter and first six months of 2014 also included revenues in the Personal Insurance segment associated with the runoff of the Company’s National Flood Insurance Program business that was sold on a renewal rights basis in 2013.

 

Claims and Expenses

 

Claims and Claim Adjustment Expenses

 

Claims and claim adjustment expenses in the second quarter of 2015 were $3.55 billion, $279 million or 7% lower than in the same period of 2014, primarily reflecting (i) lower catastrophe losses and (ii) higher net favorable prior year reserve development, partially offset by (iii) the impact of loss cost trends.  Catastrophe losses in the second quarters of both 2015 and 2014 primarily resulted from wind and hail storms in several regions of the United States.  Factors contributing to net favorable prior year reserve development in each segment during the second quarters of 2015 and 2014 are discussed in the segment discussions that follow.

 

Claims and claim adjustment expenses in the first six months of 2015 were $6.98 billion, $163 million or 2% lower than in the same period of 2014, primarily reflecting (i) lower catastrophe losses, partially offset by (ii) lower net favorable prior year reserve development and (iii) the impact of loss cost trends.  Catastrophe losses in the first six months of both 2015 and 2014 included the second quarter storms in the United States described above, as well as winter storms in the Mid-Atlantic, Midwestern and Southeastern regions of the United States in the first quarters of both 2015 and 2014.  Factors contributing to net favorable prior year reserve development in each segment during these periods are discussed in the segment discussions that follow.

 

Significant Catastrophe Losses

 

The following table presents for significant catastrophes that occurred in 2015, 2014 and 2013 the amount of losses incurred in the three months and six months ended June 30, 2015 and 2014, and the amount of net unfavorable (favorable) prior year reserve development recognized in these periods, as well as the estimated ultimate losses for these significant catastrophes at June 30, 2015 and December 31, 2014.  For purposes of the table, a significant catastrophe is an event for which the Company estimates its ultimate losses will be $100 million or more after reinsurance and before taxes.  For the Company’s definition of a catastrophe, refer to “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations — Consolidated Overview” in the Company’s 2014 Annual Report.

 

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Losses Incurred/Unfavorable (Favorable)
Prior Year Reserve Development

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

Estimated Ultimate Losses

 

(in millions, pretax and net of reinsurance)

 

2015

 

2014

 

2015

 

2014

 

June 30, 
2015

 

December 31,
2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

PCS Serial Number:

 

 

 

 

 

 

 

 

 

 

 

 

 

93 — Severe wind and hail storms

 

$

5

 

$

1

 

$

6

 

$

 

$

125

 

$

119

 

15 — Severe wind and hail storms

 

4

 

1

 

 

1

 

144

 

144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

PCS Serial Number:

 

 

 

 

 

 

 

 

 

 

 

 

 

32 — Winter storm

 

(2

)

3

 

(3

)

152

 

141

 

144

 

43 — Severe wind and hail storms

 

(1

)

116

 

(1

)

116

 

179

 

180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

PCS Serial Number:

 

 

 

 

 

 

 

 

 

 

 

 

 

68 — Winter storm

 

(9

)

n/a

 

153

 

n/a

 

153

 

n/a

 

 


n/a: not applicable.

 

Amortization of Deferred Acquisition Costs

 

Amortization of deferred acquisition costs in the second quarter of 2015 was $963 million, $2 million or less than 1% lower than in the same period of 2014.  Amortization of deferred acquisition costs in the first six months of 2015 was $1.93 billion, $11 million or 1% higher than in the same period of 2014.  Amortization of deferred acquisition costs is discussed in more detail in the segment discussions that follow.

 

General and Administrative Expenses

 

General and administrative expenses in the second quarter of 2015 were $1.03 billion, $27 million or 3% higher than in the same period of 2014.  General and administrative expenses in the first six months of 2015 were $2.02 billion, $138 million or 7% higher than in the same period of 2014.  The increase in the first six months of 2015 primarily reflected the impact of a $76 million first quarter 2014 reduction in the estimated liability for state assessments related to workers’ compensation premiums.  General and administrative expenses are discussed in more detail in the segment discussions that follow.

 

Interest Expense

 

Interest expense in the second quarter and first six months of 2015 was $92 million and $184 million, respectively, level with the same periods of 2014.

 

Income Tax Expense

 

Income tax expense in the second quarter of 2015 was $264 million, $46 million or 21% higher than in the same period of 2014, primarily reflecting the impact of the $175 million increase in income before income taxes in the second quarter of 2015, partially offset by the $32 million reduction in income tax expense in the second quarter of 2015 resulting from the resolution of prior year tax matters.  Income tax expense in the first six months of 2015 was $579 million, $57 million or 9% lower than in the same period of 2014, primarily reflecting the impact of the $147 million decrease in income before income taxes in the first six months of 2015 and the resolution of prior year tax matters in the second quarter of 2015.

 

The Company’s effective tax rates in the second quarter and first six months of 2015 were 25% and 26%, respectively.  In the second quarter and first six months of 2014, the Company’s effective tax rates were 24% and 27%, respectively.  The effective tax rates in all periods were lower than the statutory rate of 35% primarily due to the impact of tax-exempt investment income on the calculation of the Company’s income tax provision.  In addition, the effective tax rates in the second quarter and first six months of 2015 were reduced by the impact of the resolution of prior year tax matters.

 

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Combined Ratio

 

The combined ratio of 90.8% in the second quarter of 2015 was 4.3 points lower than the combined ratio of 95.1% in the same period of 2014.  The combined ratio of 89.9% in the first six months of 2015 was 0.6 points lower than the combined ratio of 90.5% in the same period of 2014.

 

The loss and loss adjustment expense ratio of 58.9% in the second quarter of 2015 was 4.7 points lower than the loss and loss adjustment expense ratio of 63.6% in the same period of 2014.  Catastrophe losses accounted for 3.7 points and 7.3 points of the 2015 and 2014 second quarter loss and loss adjustment expense ratios, respectively.  Net favorable prior year reserve development in the second quarters of 2015 and 2014 provided 3.5 points and 3.1 points of benefit, respectively, to the loss and loss adjustment expense ratio.  The loss and loss adjustment expense ratio excluding catastrophe losses and prior year reserve development (“underlying loss and loss adjustment expense ratio”) in the second quarter of 2015 was 0.7 points lower than the 2014 ratio on the same basis.

 

The loss and loss adjustment expense ratio of 58.2% in the first six months of 2015 was 1.7 points lower than the loss and loss adjustment expense ratio of 59.9% in the same period of 2014.  Catastrophe losses accounted for 3.3 points and 5.0 points of the 2015 and 2014 six-month loss and loss adjustment expense ratios, respectively.  Net favorable prior year reserve development in the first six months of 2015 and 2014 provided 3.8 points and 4.1 points of benefit, respectively, to the loss and loss adjustment expense ratio.  The underlying loss and loss adjustment expense ratio in the first six months of 2015 was 0.3 points lower than the 2014 ratio on the same basis.

 

The underwriting expense ratio of 31.9% for the second quarter of 2015 was 0.4 points higher than the underwriting expense ratio of 31.5% in the same period of 2014.  In the first six months of 2015, the underwriting expense ratio of 31.7% was 1.1 points higher than the underwriting expense ratio of 30.6% in the same period of 2014, primarily reflecting the impact of the first quarter 2014 reduction in the estimated liability for state assessments to be paid by the Company related to workers’ compensation premiums in the Business and International Insurance segment.

 

Written Premiums

 

Consolidated gross and net written premiums were as follows:

 

 

 

Gross Written Premiums

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Business and International Insurance

 

$

4,027

 

$

4,061

 

$

8,303

 

$

8,285

 

Bond & Specialty Insurance

 

537

 

542

 

1,059

 

1,070

 

Personal Insurance

 

1,978

 

1,916

 

3,654

 

3,565

 

Total

 

$

6,542

 

$

6,519

 

$

13,016

 

$

12,920

 

 

 

 

Net Written Premiums

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Business and International Insurance

 

$

3,679

 

$

3,729

 

$

7,476

 

$

7,501

 

Bond & Specialty Insurance

 

534

 

540

 

1,012

 

1,022

 

Personal Insurance

 

1,956

 

1,893

 

3,578

 

3,512

 

Total

 

$

6,169

 

$

6,162

 

$

12,066

 

$

12,035

 

 

Gross and net written premiums in the second quarter of 2015 both increased by less than 1% over the same period of 2014.  Gross and net written premiums in the first six months of 2015 increased by 1% and less than 1%, respectively, over the same period of 2014.  The slight difference in growth rates for gross and net written premiums for the first six months of 2015 primarily reflected the impact of changes in the timing and structure of certain of the Company’s reinsurance treaties.  In the first quarter of 2015, the Company entered into a new Corporate Catastrophe Excess-of-Loss Reinsurance Treaty that is described in more detail in “Part I—Item 1—Business” of the Company’s 2014 Annual Report.  This treaty replaced the

 

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Company’s General Catastrophe Reinsurance Treaty, which was cancelled on a cut-off basis effective December 31, 2014, and the General Catastrophe Aggregate Excess-of-Loss Reinsurance Treaty, which expired on December 31, 2014.  Factors contributing to the changes in gross and net written premiums in each segment are discussed in more detail in the segment discussions that follow.

 

RESULTS OF OPERATIONS BY SEGMENT

 

Business and International Insurance

 

Results of the Company’s Business and International Insurance segment were as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(dollars in millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Earned premiums

 

$

3,609

 

$

3,631

 

$

7,229

 

$

7,189

 

Net investment income

 

487

 

539

 

941

 

1,109

 

Fee income

 

111

 

112

 

222

 

219

 

Other revenues

 

5

 

10

 

13

 

22

 

Total revenues

 

$

4,212

 

$

4,292

 

$

8,405

 

$

8,539

 

 

 

 

 

 

 

 

 

 

 

Total claims and expenses

 

$

3,490

 

$

3,688

 

$

6,993

 

$

6,984

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

543

 

$

471

 

$

1,058

 

$

1,165

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expense ratio

 

60.6

%

66.2

%

60.9

%

63.0

%

Underwriting expense ratio

 

32.6

 

31.9

 

32.4

 

30.7

 

Combined ratio

 

93.2

%

98.1

%

93.3

%

93.7

%

 

Overview

 

Operating income in the second quarter of 2015 was $543 million, $72 million or 15% higher than operating income of $471 million in the same period of 2014.  The increase in operating income in the second quarter of 2015 compared with the same period of 2014 primarily reflected the pretax impacts of (i) lower catastrophe losses and (ii) higher net favorable prior year reserve development, partially offset by (iii) lower net investment income and (iv) slightly lower underlying underwriting margins.  Catastrophe losses in the second quarters of 2015 and 2014 were $108 million and $242 million, respectively.  Net favorable prior year reserve development in the second quarters of 2015 and 2014 was $103 million and $47 million, respectively.  Partially offsetting this net pretax increase in operating income was a related increase in income tax expense.  Income tax expense in the second quarter of 2015 was reduced by $12 million as a result of the resolution of prior year tax matters.

 

Operating income in the first six months of 2015 was $1.06 billion, $107 million or 9% lower than operating income of $1.17 billion in the same period of 2014.  The decrease in operating income in the first six months of 2015 compared with the same period of 2014 primarily reflected the pretax impacts of (i) lower net investment income and (ii) lower underlying underwriting margins, partially offset by (iii) lower catastrophe losses and (iv) higher net favorable prior year reserve development.  Catastrophe losses in the first six months of 2015 and 2014 were $207 million and $325 million, respectively.  Net favorable prior year reserve development in the first six months of 2015 and 2014 was $180 million and $142 million, respectively. The decline in underlying underwriting margins primarily resulted from the pretax impacts of the first quarter 2014 reduction in the estimated liability for state assessments to be paid by the Company related to workers’ compensation premiums.  Partially offsetting this net pretax decrease in operating income was a related decrease in income tax expense.  Income tax expense in the first six months of 2015 was also reduced as a result of the resolution of prior year tax matters in the second quarter of 2015.

 

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Revenues

 

Earned Premiums

 

Earned premiums in the second quarter of 2015 were $3.61 billion, $22 million or 1% lower than in the same period of 2014.  Earned premiums in the first six months of 2015 were $7.23 billion, $40 million or 1% higher than in the same period of 2014.

 

Net Investment Income

 

Net investment income in the second quarter of 2015 was $487 million, $52 million or 10% lower than in the same 2014 period.  Net investment income in the first six months of 2015 was $941 million, $168 million or 15% lower than in the same period of 2014.  Refer to the “Net Investment Income” section of the “Consolidated Results of Operations” discussion herein for a description of the factors contributing to the decreases in the Company’s consolidated net investment income in the second quarter and first six months of 2015 compared with the same periods of 2014.  In addition, refer to note 2 of notes to the Company’s consolidated financial statements in the Company’s 2014 Annual Report for a discussion of the Company’s net investment income allocation methodology.

 

Fee Income

 

National Accounts is the primary source of fee income due to its service businesses, which include claim and loss prevention services to large companies that choose to self-insure a portion of their insurance risks, as well as claims and policy management services to workers’ compensation residual market pools.  Fee income in the second quarter of 2015 was slightly lower than in the same period of 2014.  Fee income in the first six months of 2015 increased by $3 million, or 1% over the same period of 2014.

 

Claims and Expenses

 

Claims and Claim Adjustment Expenses

 

Claims and claim adjustment expenses in the second quarter of 2015 were $2.24 billion, $217 million or 9% lower than in the same period of 2014.  The decrease in 2015 primarily reflected (i) lower catastrophe losses and (ii) higher net favorable prior year reserve development, partially offset by (iii) the impact of loss cost trends.  Net favorable prior year reserve development in the second quarter of 2015 was primarily driven by (i) better than expected loss experience in the workers’ compensation product line for accident years 2006 and prior, (ii) better than expected loss experience in the general liability product line primarily related to primary coverages for accident years 2008 through 2013, reflecting more favorable legal and judicial environments than what the Company previously expected, (iii) better than expected loss experience in the Company’s operations at Lloyd’s and in Canada, (iv) better than expected loss experience for property coverages in the commercial multi-peril product line primarily related to non-catastrophe losses for accident years 2012 and 2014 and (v) better than expected loss experience for the property product line related to catastrophe losses for accident year 2014.  Net favorable prior year reserve development in the second quarter of 2014 was primarily driven by (i) better than expected loss experience in the general liability product line related to excess coverages for accident years 2008 through 2012, reflecting more favorable legal and judicial environments than what the Company previously expected, and (ii) better than expected loss experience in the Company’s operations at Lloyd’s and in Canada.  These factors contributing to net favorable prior year reserve development in the second quarters of 2015 and 2014 were partially offset by $72 million and $87 million increases, respectively, to environmental reserves, which are discussed in further detail in the “Environmental Claims and Litigation” section herein.

 

Claims and claim adjustment expenses in the first six months of 2015 were $4.50 billion, $129 million or 3% lower than in the same period of 2014.  Claims and claim adjustment expenses in the first six months of 2015 were impacted by the same factors described above for the second quarter of 2015.  Net favorable prior year reserve development in the first six months of 2015 was primarily driven by (i) better than expected loss experience in the general liability product line, primarily related to primary coverages for accident years 2005 and prior and for 2009 through 2013, reflecting more favorable legal and judicial environments than what the Company previously expected, (ii) better than expected loss experience in the workers’ compensation line of business for accident years 2006 and prior, (iii) better than expected loss experience in the Company’s operations at Lloyd’s and in Canada, (iv) better than expected loss experience for the property product line related to catastrophe losses for accident years 2012 through 2014 and (v) better than expected loss experience for property coverages in the commercial multi-peril product line primarily related to non-catastrophe losses for accident years 2012 and 2014.  Net favorable prior year reserve development in the first six months of 2014 was primarily driven by (i) better than expected loss

 

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experience in the general liability product line related to excess coverages for accident years 2008 through 2012, reflecting more favorable legal and judicial environments than what the Company previously expected, (ii) better than expected loss experience for the property product line for accident years 2010 through 2013 related to non-catastrophe and catastrophe losses and (iii) better than expected loss experience in the Company’s operations at Lloyd’s and in Canada.  These factors contributing to net favorable prior year reserve development in the first six months of 2015 and 2014 were partially offset by the $72 million and $87 million increases, respectively, to environmental reserves, which are discussed in further detail in the “Environmental Claims and Litigation” section herein.  Additionally, net favorable prior year reserve development in the first six months of 2014 reflected higher than expected loss experience for liability coverages in the commercial multi-peril product line for accident years 2010 through 2013.

 

Amortization of Deferred Acquisition Costs

 

Amortization of deferred acquisition costs in the second quarter of 2015 was $578 million, $2 million or less than 1% lower than in the same period of 2014.  Amortization of deferred acquisition costs in the first six months of 2015 was $1.16 billion, $17 million or 1% higher than in the same period of 2014.  These changes were generally consistent with the changes in earned premiums.

 

General and Administrative Expenses

 

General and administrative expenses in the second quarter of 2015 were $674 million, $21 million or 3% higher than in the same period of 2014, primarily due to higher technology and employee related expenses.  General and administrative expenses in the first six months of 2015 were $1.33 billion, $121 million or 10% higher than in the same period of 2014, primarily reflecting the impacts of the first quarter 2014 reduction in the estimated liability for state assessments to be paid by the Company related to workers’ compensation premiums and higher technology and employee related expenses.

 

Income Tax Expense

 

Income tax expense in the second quarter of 2015 was $179 million, $46 million or 35% higher than in the same period of 2014, primarily reflecting the $118 million increase in pretax operating income, partially offset by the $12 million reduction in income tax expense in the second quarter of 2015 resulting from the resolution of prior year tax matters.  Income tax expense in the first six months of 2015 was $354 million, $36 million or 9% lower than in the same period of 2014, primarily reflecting the $143 million decrease in pretax operating income and the resolution of prior year tax matters in the second quarter of 2015.

 

Combined Ratio

 

The combined ratio of 93.2% in the second quarter of 2015 was 4.9 points lower than the combined ratio of 98.1% in the same period of 2014.  The combined ratio of 93.3% in the first six months of 2015 was 0.4 points lower than the combined ratio of 93.7% in the same period of 2014.

 

The loss and loss adjustment expense ratio of 60.6% in the second quarter of 2015 was 5.6 points lower than the loss and loss adjustment expense ratio of 66.2% in the same period of 2014.  Catastrophe losses in the second quarters of 2015 and 2014 accounted for 2.9 points and 6.6 points, respectively, of the loss and loss adjustment expense ratio.  Net favorable prior year reserve development in the second quarters of 2015 and 2014 provided 2.8 points and 1.3 points of benefit, respectively, to the loss and loss adjustment expense ratio. The 2015 second quarter underlying loss and loss adjustment expense ratio was 0.4 points lower than the 2014 ratio on the same basis.

 

The loss and loss adjustment expense ratio of 60.9% in the first six months of 2015 was 2.1 points lower than the loss and loss adjustment expense ratio of 63.0% in the same period of 2014.  Catastrophe losses in the first six months of 2015 and 2014 accounted for 2.9 points and 4.5 points, respectively, of the loss and loss adjustment expense ratio.  Net favorable prior year reserve development in the first six months of 2015 and 2014 provided 2.5 points and 2.0 points of benefit, respectively, to the loss and loss adjustment expense ratio.  The underlying loss and loss adjustment expense ratio in the first six months of 2015 was level with the 2014 ratio on the same basis.

 

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The underwriting expense ratio of 32.6% for the second quarter of 2015 was 0.7 points higher than the underwriting expense ratio of 31.9% in the same period of 2014.  In the first six months of 2015, the underwriting expense ratio of 32.4% was 1.7 points higher than the underwriting expense ratio of 30.7% in the same 2014 period, primarily reflecting the impact of the first quarter 2014 reduction in the estimated liability for state assessments to be paid by the Company related to workers’ compensation premiums.

 

Written Premiums

 

The Business and International Insurance segment’s gross and net written premiums by market were as follows:

 

 

 

Gross Written Premiums

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Domestic:

 

 

 

 

 

 

 

 

 

Select Accounts

 

$

723

 

$

717

 

$

1,463

 

$

1,448

 

Middle Market

 

1,543

 

1,501

 

3,382

 

3,250

 

National Accounts

 

376

 

368

 

886

 

853

 

First Party

 

506

 

509

 

929

 

943

 

Specialized Distribution

 

301

 

284

 

571

 

553

 

Total Domestic

 

3,449

 

3,379

 

7,231

 

7,047

 

International

 

578

 

682

 

1,072

 

1,238

 

Total Business and International Insurance

 

$

4,027

 

$

4,061

 

$

8,303

 

$

8,285

 

 

 

 

Net Written Premiums

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Domestic:

 

 

 

 

 

 

 

 

 

Select Accounts

 

$

709

 

$

705

 

$

1,431

 

$

1,423

 

Middle Market

 

1,456

 

1,420

 

3,189

 

3,052

 

National Accounts

 

228

 

243

 

527

 

543

 

First Party

 

452

 

450

 

792

 

837

 

Specialized Distribution

 

300

 

283

 

568

 

550

 

Total Domestic

 

3,145

 

3,101

 

6,507

 

6,405

 

International

 

534

 

628

 

969

 

1,096

 

Total Business and International Insurance

 

$

3,679

 

$

3,729

 

$

7,476

 

$

7,501

 

 

Gross and net written premiums in the second quarter of 2015 both decreased by 1% from the same period of 2014.  Gross and net written premiums in the first six months of 2015 increased by less than 1% and decreased by less than 1%, respectively, compared with the same period of 2014.  Gross and net written premiums in the second quarter and first six months of 2015 were negatively impacted by changes in foreign currency exchange rates.  Net written premiums in the first six months of 2015 were negatively impacted by changes in the timing and structure of certain of the Company’s reinsurance treaties in the first quarter of 2015 as discussed in the “Consolidated Overview” section above.  Excluding the International surety line of business, for which the following are not relevant measures, business retention rates in the second quarter and first six months of 2015 remained strong and were higher than in the same periods of 2014.  Renewal premium changes in the second quarter and first six months of 2015 remained positive but were lower than in the same periods of 2014, primarily due to lower positive renewal rate changes.  New business premiums in the second quarter and first six months of 2015 decreased from the same periods of 2014.

 

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Select Accounts.  Net written premiums of $709 million and $1.43 billion in the second quarter and first six months of 2015, respectively, both increased by 1% over the same periods of 2014.  Business retention rates in the second quarter and first six months of 2015 remained strong and were higher than in the same periods of 2014.  Renewal premium changes in the second quarter and first six months of 2015 remained positive but were lower than in the same periods of 2014.  New business premiums in the second quarter and first six months of 2015 decreased slightly from the same periods of 2014.

 

Middle Market.  Net written premiums of $1.46 billion and $3.19 billion in the second quarter and first six months of 2015, respectively, increased by 3% and 4%, respectively, over the same periods of 2014.  Business retention rates in the second quarter and first six months of 2015 remained strong and increased over the same periods of 2014.  Renewal premium changes in the second quarter and first six months of 2015 remained positive but were lower than in the same periods of 2014.  New business premiums in the second quarter of 2015 decreased from the same period of 2014, while new business premiums in the first six months of 2015 increased over the same period of 2014.

 

National Accounts.  Net written premiums of $228 million and $527 million in the second quarter and first six months of 2015, respectively, decreased by 6% and 3%, respectively, from the same periods of 2014.  Business retention rates in the second quarter and first six months of 2015 remained strong and were higher than in the same periods of 2014.  Renewal premium changes in the second quarter and first six months of 2015 remained positive but were lower than in the same periods of 2014.  New business premiums in the second quarter and first six months of 2015 decreased from the same periods of 2014.

 

First Party.  Net written premiums of $452 million in the second quarter of 2015 increased by less than 1% over the same period of 2014, while net written premiums of $792 million in the first six months of 2015 decreased by 5% from the same period of 2014.  The decrease in net written premiums in the first six months of 2015 included the impact of changes in the timing and structure of certain reinsurance transactions in the first quarter of 2015.  Business retention rates in the second quarter and first six months of 2015 remained strong and increased over the same periods of 2014.  Renewal premium changes in the second quarter and first six months of 2015 were negative, compared with positive renewal premium changes in the same periods of 2014.  New business premiums in the second quarter and first six months of 2015 decreased from the same periods of 2014.

 

Specialized Distribution.  Net written premiums of $300 million and $568 million in the second quarter and first six months of 2015, respectively, increased by 6% and 3%, respectively, over the same period of 2014.  Business retention rates in the second quarter and first six months of 2015 remained strong and were higher than in the same periods of 2014.  Renewal premium changes in the second quarter of 2015 remained positive and were higher than in the same period of 2014, while renewal premium changes in the first six months of 2015 remained positive but decreased from the same period of 2014.  New business premiums in the second quarter and first six months of 2015 increased over the same periods of 2014.

 

International.  Net written premiums of $534 million in the second quarter of 2015 decreased by 15% from the same period of 2014, primarily due to changes in foreign currency exchange rates.  Net written premiums of $969 million in the first six months of 2015 decreased by 12% from the same period of 2014, primarily due to changes in foreign currency exchange rates, partially offset by the impact of changes in the timing and structure of certain reinsurance transactions related to the Company’s Canadian operations.  Excluding the surety line of business, for which the following are not relevant measures, business retention rates in the second quarter and first six months of 2015 remained strong and were higher than in the same periods of 2014.  Renewal premium changes in the second quarter and first six months of 2015 remained positive but were lower than in the same periods of 2014.  New business premiums in the second quarter and first six months of 2015 decreased from the same periods of 2014.

 

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Bond & Specialty Insurance

 

Results of the Company’s Bond & Specialty Insurance segment were as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(dollars in millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Earned premiums

 

$

524

 

$

524

 

$

1,028

 

$

1,027

 

Net investment income

 

57

 

62

 

113

 

128

 

Other revenues

 

5

 

6

 

10

 

10

 

Total revenues

 

$

586

 

$

592

 

$

1,151

 

$

1,165

 

 

 

 

 

 

 

 

 

 

 

Total claims and expenses

 

$

388

 

$

307

 

$

774

 

$

656

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

151

 

$

192

 

$

275

 

$

346

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expense ratio

 

36.3

%

20.5

%

36.9

%

25.7

%

Underwriting expense ratio

 

37.4

 

37.9

 

38.0

 

37.7

 

Combined ratio

 

73.7

%

58.4

%

74.9

%

63.4

%

 

Overview

 

Operating income in the second quarter of 2015 was $151 million, $41 million or 21% lower than operating income of $192 million in the same period of 2014, reflecting the pretax impacts of (i) a decrease in net favorable prior year reserve development and (ii) lower net investment income.  Net favorable prior year reserve development in the second quarters of 2015 and 2014 was $40 million and $124 million, respectively.  Catastrophe losses in the second quarters of 2015 and 2014 were $1 million and $4 million, respectively.  Partially offsetting this net pretax decrease in operating income was a related decrease in income tax expense.  Income tax expense in the second quarter of 2015 was also reduced by $16 million as a result of the resolution of prior year tax matters.

 

Operating income in the first six months of 2015 was $275 million, $71 million or 21% lower than operating income of $346 million in the same period of 2014, reflecting the pretax impact of the same factors described above.  Net favorable prior year reserve development in the first six months of 2015 and 2014 was $75 million and $191 million, respectively.  Catastrophe losses in the first six months of 2015 and 2014 were $2 million and $5 million, respectively.  Partially offsetting this net pretax decrease in operating income was a related decrease in income tax expense.  Income tax expense in the first six months of 2015 was also reduced as a result of the resolution of prior year tax matters in the second quarter of 2015.

 

Revenues

 

Earned Premiums

 

Earned premiums in the second quarter of 2015 were $524 million, level with the same period of 2014.  Earned premiums in the first six months of 2015 were $1.03 billion, $1 million or less than 1% higher than in the same period of 2014.

 

Net Investment Income

 

Net investment income in the second quarter of 2015 was $57 million, $5 million or 8% lower than in the same period of 2014.  Net investment income in the first six months of 2015 was $113 million, $15 million or 12% lower than in the same period of 2014.  Refer to the “Net Investment Income” section of “Consolidated Results of Operations” herein for a discussion of the decreases in the Company’s consolidated net investment income in the second quarter and first six months of 2015 as compared with the same periods of 2014.  In addition, refer to note 2 of notes to the Company’s consolidated financial statements in the Company’s 2014 Annual Report for a discussion of the Company’s net investment income allocation methodology.

 

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Claims and Expenses

 

Claims and Claim Adjustment Expenses

 

Claims and claim adjustment expenses in the second quarter of 2015 were $192 million, $82 million or 75% higher than in the same period of 2014, primarily reflecting the impact of a decrease in net favorable prior year reserve development.  Net favorable prior year reserve development in the second quarter of 2015 was primarily driven by better than expected loss experience in the contract surety product line for accident years 2010 through 2013.  In the second quarter of 2014, net favorable prior year reserve development was primarily driven by better than expected loss experience in the contract surety product line for accident years 2004 through 2010.

 

Claims and claim adjustment expenses in the first six months of 2015 were $384 million, $115 million or 43% higher than in the same period of 2014, primarily reflecting the impact of a decrease in net favorable prior year reserve development.  Net favorable prior year reserve development in the first six months of 2015 was primarily driven by better than expected loss experience in the contract surety product line for accident years 2010 through 2013.  In the first six months of 2014, net favorable prior year reserve development was primarily driven by better than expected loss experience in the contract surety product line for accident years 2004 through 2010.

 

Amortization of Deferred Acquisition Costs

 

Amortization of deferred acquisition costs in the second quarter of 2015 was $97 million, $2 million or 2% higher than in the same period of 2014.  Amortization of deferred acquisition costs in the first six months of 2015 was $191 million, $3 million or 2% higher than in the same period of 2014.

 

General and Administrative Expenses

 

General and administrative expenses in the second quarter of 2015 were $99 million, $3 million or 3% lower than in the same period of 2014.  General and administrative expenses in the first six months of 2015 were $199 million, level with the same period of 2014.

 

Income Tax Expense

 

Income tax expense in the second quarter of 2015 was $47 million, $46 million or 49% lower than in the same period of 2014, primarily reflecting the $87 million decrease in pretax operating income and the $16 million reduction in income tax expense in the second quarter of 2015 resulting from the resolution of prior year tax matters.  Income tax expense in the first six months of 2015 was $102 million, $61 million or 37% lower than in the same period of 2014, primarily reflecting the $132 million decrease in pretax operating income and the resolution of prior year tax matters in the second quarter of 2015.

 

Combined Ratio

 

The combined ratio of 73.7% in the second quarter of 2015 was 15.3 points higher than the combined ratio of 58.4% in the same period of 2014.  The combined ratio of 74.9% in the first six months of 2015 was 11.5 points higher than the combined ratio of 63.4% in the same period of 2014.

 

The loss and loss adjustment expense ratio of 36.3% in the second quarter of 2015 was 15.8 points higher than the loss and loss adjustment expense ratio of 20.5% in the same period of 2014.  Net favorable prior year reserve development in the second quarters of 2015 and 2014 provided 7.7 points and 23.7 points of benefit, respectively, to the loss and loss adjustment expense ratio.  Catastrophe losses in the second quarters of 2015 and 2014 accounted for 0.3 points and 0.9 points, respectively, of the loss and loss adjustment expense ratio.  The 2015 second quarter underlying loss and loss adjustment expense ratio was 0.4 points higher than the 2014 ratio on the same basis.

 

The loss and loss adjustment expense ratio of 36.9% in the first six months of 2015 was 11.2 points higher than the loss and loss adjustment expense ratio of 25.7% in the same period of 2014.  Net favorable prior year reserve development in the first six months of 2015 and 2014 provided 7.3 points and 18.6 points of benefit, respectively, to the loss and loss adjustment expense ratio.  Catastrophe losses in the first six months of 2015 and 2014 accounted for 0.2 points and 0.6 points, respectively, of the loss and loss adjustment expense ratio.  The underlying loss and loss adjustment expense ratio in the first six months of 2015 was 0.3 points higher than the 2014 ratio on the same basis.

 

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The underwriting expense ratio of 37.4% in the second quarter of 2015 was 0.5 points lower than the underwriting expense ratio of 37.9% in the same period of 2014.  In the first six months of 2015, the underwriting expense ratio of 38.0% was 0.3 points higher than the underwriting expense ratio of 37.7% in the same period of 2014.

 

Written Premiums

 

The Bond & Specialty Insurance segment’s gross and net written premiums were as follows:

 

 

 

Gross Written Premiums

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Bond & Specialty Insurance

 

$

537

 

$

542

 

$

1,059

 

$

1,070

 

 

 

 

Net Written Premiums

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Bond & Specialty Insurance

 

$

534

 

$

540

 

$

1,012

 

$

1,022

 

 

Gross and net written premiums in the second quarter and first six months of 2015 both decreased by 1% from the same periods of 2014.  Excluding the surety line of business, for which the following are not relevant measures, business retention rates in the second quarter and first six months of 2015 remained strong and were higher than in the same periods of 2014.  Renewal premium changes in the second quarter and first six months of 2015 remained positive, but were lower than in the same periods of 2014.  New business premiums in the second quarter and first six months of 2015 increased over the same periods of 2014.

 

Personal Insurance

 

Results of the Company’s Personal Insurance segment were as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(dollars in millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Earned premiums

 

$

1,798

 

$

1,773

 

$

3,562

 

$

3,535

 

Net investment income

 

88

 

94

 

170

 

194

 

Other revenues

 

12

 

17

 

24

 

43

 

Total revenues

 

$

1,898

 

$

1,884

 

$

3,756

 

$

3,772

 

 

 

 

 

 

 

 

 

 

 

Total claims and expenses

 

$

1,653

 

$

1,788

 

$

3,143

 

$

3,282

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

174

 

$

75

 

$

426

 

$

343

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expense ratio

 

62.2

%

71.1

%

58.7

%

63.4

%

Underwriting expense ratio

 

28.9

 

28.7

 

28.6

 

28.3

 

Combined ratio

 

91.1

%

99.8

%

87.3

%

91.7

%

 

 

 

 

 

 

 

 

 

 

Incremental impact of direct to consumer initiative on combined ratio

 

1.7

%

1.5

%

1.7

%

1.6

%

 

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Overview

 

Operating income in the second quarter of 2015 was $174 million, $99 million higher than operating income of $75 million in the same period of 2014.  The increase in operating income primarily reflected the pretax impacts of (i) lower catastrophe losses, (ii) higher net favorable prior year reserve development and (iii) higher underlying underwriting margins, partially offset by (iv) lower net investment income and (v) a decline in other revenues.  Catastrophe losses in the second quarters of 2015 and 2014 were $112 million and $190 million, respectively.  Net favorable prior year reserve development in the second quarters of 2015 and 2014 was $64 million and $12 million, respectively.  The higher underlying underwriting margins primarily resulted from the pretax impact of lower non-catastrophe weather-related losses.  Partially offsetting this net pretax increase in operating income was a related increase in income tax expense.  Income tax expense in the second quarter of 2015 was reduced by $4 million as a result of the resolution of prior year tax matters.

 

Operating income in the first six months of 2015 was $426 million, $83 million or 24% higher than operating income of $343 million in the same period of 2014, primarily reflecting the pretax impact of the same factors described above.  Catastrophe losses in the first six months of 2015 were $174 million, compared with $255 million in the same period of 2014.  Net favorable prior year reserve development in the first six months of 2015 was $195 million, compared with $144 million in the same period of 2014.  Partially offsetting this net pretax increase in operating income was a related increase in income tax expense.  Income tax expense in the first six months of 2015 was reduced as a result of the resolution of prior year tax matters in the second quarter of 2015.

 

Revenues

 

Earned Premiums

 

Earned premiums in the second quarter of 2015 were $1.80 billion, $25 million or 1% higher than in the same period of 2014.  Earned premiums in the first six months of 2015 were $3.56 billion, $27 million or 1% higher than in the same period of 2014.

 

Net Investment Income

 

Net investment income in the second quarter of 2015 was $88 million, $6 million or 6% lower than in the same period of 2014.  Net investment income in the first six months of 2015 was $170 million, $24 million or 12% lower than in the same period of 2014.  Refer to the “Net Investment Income” section of the “Consolidated Results of Operations” discussion herein for a description of the factors contributing to the decreases in the Company’s consolidated net investment income in the second quarter and first six months of 2015 compared with the same periods of 2014.  In addition, refer to note 2 of notes to the Company’s consolidated financial statements in the Company’s 2014 Annual Report for a discussion of the Company’s net investment income allocation methodology.

 

Other Revenues

 

Other revenues in the second quarters and first six months of 2015 and 2014 primarily consisted of installment premium charges.  The second quarter and first six months of 2014 also included revenues associated with the runoff of the Company’s National Flood Insurance Program business that was sold on a renewal rights basis in 2013.

 

Claims and Expenses

 

Claims and Claim Adjustment Expenses

 

Claims and claim adjustment expenses in the second quarter of 2015 were $1.12 billion, $144 million or 11% lower than in the same period of 2014.  The decrease primarily reflected (i) lower catastrophe losses, (ii) lower non-catastrophe weather-related losses and (iii) higher net favorable prior year reserve development, partially offset by (iv) the impact of loss cost trends.  Net favorable prior year reserve development in the second quarter of 2015 was primarily driven by (i) better than expected loss experience in the Homeowners and Other product line for liability coverages for accident years 2011 through 2014 and for non-catastrophe weather-related losses for accident year 2014, and (ii) better than expected loss experience in the Automobile product line for liability coverages for accident years 2012 through 2014. Net favorable prior year reserve development in the second quarter of 2014 was primarily driven by better than expected loss experience in the Homeowners and Other product line for accident year 2013 for non-catastrophe weather-related losses.

 

Claims and claim adjustment expenses in the first six months of 2015 were $2.09 billion, $149 million or 7% lower than in the same period of 2014, primarily reflecting the same factors described above.  Net favorable prior year reserve development in the first six months of 2015 was primarily driven by (i) better than expected loss experience in the Homeowners and Other product line for liability coverages for accident years 2011 through 2014, for non-catastrophe weather-related losses for

 

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accident year 2014 and for catastrophe losses for accident year 2011, and (ii) better than expected loss experience in the Automobile product line for liability coverages for accident years 2012 and 2013.  Net favorable prior year reserve development in the first six months of 2014 was primarily driven by better than expected loss experience in the Homeowners and Other product line for accident year 2013 for non-catastrophe weather-related losses and for accident years 2011 through 2013 for catastrophe losses.

 

Amortization of Deferred Acquisition Costs

 

Amortization of deferred acquisition costs in the second quarter of 2015 was $288 million, $2 million or 1% lower than in the same period of 2014.  Amortization of deferred acquisition costs in the first six months of 2015 was $573 million, $9 million or 2% lower than in the same period of 2014.  The decreases in both periods of 2015 primarily reflected a decline in commission expense due to lower commission rates.

 

General and Administrative Expenses

 

General and administrative expenses in the second quarter of 2015 were $248 million, $11 million or 5% higher than in the same period of 2014.  General and administrative expenses in the first six months of 2015 were $479 million, $19 million or 4% higher than in the same period of 2014.  The increases in both periods of 2015 primarily reflected higher underwriting expenses related to higher new business levels and higher contingent commission expenses.

 

Income Tax Expense

 

Income tax expense in the second quarter of 2015 was $71 million, $50 million higher than in the same period of 2014, primarily reflecting the $149 million increase in pretax operating income, partially offset by the $4 million reduction in income tax expense in the second quarter of 2015 resulting from the resolution of prior year tax matters. Income tax expense in the first six months of 2015 was $187 million, $40 million or 27% higher than in the same period of 2014, primarily reflecting the $123 million increase in pretax operating income, partially offset by the resolution of prior year tax matters in the second quarter of 2015.

 

Combined Ratio

 

The combined ratio of 91.1% in the second quarter of 2015 was 8.7 points lower than the combined ratio of 99.8% in the same period of 2014.  The combined ratio of 87.3% in the first six months of 2015 was 4.4 points lower than the combined ratio of 91.7% in the same period of 2014.

 

The loss and loss adjustment expense ratio of 62.2% in the second quarter of 2015 was 8.9 points lower than the loss and loss adjustment expense ratio of 71.1% in the same period of 2014.  Catastrophe losses accounted for 6.2 points and 10.7 points of the loss and loss adjustment expense ratios in the second quarters of 2015 and 2014, respectively.  Net favorable prior year reserve development in the second quarters of 2015 and 2014 provided 3.5 points and 0.7 points of benefit, respectively, to the loss and loss adjustment expense ratio. The 2015 second quarter underlying loss and loss adjustment expense ratio was 1.6 points lower than the 2014 ratio on the same basis, primarily reflecting lower non-catastrophe weather-related losses.

 

The loss and loss adjustment expense ratio of 58.7% in the first six months of 2015 was 4.7 points lower than the loss and loss adjustment expense ratio of 63.4% in the same period of 2014.  Catastrophe losses accounted for 4.9 points and 7.2 points of the loss and loss adjustment expense ratios in the first six months of 2015 and 2014, respectively.  Net favorable prior year reserve development in the first six months of 2015 and 2014 provided 5.5 points and 4.1 points of benefit, respectively, to the loss and loss adjustment expense ratio. The 2015 underlying loss and loss adjustment expense ratio in the first six months of 2015 was 1.0 points lower than the 2014 ratio on the same basis, primarily reflecting lower non-catastrophe weather-related losses.

 

The underwriting expense ratio of 28.9% for the second quarter of 2015 was 0.2 points higher than the underwriting expense ratio of 28.7% in the same period of 2014.  In the first six months of 2015, the underwriting expense ratio of 28.6% was 0.3 points higher than the underwriting expense ratio of 28.3% in the same 2014 period.

 

Agency Written Premiums

 

Personal Insurance’s gross and net written premiums by product line were as follows for its Agency business, which comprises business written through agents, brokers and other intermediaries and represents almost all of the Personal Insurance segment’s gross and net written premiums:

 

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Gross Written Premiums

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Agency Automobile

 

$

893

 

$

834

 

$

1,721

 

$

1,629

 

Agency Homeowners and Other

 

1,029

 

1,036

 

1,824

 

1,847

 

Total Agency Personal Insurance

 

$

1,922

 

$

1,870

 

$

3,545

 

$

3,476

 

 

 

 

Net Written Premiums

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Agency Automobile

 

$

890

 

$

831

 

$

1,712

 

$

1,619

 

Agency Homeowners and Other

 

1,010

 

1,016

 

1,758

 

1,804

 

Total Agency Personal Insurance

 

$

1,900

 

$

1,847

 

$

3,470

 

$

3,423

 

 

In the second quarter and first six months of 2015, gross agency written premiums were 3% and 2% higher than in the respective periods of 2014.  In the second quarter and first six months of 2015, net agency written premiums were 3% and 1% higher than in the respective periods of 2014.  The lower rate of increase in net agency written premiums compared to the rate of increase in gross written agency written premiums for the first six months of 2015 primarily reflected the impact of changes in the timing and structure of certain of the Company’s corporate catastrophe reinsurance treaties in the first quarter of 2015 as discussed in the “Consolidated Overview” section above.

 

In the second quarter and first six months of 2015, net written premiums in the Agency Automobile line of business were 7% and 6% higher, respectively, than in the same periods of 2014.  Business retention rates in the second quarter and first six months of 2015 remained strong and were higher than in the respective periods of 2014.  Renewal premium changes in the second quarter and first six months of 2015 remained positive but were lower than in the same periods of 2014.   New business premiums in the second quarter and first six months of 2015 increased over the same periods of 2014 driven by sales of the Company’s private passenger automobile product, Quantum Auto 2.0.

 

In the second quarter and first six months of 2015, net written premiums in the Agency Homeowners and Other line of business were less than 1% lower and 3% lower, respectively, than in the same periods of 2014.  The decrease in net agency written premiums for the first six months of 2015 included the impact of changes in the timing and structure of certain of the Company’s corporate catastrophe reinsurance treaties in the first quarter of 2015 as discussed in the “Consolidated Overview” section above.  Business retention rates in the second quarter and first six months of 2015 remained strong and were slightly higher than in the respective periods of 2014.  Renewal premium changes in the second quarter and first six months of 2015 remained positive but were lower than in the respective periods of 2014.  New business premiums in the second quarter and first six months of 2015 increased over the same periods of 2014.

 

For its Agency business, the Personal Insurance segment had approximately 6.1 million active policies at both June 30, 2015 and 2014.

 

Direct to Consumer Written Premiums

 

In the direct to consumer business, net written premiums in the second quarter and first six months of 2015 were $56 million and $108 million, respectively, compared with $46 million and $89 million in the respective periods of 2014.  In the second quarter and first six months of 2015, automobile net written premiums increased by $7 million and $14 million, respectively, or 23% over the same periods of 2014.  In the second quarter and first six months of 2015, homeowners and other net written premiums increased $3 million and $5 million, respectively, or 20% and 19%, respectively, over the same periods of 2014.  The direct to consumer business had 213,000 and 176,000 active policies at June 30, 2015 and 2014, respectively.

 

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Interest Expense and Other

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

$

(62

)

$

(65

)

$

(126

)

$

(129

)

 

The operating loss for Interest Expense and Other in the second quarter of 2015 was $62 million, compared with $65 million in the same period of 2014.  The operating loss for Interest Expense and Other in the first six months of 2015 was $126 million, compared with $129 million in the same period of 2014.  After-tax interest expense in the second quarter and first six months of both 2015 and 2014 was $60 million and $120 million, respectively.

 

ASBESTOS CLAIMS AND LITIGATION

 

The Company believes that the property and casualty insurance industry has suffered from court decisions and other trends that have expanded insurance coverage for asbestos claims far beyond the original intent of insurers and policyholders. The Company has received and continues to receive a significant number of asbestos claims from the Company’s policyholders (which includes others seeking coverage under a policy).  Factors underlying these claim filings include continued intensive advertising by lawyers seeking asbestos claimants and the continued focus by plaintiffs on defendants who were not traditionally primary targets of asbestos litigation.  The focus on these defendants is primarily the result of the number of traditional asbestos defendants who have sought bankruptcy protection in previous years.  In addition to contributing to the overall number of claims, bankruptcy proceedings may increase the volatility of asbestos-related losses by initially delaying the reporting of claims and later by significantly accelerating and increasing loss payments by insurers, including the Company. The bankruptcy of many traditional defendants has also caused increased settlement demands against those policyholders who are not in bankruptcy but remain in the tort system. Currently, in many jurisdictions, those who allege very serious injury and who can present credible medical evidence of their injuries are receiving priority trial settings in the courts, while those who have not shown any credible disease manifestation are having their hearing dates delayed or placed on an inactive docket.  Prioritizing claims involving credible evidence of injuries, along with the focus on defendants who were not traditionally primary targets of asbestos litigation, contributes to the claims and claim adjustment expense payment patterns experienced by the Company.  The Company’s asbestos-related claims and claim adjustment expense experience also has been impacted by the unavailability of other insurance sources potentially available to policyholders, whether through exhaustion of policy limits or through the insolvency of other participating insurers.

 

The Company continues to be involved in coverage litigation concerning a number of policyholders, some of whom have filed for bankruptcy, who in some instances have asserted that all or a portion of their asbestos-related claims are not subject to aggregate limits on coverage. In these instances, policyholders also may assert that each individual bodily injury claim should be treated as a separate occurrence under the policy. It is difficult to predict whether these policyholders will be successful on both issues. To the extent both issues are resolved in a policyholder’s favor and other Company defenses are not successful, the Company’s coverage obligations under the policies at issue would be materially increased and bounded only by the applicable per-occurrence limits and the number of asbestos bodily injury claims against the policyholders.  Although the Company has seen a moderation in the overall risk associated with these lawsuits, it remains difficult to predict the ultimate cost of these claims.

 

Many coverage disputes with policyholders are only resolved through settlement agreements. Because many policyholders make exaggerated demands, it is difficult to predict the outcome of settlement negotiations. Settlements involving bankrupt policyholders may include extensive releases which are favorable to the Company but which could result in settlements for larger amounts than originally anticipated. There also may be instances where a court may not approve a proposed settlement, which may result in additional litigation and potentially less beneficial outcomes for the Company. As in the past, the Company will continue to pursue settlement opportunities.

 

In addition to claims against policyholders, proceedings have been launched directly against insurers, including the Company, by individuals challenging insurers’ conduct with respect to the handling of past asbestos claims and by individuals seeking damages arising from alleged asbestos-related bodily injuries.   Travelers Property Casualty Corp. (TPC) had previously entered into settlement agreements in connection with a number of these direct action claims (Direct Action

 

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Settlements).  The Company had been involved in litigation concerning whether all of the conditions of the Direct Action Settlements had been satisfied.  On July 22, 2014, the United States Court of Appeals for the Second Circuit ruled that all of the conditions of the Direct Action Settlements had been satisfied.  On January 15, 2015, the bankruptcy court entered an order directing the Company to pay $579 million to the plaintiffs, comprised of the $502 million settlement amounts, plus pre- and post-judgment interest of $77 million, and the Company has made that payment.  For a full discussion of these settlement agreements and related litigation, see the “Settlement of Asbestos Direct Action Litigation” sections of note 11 of notes to the unaudited consolidated financial statements herein and note 16 of notes to the consolidated financial statements in the Company’s 2014 Annual Report. It is possible that the filing of other direct actions against insurers, including the Company, could be made in the future.  It is difficult to predict the outcome of these proceedings, including whether the plaintiffs will be able to sustain these actions against insurers based on novel legal theories of liability. The Company believes it has meritorious defenses to these claims and has received favorable rulings in certain jurisdictions.

 

The Company’s quarterly asbestos reserve reviews include an analysis of exposure and claim payment patterns by policyholder category, as well as recent settlements, policyholder bankruptcies, judicial rulings and legislative actions.  The Company also analyzes developing payment patterns among policyholders in the Home Office, Field Office and Assumed Reinsurance and Other categories as well as projected reinsurance billings and recoveries.  In addition, the Company reviews its historical gross and net loss and expense paid experience, year-by-year, to assess any emerging trends, fluctuations, or characteristics suggested by the aggregate paid activity.  Conventional actuarial methods are not utilized to establish asbestos reserves nor have the Company’s evaluations resulted in any way of determining a meaningful average asbestos defense or indemnity payment.

 

Because each policyholder presents different liability and coverage issues, the Company generally reviews the exposure presented by each policyholder at least annually.  Among the factors which the Company may consider in the course of this review are: available insurance coverage, including the role of any umbrella or excess insurance the Company has issued to the policyholder; limits and deductibles; an analysis of the policyholder’s potential liability; the jurisdictions involved; past and anticipated future claim activity and loss development on pending claims; past settlement values of similar claims; allocated claim adjustment expense; potential role of other insurance; the role, if any, of non-asbestos claims or potential non-asbestos claims in any resolution process; and applicable coverage defenses or determinations, if any, including the determination as to whether or not an asbestos claim is a products/completed operation claim subject to an aggregate limit and the available coverage, if any, for that claim.

 

Net asbestos paid loss and loss expenses in the first six months of 2015 were $623 million, compared with $100 million in the same period of 2014.  Net payments in the first six months of 2015 included the payment of the $502 million settlement amounts related to the Settlement of Asbestos Direct Action Litigation as described in more detail in note 11 of notes to the unaudited consolidated financial statements herein.  Net asbestos reserves were $1.73 billion at June 30, 2015, compared with $2.25 billion at June 30, 2014.

 

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The following table displays activity for asbestos losses and loss expenses and reserves:

 

(at and for the six months ended June 30, in millions)

 

2015

 

2014

 

Beginning reserves:

 

 

 

 

 

Gross

 

$

2,520

 

$

2,606

 

Ceded

 

(163

)

(256

)

Net

 

2,357

 

2,350

 

Incurred losses and loss expenses:

 

 

 

 

 

Gross

 

 

 

Ceded

 

 

 

Net

 

 

 

Paid loss and loss expenses:

 

 

 

 

 

Gross

 

664

 

124

 

Ceded

 

(41

)

(24

)

Net

 

623

 

100

 

Foreign exchange and other:

 

 

 

 

 

Gross

 

 

 

Ceded

 

 

 

Net

 

 

 

Ending reserves:

 

 

 

 

 

Gross

 

1,856

 

2,482

 

Ceded

 

(122

)

(232

)

Net

 

$

1,734

 

$

2,250

 

 

See “—Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves.”

 

ENVIRONMENTAL CLAIMS AND LITIGATION

 

The Company has received and continues to receive claims from policyholders who allege that they are liable for injury or damage arising out of their alleged disposition of toxic substances. Mostly, these claims are due to various legislative as well as regulatory efforts aimed at environmental remediation. For instance, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), enacted in 1980 and later modified, enables private parties as well as federal and state governments to take action with respect to releases and threatened releases of hazardous substances. This federal statute permits the recovery of response costs from some liable parties and may require liable parties to undertake their own remedial action. Liability under CERCLA may be joint and several with other responsible parties.

 

The Company has been, and continues to be, involved in litigation involving insurance coverage issues pertaining to environmental claims. The Company believes that some court decisions have interpreted the insurance coverage to be broader than the original intent of the insurers and policyholders. These decisions often pertain to insurance policies that were issued by the Company prior to the mid-1980s. These decisions continue to be inconsistent and vary from jurisdiction to jurisdiction. Environmental claims, when submitted, rarely indicate the monetary amount being sought by the claimant from the policyholder, and the Company does not keep track of the monetary amount being sought in those few claims which indicate a monetary amount.

 

The resolution of environmental exposures by the Company generally occurs through settlements with policyholders as opposed to claimants.  Generally, the Company strives to extinguish any obligations it may have under any policy issued to the policyholder for past, present and future environmental liabilities and extinguish any pending coverage litigation dispute with the policyholder.  This form of settlement is commonly referred to as a “buy-back” of policies for future environmental liability. In addition, many of the agreements have also extinguished any insurance obligation which the Company may have for other claims, including but not limited to asbestos and other cumulative injury claims.  The Company and its

 

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policyholders may also agree to settlements which extinguish any liability arising from known specified sites or claims.  Where appropriate, these agreements also include indemnities and hold harmless provisions to protect the Company.  The Company’s general purpose in executing these agreements is to reduce the Company’s potential environmental exposure and eliminate the risks presented by coverage litigation with the policyholder and related costs.

 

In establishing environmental reserves, the Company evaluates the exposure presented by each policyholder and the anticipated cost of resolution, if any. In the course of this analysis, the Company generally considers the probable liability, available coverage and relevant judicial interpretations.  In addition, the Company considers the many variables presented, such as: the nature of the alleged activities of the policyholder at each site; the number of sites; the total number of potentially responsible parties at each site; the nature of the alleged environmental harm and the corresponding remedy at each site; the nature of government enforcement activities at each site; the ownership and general use of each site; the overall nature of the insurance relationship between the Company and the policyholder, including the role of any umbrella or excess insurance the Company has issued to the policyholder; the involvement of other insurers; the potential for other available coverage, including the number of years of coverage; the role, if any, of non-environmental claims or potential non-environmental claims in any resolution process; and the applicable law in each jurisdiction.  The evaluation of the exposure presented by a policyholder can change as information concerning that policyholder and the many variables presented is developed.  Conventional actuarial techniques are not used to estimate these reserves.

 

In its review of environmental reserves, the Company considers: past settlement payments; changing judicial and legislative trends; its reserves for the costs of litigating environmental coverage matters; the potential for policyholders with smaller exposures to be named in new clean-up actions for both on- and off-site waste disposal activities; the potential for adverse development; the potential for additional new claims beyond previous expectations; and the potential higher costs for new settlements.

 

The duration of the Company’s investigation and review of these claims and the extent of time necessary to determine an appropriate estimate, if any, of the value of the claim to the Company vary significantly and are dependent upon a number of factors. These factors include, but are not limited to, the cooperation of the policyholder in providing claim information, the pace of underlying litigation or claim processes, the pace of coverage litigation between the policyholder and the Company and the willingness of the policyholder and the Company to negotiate, if appropriate, a resolution of any dispute pertaining to these claims. Because these factors vary from claim-to-claim and policyholder-by-policyholder, the Company cannot provide a meaningful average of the duration of an environmental claim. However, based upon the Company’s experience in resolving these claims, the duration may vary from months to several years.

 

The Company continues to receive notices from policyholders tendering claims for the first time, frequently under policies issued prior to the mid-1980s.  These policyholders continue to present smaller exposures, have fewer sites and are lower tier defendants.  Further, in many instances, clean-up costs have been reduced because regulatory agencies are willing to accept risk-based site analyses and more efficient clean-up technologies.  Over the past several years, the Company has experienced generally favorable trends in the number of new policyholders tendering environmental claims for the first time and in the number of pending declaratory judgment actions relating to environmental matters.  However, the degree to which those favorable trends have continued has been less than anticipated.  In addition, reserve development on existing environmental claims has been greater than anticipated.  As a result of these factors, the Company increased its net environmental reserves by $72 million and $87 million in the second quarters of 2015 and 2014, respectively.

 

Net environmental paid loss and loss expenses in the first six months of 2015 were $25 million, compared with $49 million in the same period of 2014.  At June 30, 2015, approximately 93% of the net environmental reserve (approximately $364 million) was carried in a bulk reserve and included unresolved environmental claims, incurred but not reported environmental claims and the anticipated cost of coverage litigation disputes relating to these claims. The bulk reserve the Company carries is established and adjusted based upon the aggregate volume of in-process environmental claims and the Company’s experience in resolving those claims. The balance, approximately 7% of the net environmental reserve (approximately $27 million), consists of case reserves.

 

The following table displays activity for environmental losses and loss expenses and reserves:

 

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Table of Contents

 

(at and for the six months ended June 30, in millions)

 

2015

 

2014

 

Beginning reserves:

 

 

 

 

 

Gross

 

$

353

 

$

355

 

Ceded

 

(7

)

(11

)

Net

 

346

 

344

 

 

 

 

 

 

 

Incurred losses and loss expenses:

 

 

 

 

 

Gross

 

81

 

94

 

Ceded

 

(9

)

(7

)

Net

 

72

 

87

 

 

 

 

 

 

 

Paid loss and loss expenses:

 

 

 

 

 

Gross

 

26

 

53

 

Ceded

 

(1

)

(4

)

Net

 

25

 

49

 

 

 

 

 

 

 

Foreign exchange and other:

 

 

 

 

 

Gross

 

(2

)

 

Ceded

 

 

 

Net

 

(2

)

 

 

 

 

 

 

 

Ending reserves:

 

 

 

 

 

Gross

 

406

 

396

 

Ceded

 

(15

)

(14

)

Net

 

$

391

 

$

382

 

 

UNCERTAINTY REGARDING ADEQUACY OF ASBESTOS AND ENVIRONMENTAL RESERVES

 

As a result of the processes and procedures discussed above, management believes that the reserves carried for asbestos and environmental claims are appropriately established based upon known facts, current law and management’s judgment. However, the uncertainties surrounding the final resolution of these claims continue, and it is difficult to determine the ultimate exposure for asbestos and environmental claims and related litigation. As a result, these reserves are subject to revision as new information becomes available and as claims develop. The continuing uncertainties include, without limitation, the risks and lack of predictability inherent in complex litigation, any impact from the bankruptcy protection sought by various asbestos producers and other asbestos defendants, a further increase or decrease in the cost to resolve, and/or the number of, asbestos and environmental claims beyond that which is anticipated, the emergence of a greater number of asbestos claims than anticipated as a result of extended life expectancies resulting from medical advances and lifestyle improvements, the role of any umbrella or excess policies the Company has issued, the resolution or adjudication of disputes pertaining to the amount of available coverage for asbestos and environmental claims in a manner inconsistent with the Company’s previous assessment of these claims, the number and outcome of direct actions against the Company, future developments pertaining to the Company’s ability to recover reinsurance for asbestos and environmental claims and the unavailability of other insurance sources potentially available to policyholders, whether through exhaustion of policy limits or through the insolvency of other participating insurers.  In addition, uncertainties arise from the insolvency or bankruptcy of policyholders and other defendants.  It is also not possible to predict changes in the legal, regulatory and legislative environment and their impact on the future development of asbestos and environmental claims.  This environment could be affected by changes in applicable legislation and future court and regulatory decisions and interpretations, including the outcome of legal challenges to legislative and/or judicial reforms establishing medical criteria for the pursuit of asbestos claims.  It is also difficult to predict the ultimate outcome of complex coverage disputes until settlement negotiations near completion and significant legal questions are resolved or, failing settlement, until the dispute is adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations often involve a large number of claimants and other parties and require court approval to be effective. As part of its continuing analysis of asbestos and environmental reserves, the Company continues to study the implications of these and other developments.

 

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Because of the uncertainties set forth above, additional liabilities may arise for amounts in excess of the Company’s current reserves.  In addition, the Company’s estimate of claims and claim adjustment expenses may change.  These additional liabilities or increases in estimates, or a range of either, cannot now be reasonably estimated and could result in income statement charges that could be material to the Company’s operating results in future periods.

 

INVESTMENT PORTFOLIO

 

The Company’s invested assets at June 30, 2015 were $71.23 billion, of which 93% was invested in fixed maturity and short-term investments, 1% in equity securities, 1% in real estate investments and 5% in other investments.  Because the primary purpose of the investment portfolio is to fund future claims payments, the Company employs a conservative investment philosophy.  A significant majority of funds available for investment are deployed in a widely diversified portfolio of high quality, liquid, taxable U.S. government, tax-exempt U.S. municipal and taxable corporate and U.S. agency mortgage-backed bonds.

 

The carrying value of the Company’s fixed maturity portfolio at June 30, 2015 was $61.93 billion.  The Company closely monitors the duration of its fixed maturity investments, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy the Company’s insurance and debt obligations.  The weighted average credit quality of the Company’s fixed maturity portfolio, both including and excluding U.S. Treasury securities, was “Aa2” at both June 30, 2015 and December 31, 2014.  Below investment grade securities represented 2.9% and 3.0% of the total fixed maturity investment portfolio at June 30, 2015 and December 31, 2014, respectively.  The average effective duration of fixed maturities and short-term securities was 3.9 (4.2 excluding short-term securities) at June 30, 2015 and 3.5 (3.7 excluding short-term securities) at December 31, 2014.

 

Obligations of States, Municipalities and Political Subdivisions

 

The Company’s fixed maturity investment portfolio at June 30, 2015 and December 31, 2014 included $32.71 billion and $33.57 billion, respectively, of securities which are obligations of states, municipalities and political subdivisions (collectively referred to as the municipal bond portfolio).  The municipal bond portfolio is diversified across the United States, the District of Columbia and Puerto Rico and includes general obligation and revenue bonds issued by states, cities, counties, school districts and similar issuers.  Included in the municipal bond portfolio at June 30, 2015 and December 31, 2014 were $7.27 billion and $7.56 billion, respectively, of pre-refunded bonds, which 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.  The irrevocable trusts are verified as to their sufficiency by an independent verification agent of the underwriter, issuer or trustee.  All of the Company’s holdings of securities issued by Puerto Rico and related entities have been pre-refunded and therefore are defeased by U.S. Treasury securities.

 

The Company bases its investment decision on the underlying credit characteristics of the municipal security.  While its municipal bond portfolio includes a number of securities that were enhanced by third-party insurance for the payment of principal and interest in the event of an issuer default, the Company does not rely on enhanced credit characteristics provided by such third-party insurance as part of its investing decisions.  Of the insured municipal securities in the Company’s investment portfolio at June 30, 2015, almost 100% were rated at “A3” or above, and approximately 89% were rated at “Aa3” or above, without the benefit of insurance.  The Company believes that a loss of the benefit of insurance would not result in a material adverse impact on the Company’s results of operations, financial position or liquidity, due to the underlying credit strength of the issuers of the securities, as well as the Company’s ability and intent to hold the securities.  The average credit rating of the underlying issuers of these securities was “Aa2” at June 30, 2015.  The average credit rating of the entire municipal bond portfolio was “Aa1” at June 30, 2015 with and without the enhancement provided by third-party insurance.

 

Mortgage-Backed Securities, Collateralized Mortgage Obligations and Pass-Through Securities

 

The Company’s fixed maturity investment portfolio at June 30, 2015 and December 31, 2014 included $2.05 billion and $2.21 billion, respectively, of residential mortgage-backed securities, including pass-through-securities and collateralized mortgage obligations (CMOs), all of which are subject to prepayment risk (either shortening or lengthening of duration).  While prepayment risk for securities and its effect on income cannot be fully controlled, particularly when interest rates move dramatically, the Company’s investment strategy generally favors securities that reduce this risk within expected interest rate

 

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ranges.  Included in the totals at June 30, 2015 and December 31, 2014 were $771 million and $872 million, respectively, of GNMA, FNMA, FHLMC (excluding FHA project loans) and Canadian government guaranteed residential mortgage-backed pass-through securities classified as available for sale.  Also included in those totals were residential CMOs classified as available for sale with a fair value of $1.28 billion and $1.34 billion at June 30, 2015 and December 31, 2014, respectively.  Approximately 45% and 46% of the Company’s CMO holdings at June 30, 2015 and December 31, 2014, respectively, were guaranteed by or fully collateralized by securities issued by GNMA, FNMA or FHLMC.  The average credit rating of the $704 million and $725 million of non-guaranteed CMO holdings at June 30, 2015 and December 31, 2014 was “Baa3” and “Ba1,” respectively. The average credit rating of all of the above securities was “Aa3” at both June 30, 2015 and December 31, 2014.  For further discussion regarding the Company’s investments in residential CMOs, see “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Investment Portfolio” in the Company’s 2014 Annual Report.

 

Alternative Documentation Mortgages and Sub-Prime Mortgages

 

At June 30, 2015 and December 31, 2014, the Company’s fixed maturity investment portfolio included CMOs backed by alternative documentation mortgages and asset-backed securities collateralized by sub-prime mortgages with a collective fair value of $217 million and $252 million, respectively (comprising less than 1% of the Company’s total fixed maturity investments at both dates).  The Company defines sub-prime mortgage-backed securities as investments in which the underlying loans primarily exhibit one or more of the following characteristics: low FICO scores, above-prime interest rates, high loan-to-value ratios or high debt-to-income ratios.  Alternative documentation securitizations are those in which the underlying loans primarily meet the government-sponsored entities’ requirements for credit score but do not meet the government-sponsored entities’ guidelines for documentation, property type, debt and loan-to-value ratios.  The average credit rating on these securities and obligations held by the Company was “Ba2” at both June 30, 2015 and December 31, 2014.  The Company does not believe this portfolio exposes it to a material adverse impact on its results of operations, financial position or liquidity, due to the portfolio’s relatively small size.

 

Commercial Mortgage-Backed Securities and Project Loans

 

At June 30, 2015 and December 31, 2014, the Company held commercial mortgage-backed securities (including FHA project loans) of $748 million and $715 million, respectively.  The average credit rating on these securities held by the Company was “Aaa” at both June 30, 2015 and December 31, 2014.  The Company does not believe this portfolio exposes it to a material adverse impact on its results of operations, financial position or liquidity, due to the portfolio’s relatively small size and the underlying credit strength of these securities.

 

Equity Securities, Real Estate Investments and Short-Term Investments

 

See note 1 of notes to the consolidated financial statements in the Company’s 2014 Annual Report for further information about these invested asset classes.

 

Other Investments

 

The Company also invests in private equity limited partnerships, hedge funds, and real estate partnerships.  Also included in other investments are non-public common and preferred equities, trading securities and derivatives.  These asset classes have historically provided a higher return than fixed maturities but are subject to more volatility.  At June 30, 2015 and December 31, 2014, the carrying value of the Company’s other investments was $3.57 billion and $3.59 billion, respectively.

 

CATASTROPHE REINSURANCE COVERAGE

 

The Company’s catastrophe reinsurance coverage is discussed in the “Catastrophe Reinsurance” section of “Part I — Item 1 — Business” in the Company’s 2014 Annual Report.  Except as discussed below, there have been no material changes to the Company’s catastrophe reinsurance coverage from that reported in the Company’s 2014 Annual Report.

 

Catastrophe Bonds. The Company has catastrophe protection through two indemnity reinsurance agreements with Long Point Re III Ltd. (Long Point Re III), an independent Cayman Islands company licensed as a Class C insurer in the Cayman Islands.  The reinsurance agreements meet the requirements to be accounted for as reinsurance in accordance with the guidance for reinsurance contracts.  In connection with the reinsurance agreements, Long Point Re III issued notes (generally referred to as “catastrophe bonds”) to investors in amounts equal to the full coverage provided under the reinsurance

 

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agreements as described below.  The proceeds of both issuances were deposited in reinsurance trust accounts.  The businesses covered by these reinsurance agreements are subsets of the Company’s overall insurance portfolio, comprising specified property coverages spread across the following geographic locations: Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Virginia and Vermont.

 

One reinsurance agreement with Long Point Re III expires in May 2016 and provides coverage to the Company for certain losses from hurricanes in the locations listed above.  The attachment point, maximum limit and insurance percentage under this agreement were reset in May 2015.  Accordingly, for the period May 17, 2015 through and including May 16, 2016, the Company will be entitled to begin recovering amounts under the reinsurance agreement if the losses in the covered area for a single occurrence reach an initial attachment amount of $1.058 billion.  The full $300 million coverage amount is available on a proportional basis until such covered losses reach a maximum $1.608 billion.  The coverage under the reinsurance agreement is limited to specified property coverage written in the Company’s Personal Insurance segment, and within Select Accounts and Commercial Accounts in the Company’s Business and International Insurance segment.

 

The other reinsurance agreement was entered into in May 2015 in connection with Long Point Re III’s offering to unrelated investors of $300 million aggregate principal amount of catastrophe bonds.  This reinsurance agreement expires in May 2018 and provides coverage to the Company for losses from tropical cyclones, earthquakes, severe thunderstorms or winter storms in the locations listed above.  The attachment point and maximum limit under this agreement will be reset annually to adjust the expected loss of the layer within a predetermined range.  For the period May 16, 2015 through and including May 15, 2016, the Company will be entitled to begin recovering amounts under the reinsurance agreement if the losses in the covered area for a single occurrence reach an initial attachment amount of $2.0 billion.  The full $300 million coverage amount is available on a proportional basis until such covered losses reach a maximum $2.50 billion.  The coverage under the reinsurance agreement is limited to specified property coverage written in the Company’s Personal Insurance segment; Select Accounts, Middle Market (excluding Excess Casualty and Global Partner Services), First Party (excluding Boiler & Machinery) and Specialized Distribution in the Company’s Business and International Insurance segment; and Bond & Specialty Insurance Other in the Company’s Bond & Specialty Insurance segment.

 

See the “Catastrophe Reinsurance” section of “Part I — Item 1 — Business” in the Company’s 2014 Annual Report for more details, including a discussion of the structure of and accounting for Long Point Re III.

 

Other Catastrophe Reinsurance Treaties.  In addition to its catastrophe bonds, the Company also is party to a corporate catastrophe excess-of-loss reinsurance treaty, a northeast general catastrophe reinsurance treaty, two earthquake excess-of-loss reinsurance treaties and several international reinsurance treaties.

 

·                  Corporate Catastrophe Excess-of-Loss Reinsurance Treaty — See the “Catastrophe Reinsurance” section of “Part I — Item 1 — Business” in the Company’s 2014 Annual Report.

 

·                  Northeast General Catastrophe Reinsurance Treaty.  The northeast general catastrophe treaty provides up to $800 million part of $850 million of coverage, subject to a $2.25 billion retention, for certain losses arising from hurricanes, tornados, hail storms, earthquakes and winter storm or freeze losses from Virginia to Maine for the period July 1, 2015 through and including June 30, 2016.  Losses from a covered event (occurring over several days) anywhere in the United States, Canada, the Caribbean and Mexico and waters contiguous thereto may be used to satisfy the retention.  Recoveries under the catastrophe bonds (if any) would be first applied to reduce losses subject to this treaty.

 

·                  Middle Markets Earthquake Catastrophe Excess-of-Loss Reinsurance Treaty. This earthquake excess-of-loss treaty provides for up to $150 million part of $165 million of coverage, subject to a $60 million retention, for losses arising from an earthquake, including fire following and sprinkler leakage incurred under policies written by Technology, Public Sector Services and Commercial Accounts in the Company’s Business and International Insurance segment for the period July 1, 2015 through and including June 30, 2016.

 

·                  Personal Insurance Earthquake Excess-of-Loss Reinsurance Treaty. See the “Catastrophe Reinsurance” section of “Part I — Item 1 — Business” in the Company’s 2014 Annual Report.

 

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·                  Canadian Property Catastrophe Excess-of-Loss Reinsurance Contract.  This contract, effective for the period July 1, 2015 through and including June 30, 2016, covers the accumulation of net property losses arising out of one occurrence on business written by the Company’s Canadian businesses.  The treaty covers all property written by the Company’s Canadian businesses for Canadian insureds, including, but not limited to, habitational property, commercial property, inland marine, ocean marine and auto physical damages exposures, with respect to risks located worldwide, written for Canadian insureds.  The treaty provides coverage for 100% of loss retained in excess of C$100 million (US$80 million at June 30, 2015), up to C$800 million (US$641 million at June 30, 2015).

 

·                  Other International Reinsurance Treaties.  See the “Catastrophe Reinsurance” section of “Part I — Item 1 — Business” in the Company’s 2014 Annual Report.

 

The Company regularly reviews its catastrophe reinsurance coverage and may adjust such coverage in the future.

 

REINSURANCE RECOVERABLES

 

For a description of the Company’s reinsurance recoverables, refer to “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reinsurance Recoverables” in the Company’s 2014 Annual Report.

 

The following table summarizes the composition of the Company’s reinsurance recoverables:

 

(in millions)

 

June 30,
2015

 

December 31,
2014

 

Gross reinsurance recoverables on paid and unpaid claims and claim adjustment expenses

 

$

4,013

 

$

4,270

 

Allowance for uncollectible reinsurance

 

(194

)

(203

)

 

 

 

 

 

 

Net reinsurance recoverables

 

3,819

 

4,067

 

Mandatory pools and associations

 

1,947

 

1,909

 

Structured settlements

 

3,199

 

3,284

 

 

 

 

 

 

 

 

 

Total reinsurance recoverables

 

$

8,965

 

$

9,260

 

 

The $248 million decline in net reinsurance recoverables from December 31, 2014 primarily reflected the impact of cash collections in the first six months of 2015.

 

OUTLOOK

 

The following discussion provides outlook information for certain key drivers of the Company’s results of operations and capital position.

 

Premiums.  The Company’s earned premiums are a function of net written premium volume.  Net written premiums comprise both renewal business and new business and are recognized as earned premium over the life of the underlying policies. When business renews, the amount of net written premiums associated with that business may increase or decrease (renewal premium change) as a result of increases or decreases in rate and/or insured exposures, which the Company considers as a measure of units of exposure (such as the number and value of vehicles or properties insured).  Net written premiums from both renewal and new business, and therefore earned premiums, are impacted by competitive market conditions as well as general economic conditions, which, particularly in the case of the Business and International Insurance segment, affect audit premium adjustments, policy endorsements and mid-term cancellations.  Property and casualty insurance market conditions are expected to remain competitive.  Net written premiums may also be impacted by the structure of reinsurance programs and related costs, as well as changes in foreign currency exchange rates.

 

Overall, the Company expects retention levels (the amount of expiring premium that renews, before the impact of renewal premium changes) will remain strong.  In the Business and International Insurance segment, the Company expects that renewal premium changes during the remainder of 2015 and into 2016 will remain positive, driven by both positive renewal rate changes and, subject to the economic uncertainties discussed below, growth in insured exposures, and will be broadly consistent with the levels attained in the first six months of 2015.  In the Bond & Specialty Insurance segment, the Company expects that renewal premium changes with respect to management liability business during the remainder of 2015 and into 2016 will remain positive, but will be lower than the levels attained in the first six months of 2015.  With respect to surety business, within the Bond & Specialty Insurance segment, the Company expects net written premium volume during the

 

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remainder of 2015 and into 2016 will be broadly consistent with the levels attained in the same periods of 2014 and 2015.  In the Personal Insurance segment, the Company expects that both Agency Automobile and Agency Homeowners and Other renewal premium changes during the remainder of 2015 and into 2016 will remain positive, driven by both positive renewal rate changes (based on the Company’s actions to file for rate increases) and, subject to the economic uncertainties discussed below, growth in insured exposures, but will be lower than the levels attained in the first six months of 2015.  The need for state regulatory approval for changes to personal property and casualty insurance prices, as well as competitive market conditions, may impact the timing and extent of renewal premium changes.

 

Property and casualty insurance market conditions are expected to remain competitive during the remainder of 2015 and into 2016 for new business, not only in Business and International Insurance and Bond & Specialty Insurance, but especially in Personal Insurance, where price comparison technology used by agents and brokers, sometimes referred to as “comparative raters,” has facilitated the process of generating multiple quotes, thereby increasing price comparison on new business and, increasingly, on renewal business.  The Company expects that its Quantum Auto 2.0 product in the Personal Insurance segment’s Agency Automobile line of business will continue to increase new business premiums during the remainder of 2015 and into 2016 compared with the levels attained in the same periods of 2014 and 2015, although at a lower rate of increase than in recent periods.  The Company also expects that, as a result of strong business retentions and increases in new business, policies in force in the Personal Insurance segment’s Agency Automobile line of business will continue to increase during the remainder of 2015 and into 2016 compared with the number of policies in force at June 30, 2015.  In each of the Company’s business segments, new business generally has less of an impact on underwriting profitability than renewal business, given the volume of new business relative to renewal business.  However, in periods of meaningful increases in new business, despite its positive impact on underwriting gains over time, the impact of a higher mix of new business versus renewal business may negatively impact the combined ratio in the short-term.

 

In recent years, the federal government, particularly the Federal Reserve, has taken extraordinary steps to stabilize financial markets, encourage economic growth and keep interest rates low.  During this time, the United States has experienced a slow rate of economic growth.  Even if economic growth continues in the United States, or other regions in which the Company does business, it may be at a slow or slower rate for an extended period of time.  Further, general uncertainty regarding a variety of domestic and international matters, such as the U.S. Federal budget and taxes, implementation of the Affordable Care Act, the regulatory environment, geopolitical instability and economic uncertainty in various parts of the world, rapid changes in commodity prices, such as recent changes in oil prices, and fluctuations in foreign currency exchange rates has added to the uncertainty regarding economic conditions generally.  If economic conditions deteriorate, the resulting low levels of economic activity could impact exposure changes at renewal and the Company’s ability to write business at acceptable rates.  Additionally, low levels of economic activity could adversely impact audit premium adjustments, policy endorsements and mid-term cancellations after policies are written.  All of the foregoing, in turn, could adversely impact net written premiums during the remainder of 2015 and into 2016, and because earned premiums are a function of net written premiums, earned premiums could be adversely impacted during the remainder of 2015 and into 2016.

 

Underwriting Gain/Loss.  The Company’s underwriting gain/loss can be significantly impacted by catastrophe losses and net favorable or unfavorable prior year reserve development, as well as underlying underwriting margins.

 

Catastrophe and other weather-related losses are inherently unpredictable from period to period.  The Company experienced significant catastrophe and other weather-related losses in a number of recent periods, which adversely impacted its results of operations. The Company’s results of operations could be adversely impacted if significant catastrophe and other weather-related losses were to occur during the remainder of 2015 and into 2016.

 

For the last several years, the Company’s results have included significant amounts of net favorable prior year reserve development, although at lower levels in some recent periods, driven by better than expected loss experience in all of the Company’s segments.  The lower level of net favorable prior year reserve development in a number of recent periods may have been in part due to the Company’s reserve estimation process incorporating those factors that led to the higher levels of net favorable prior year reserve development in previous years.  If that trend continues, the better than expected loss experience may continue at these recent lower levels, or even lower levels.  However, given the inherent uncertainty in estimating claims and claim adjustment expense reserves, loss experience could develop such that the Company recognizes higher or lower levels of favorable prior year reserve development, no favorable prior year reserve development or unfavorable prior year reserve development in future periods.  In addition, the ongoing review of prior year claims and claim adjustment expense reserves, or other changes in current period circumstances, may result in the Company revising current year loss estimates upward or downward in future periods of the current year.

 

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It is possible that the steps taken by the federal government, particularly the Federal Reserve, to stabilize financial markets and improve economic conditions could lead to higher inflation than the Company had anticipated, which could in turn lead to an increase in the Company’s loss costs and the need to strengthen claims and claim adjustment expense reserves. These impacts of inflation on loss costs and claims and claim adjustment expense reserves could be more pronounced for those lines of business that are considered “long tail”, such as general liability, as they require a relatively long period of time to finalize and settle claims for a given accident year.  For a further discussion, see “Part I—Item 1A—Risk Factors—If actual claims exceed our claims and claim adjustment expense reserves, or if changes in the estimated level of claims and claim adjustment expense reserves are necessary, our financial results could be materially and adversely affected” in the Company’s 2014 Annual Report.

 

In Business and International Insurance, the Company expects underlying underwriting margins during the remainder of 2015, in light of actual experience in this segment in the same period of 2014, will be higher, reflecting more normalized levels of non-catastrophe weather-related losses and what the Company defines as large losses.  The Company expects underlying underwriting margins into 2016 will be broadly consistent with those in the same period of 2015.

 

In Bond & Specialty Insurance, the Company expects underlying underwriting margins in the remainder of 2015 will be higher than in the same period of 2014, and underlying underwriting margins into 2016 will be broadly consistent with the same period of 2015.

 

In Personal Insurance, the Company expects underlying underwriting margins in the remainder of 2015 will be lower than in the same period of 2014, and underlying underwriting margins into 2016 will be broadly consistent with those in the same period of 2015.  In Agency Automobile, the Company expects underlying underwriting margins in the remainder of 2015, in light of actual experience in this segment in the same period of 2014, will be lower, reflecting more normalized levels of loss activity, and underlying underwriting margins into 2016 will be broadly consistent with the same period of 2015.  In Agency Homeowners and Other, the Company expects underlying underwriting margins in the remainder of 2015, in light of actual experience in this segment in the same period of 2014, will be lower, reflecting more normalized levels of non-catastrophe weather-related losses, and underlying underwriting margins into 2016 will be broadly consistent with those in the same period of 2015.  Also in Personal Insurance, the Company’s direct to consumer initiative, the distribution channel that the Company launched in 2009, while intended to enhance the Company’s long-term ability to compete successfully in a consumer-driven marketplace, is expected to remain modest with respect to premium volume and remain unprofitable for a number of years as this book of business grows and matures.

 

Consolidation within the insurance industry, including among insurance companies, reinsurance companies and brokers and independent insurance agencies, could alter the competitive environment in which the Company operates, positively or negatively, which may impact the Company’s premium volume, the rate it can charge for its products, and the terms on which its products are offered.

 

Investment Portfolio.  The Company expects to continue to focus its investment strategy on maintaining a high-quality investment portfolio and a relatively short average effective duration.  The average effective duration of fixed maturities and short-term securities was 3.9 (4.2 excluding short-term securities) at June 30, 2015.  From time to time, the Company enters into short positions in U.S. Treasury futures contracts to manage the duration of its fixed maturity portfolio.  At June 30, 2015, the Company had $450 million notional value of open U.S. Treasury futures contracts.  The Company continually evaluates its investment alternatives and mix.  Currently, the majority of the Company’s investments are comprised of a widely diversified portfolio of high-quality, liquid, taxable U.S. government, tax-exempt U.S. municipal and taxable corporate and U.S. agency mortgage-backed bonds.

 

The Company also invests much smaller amounts in equity securities, real estate, private equity limited partnerships, hedge funds, and real estate partnerships and joint ventures.  These investment classes have the potential for higher returns but also the potential for higher degrees of risk, including less stable rates of return and less liquidity.

 

Net investment income is a material contributor to the Company’s results of operations.  Interest rates remain at very low levels by historical standards.  Based on the current interest rate environment, the Company estimates that the impacts of lower reinvestment yields and a lower level of fixed maturity investments could, for the remainder of 2015, result in approximately $30 million of lower after-tax net investment income from that portfolio on a quarterly basis as compared to

 

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the corresponding quarters of 2014, and into 2016, result in approximately $20 million of lower after-tax net investment income from that portfolio on a quarterly basis as compared to the corresponding quarters of 2015.  Given recent general economic and investment market conditions, the Company expects investment income from the non-fixed maturity portfolio during the remainder of 2015 will be lower than in same period of 2014.  If general economic conditions and/or investment market conditions deteriorate during the remainder of 2015, the Company could also experience a further reduction in net investment income and/or significant realized investment losses, including impairments.

 

The Company had a net pre-tax unrealized investment gain of $1.83 billion ($1.20 billion after-tax) in its fixed maturity investment portfolio at June 30, 2015.  While the Company does not attempt to predict future interest rate movements, a rising interest rate environment would reduce the market value of fixed maturity investments and, therefore, reduce shareholders’ equity, and a declining interest rate environment would have the opposite effects.

 

For further discussion of the Company’s investment portfolio, see “Investment Portfolio” herein.  For a discussion of the risks to the Company’s business during or following a financial market disruption and risks to the Company’s investment portfolio, see the risk factors entitled “During or following a period of financial market disruption or economic downturn, our business could be materially and adversely affected” and “Our investment portfolio may suffer reduced returns or material realized or unrealized losses” included in “Part I—Item 1A—Risk Factors” in the Company’s 2014 Annual Report.  For a discussion of the risks to the Company’s investments from foreign currency exchange rate fluctuations, see the risk factor entitled “We are subject to a number of risks associated with our business outside the United States” included in “Part I—Item 1A—Risk Factors” in the Company’s 2014 Annual Report and see “Part II—Item 7A—Quantitative and Qualitative Disclosure About Market Risk—Foreign Currency Exchange Rate Risk” in the Company’s 2014 Annual Report.

 

Capital Position. The Company believes it has a strong capital position and, as part of its ongoing efforts to create shareholder value, expects to continue to return capital not needed to support its business operations to its shareholders.  The Company expects that, generally over time, the combination of dividends to common shareholders and common share repurchases will likely not exceed operating income.  In addition, the timing and actual number of shares to be repurchased in the future will depend on a variety of additional factors, including the Company’s financial position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Company’s desired ratings from independent rating agencies, funding of the Company’s qualified pension plan, capital requirements of the Company’s operating subsidiaries, legal requirements, regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions and other factors.  For information regarding the Company’s common share repurchases in 2015, see “Liquidity and Capital Resources” herein.  As a result of the Company’s business outside of the United States, primarily in Canada, the United Kingdom (including Lloyd’s), the Republic of Ireland and through its joint venture in Brazil, the Company’s capital is also subject to the effects of changes in foreign currency exchange rates.  For example, strengthening of the U.S. dollar in comparison to other currencies could result in a reduction of shareholders’ equity.  For additional discussion of the Company’s foreign exchange market risk exposure, see “Part II—Item 7A—Quantitative and Qualitative Disclosure About Market Risk” in the Company’s 2014 Annual Report.

 

Many of the statements in this “Outlook” section are forward-looking statements, which are subject to risks and uncertainties that are often difficult to predict and beyond the Company’s control.  Actual results could differ materially from those expressed or implied by such forward-looking statements.   Further, such forward-looking statements speak only as of the date of this report and the Company undertakes no obligation to update them.  See “—Forward Looking Statements.”  For a discussion of potential risks and uncertainties that could impact the Company’s results of operations or financial position, see “Part I—Item 1A—Risk Factors” in the Company’s 2014 Annual Report and “Critical Accounting Estimates” herein.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet the cash requirements of its business operations and to satisfy general corporate purposes when needed.

 

Operating Company Liquidity.  The liquidity requirements of the Company’s insurance subsidiaries are met primarily by funds generated from premiums, fees, income received on investments and investment maturities.  For further discussion of operating company liquidity, see “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in the Company’s 2014 Annual Report.

 

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Holding Company Liquidity.  TRV’s liquidity requirements primarily include shareholder dividends, debt servicing, common share repurchases and, from time to time, contributions to its qualified domestic pension plan.  At June 30, 2015, TRV held total cash and short-term invested assets in the United States aggregating $1.72 billion and having a weighted average maturity of 63 days.  It is the opinion of the Company’s management that these assets are sufficient to meet TRV’s current liquidity requirements and are in excess of TRV’s minimum target level, which comprises TRV’s estimated annual pretax interest expense and common shareholder dividends, and currently totals approximately $1.1 billion.

 

TRV is not dependent on dividends or other forms of repatriation from its foreign operations to support its liquidity needs.  U.S. income taxes have not been recognized on substantially all of the Company’s foreign operations’ undistributed earnings as of June 30, 2015, as such earnings are intended to be permanently reinvested in those operations.  Furthermore, taxes paid to foreign governments on these earnings may be used as credits against the U.S. tax on dividend distributions if such earnings were to be distributed to the holding company.  The amount of undistributed earnings from foreign operations and related taxes on those undistributed earnings were not material to the Company’s financial position or liquidity at June 30, 2015.

 

TRV has a shelf registration statement with the Securities and Exchange Commission which permits it to issue securities from time to time.  TRV also has a $1.0 billion line of credit facility with a syndicate of financial institutions that expires in June 2018.  This line of credit also supports TRV’s $800 million commercial paper program, of which $100 million was outstanding at June 30, 2015.  TRV is not reliant on its commercial paper program to meet its operating cash flow needs.

 

The Company utilized uncollateralized letters of credit issued by major banks with an aggregate limit of approximately $118 million, to provide a portion of the capital needed to support its obligations at Lloyd’s at June 30, 2015.  If uncollateralized letters of credit are not available at a reasonable price or at all in the future, the Company can collateralize these letters of credit or may have to seek alternative means of supporting its obligations at Lloyd’s, which could include utilizing holding company funds on hand.

 

On December 1, 2015, the Company’s $400 million, 5.50% senior notes will mature.  Additionally, on June 20, 2016, the Company’s $400 million, 6.25% senior notes will mature.  The Company may refinance maturing debt through funds generated internally or, depending on market conditions, through funds generated externally.

 

Operating Activities

 

Net cash flows provided by operating activities in the first six months of 2015 and 2014 were $875 million and $1.33 billion, respectively.  Cash flows in the first six months of 2015 reflected a higher level of losses and loss adjustment expenses paid as a result of the Company’s $579 million payment in the first quarter of 2015 related to the settlement of the Asbestos Direct Action Litigation as described in more detail in note 11 of notes to the unaudited consolidated financial statements herein.

 

Investing Activities

 

Net cash flows provided by investing activities were $765 million and $487 million in the first six months of 2015 and 2014, respectively.  The Company’s consolidated total investments at June 30, 2015 decreased by $2.03 billion, or 3% from year-end 2014, primarily reflecting a decrease in the unrealized appreciation of investments, common share repurchases and dividends paid to shareholders, partially offset by net cash flows provided by operating activities.

 

Financing Activities

 

Net cash flows used in financing activities in the first six months of 2015 and 2014 were $1.69 billion and $1.80 billion, respectively.  The totals in both periods primarily reflected common share repurchases and dividends to shareholders, partially offset by the proceeds from employee stock option exercises.

 

Dividends.  Dividends paid to shareholders were $369 million and $365 million in the first six months of 2015 and 2014, respectively.  The declaration and payment of future dividends to holders of the Company’s common stock will be at the discretion of the Company’s board of directors and will depend upon many factors, including the Company’s financial position, earnings, capital requirements of the Company’s operating subsidiaries, legal requirements, regulatory constraints and other factors as the board of directors deems relevant.  Dividends will be paid by the Company only if declared by its board of directors out of funds legally available, subject to any other restrictions that may be applicable to the Company.  On July 21, 2015, the Company announced that it declared a regular quarterly dividend of $0.61 per share, payable September 30, 2015, to shareholders of record on September 10, 2015.

 

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Share Repurchase Authorization.  The Company’s board of directors has approved common share repurchase authorizations under which repurchases may be made from time to time in the open market, pursuant to pre-set trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, in private transactions or otherwise.  The authorizations do not have a stated expiration date.  The timing and actual number of shares to be repurchased in the future will depend on a variety of factors, including the Company’s financial position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Company’s desired ratings from independent rating agencies, funding of the Company’s qualified pension plan, capital requirements of the Company’s operating subsidiaries, legal requirements, regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions and other factors.  During the three months and six months ended June 30, 2015, the Company repurchased 7.9 million and 13.5 million shares, respectively, under its share repurchase authorization, for a total cost of $800 million and $1.40 billion, respectively.  The average cost per share repurchased was $101.62 and $103.85, respectively.  On April 21, 2015, the board of directors approved a share repurchase authorization that added an additional $5.0 billion of repurchase capacity. At June 30, 2015, the Company had $5.08 billion of capacity remaining under the share repurchase authorization.

 

Capital Structure.  The following table summarizes the components of the Company’s capital structure at June 30, 2015 and December 31, 2014.

 

(in millions)

 

June 30,
2015

 

December 31,
2014

 

Debt:

 

 

 

 

 

Short-term

 

$

900

 

$

500

 

Long-term

 

5,461

 

5,861

 

Net unamortized fair value adjustments and debt issuance costs

 

(11

)

(12

)

 

 

 

 

 

 

Total debt

 

6,350

 

6,349

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock and retained earnings, less treasury stock

 

23,952

 

23,956

 

Accumulated other comprehensive income

 

169

 

880

 

 

 

 

 

 

 

Total shareholders’ equity

 

24,121

 

24,836

 

 

 

 

 

 

 

Total capitalization

 

$

30,471

 

$

31,185

 

 

The following table provides a reconciliation of total capitalization excluding net unrealized gain on investments to total capitalization presented in the foregoing table.

 

(dollars in millions)

 

June 30,
2015

 

December 31,
2014

 

Total capitalization excluding net unrealized gain on investments

 

$

29,095

 

$

29,219

 

Net unrealized gain on investments, net of taxes

 

1,376

 

1,966

 

 

 

 

 

 

 

Total capitalization

 

$

30,471

 

$

31,185

 

 

 

 

 

 

 

Debt-to-total capital ratio

 

20.8

%

20.4

%

 

 

 

 

 

 

Debt-to-total capital ratio excluding net unrealized gain on investments

 

21.8

%

21.7

%

 

The debt-to-total capital ratio excluding net unrealized gain on investments is calculated by dividing (a) debt by (b) total capitalization excluding net unrealized gains and losses on investments, net of taxes.  Net unrealized gains and losses on investments can be significantly impacted by both interest rate movements and other economic factors.  Accordingly, in the opinion of the Company’s management, the debt-to-total capital ratio calculated on this basis provides another useful metric for investors to understand the Company’s financial leverage position.  The Company’s ratio of debt-to-total capital (excluding after-tax net unrealized investment gains) of 21.8% at June 30, 2015 was within the Company’s target range of 15% to 25%.

 

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RATINGS

 

Ratings are an important factor in assessing the Company’s competitive position in the insurance industry.  The Company receives ratings from the following major rating agencies: A.M. Best Company (A.M. Best), Fitch Ratings (Fitch), Moody’s Investors Service (Moody’s) and Standard & Poor’s (S&P).  The following rating agency actions were taken with respect to the Company since April 21, 2015, the date on which the Company’s Form 10-Q for the quarter ended March 31, 2015 was filed with the Securities and Exchange Commission.   For additional discussion of ratings, see “Part I—Item 1—Business—Ratings” in the Company’s 2014 Annual Report.

 

·                  On May 28, 2015, A.M. Best affirmed the financial strength ratings and the issuer credit ratings of the Travelers Reinsurance Pool as well as Travelers C&S Co. of America, First Floridian Auto and Home Insurance Co., The Premier Insurance Company of Massachusetts, Travelers C&S Co. of Europe, Ltd., Travelers Insurance Company of Canada and The Dominion of Canada General Insurance Company.  Concurrently, A.M. Best affirmed the issuer credit ratings and senior debt ratings of TRV and its two wholly-owned downstream holding companies, Travelers Property Casualty Corp. and Travelers Insurance Group Holdings, Inc.  The outlook for all ratings is stable.

 

·                  On June 9, 2015, Fitch affirmed all ratings of the Company.  The outlook for all ratings is stable.

 

CRITICAL ACCOUNTING ESTIMATES

 

For a description of the Company’s critical accounting estimates, refer to “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in the Company’s 2014 Annual Report.  The Company considers its most significant accounting estimates to be those applied to claims and claim adjustment expense reserves and related reinsurance recoverables, investment valuation and impairments, and goodwill and other intangible assets impairments. Except as shown in the table below, there have been no material changes to the Company’s critical accounting estimates since December 31, 2014.

 

Claims and Claim Adjustment Expense Reserves

 

The table below displays the Company’s gross claims and claim adjustment expense reserves by product line.  Additional liabilities may arise for amounts in excess of the current related reserves.  In addition, the Company’s estimate of claims and claim adjustment expenses may change. These additional liabilities or increases in estimates, or a range of either, cannot now be reasonably estimated and could result in income statement charges that could be material to the Company’s operating results in future periods. In particular, a portion of the Company’s gross claims and claim adjustment expense reserves (totaling $2.26 billion at June 30, 2015) are for asbestos and environmental claims and related litigation. While the ongoing review of asbestos and environmental claims and associated liabilities considers the inconsistencies of court decisions as to coverage, plaintiffs’ expanded theories of liability and the risks inherent in complex litigation and other uncertainties, in the opinion of the Company’s management, it is possible that the outcome of the continued uncertainties regarding these claims could result in liability in future periods that differs from current reserves by an amount that could be material to the Company’s future operating results. See the preceding discussion of “Asbestos Claims and Litigation” and “Environmental Claims and Litigation.”

 

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Gross claims and claim adjustment expense reserves by product line were as follows:

 

 

 

June 30, 2015

 

December 31, 2014

 

(in millions)

 

Case

 

IBNR

 

Total

 

Case

 

IBNR

 

Total

 

General liability

 

$

5,045

 

$

7,777

 

$

12,822

 

$

5,886

 

$

7,826

 

$

13,712

 

Commercial property

 

698

 

608

 

1,306

 

795

 

496

 

1,291

 

Commercial multi-peril

 

1,912

 

1,821

 

3,733

 

1,849

 

1,819

 

3,668

 

Commercial automobile

 

2,067

 

1,250

 

3,317

 

2,094

 

1,249

 

3,343

 

Workers’ compensation

 

10,201

 

8,320

 

18,521

 

10,067

 

8,191

 

18,258

 

Fidelity and surety

 

220

 

565

 

785

 

233

 

573

 

806

 

Personal automobile

 

1,709

 

831

 

2,540

 

1,737

 

848

 

2,585

 

Homeowners and personal—other

 

609

 

486

 

1,095

 

578

 

525

 

1,103

 

International and other

 

3,012

 

1,678

 

4,690

 

3,254

 

1,804

 

5,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property-casualty

 

25,473

 

23,336

 

48,809

 

26,493

 

23,331

 

49,824

 

Accident and health

 

24

 

 

24

 

26

 

 

26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Claims and claim adjustment expense reserves

 

$

25,497

 

$

23,336

 

$

48,833

 

$

26,519

 

$

23,331

 

$

49,850

 

 

The $1.02 billion decrease in gross claims and claim adjustment expense reserves since December 31, 2014 primarily reflected the impact of (i) payments related to operations in runoff, including a $579 million payment related to the settlement of the Asbestos Direct Action Litigation as described in more detail in note 11 of notes to the unaudited consolidated financial statements herein, (ii) net favorable prior year reserve development and (iii) changes in foreign currency exchange rates.

 

Asbestos and environmental reserves are included in the General liability, Commercial multi-peril and International and other lines in the summary table above.  Asbestos and environmental reserves are discussed separately; see “Asbestos Claims and Litigation”, “Environmental Claims and Litigation” and “Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves” in this report.

 

FUTURE APPLICATION OF ACCOUNTING STANDARDS

 

See note 1 of notes to the Company’s unaudited consolidated financial statements contained in this quarterly report and in the Company’s 2014 Annual Report for a discussion of recently issued accounting pronouncements.

 

FORWARD-LOOKING STATEMENTS

 

This report contains, and management may make, certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements, other than statements of historical facts, may be forward-looking statements.  Words such as “may,” “will,” “should,” “likely,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates” and similar expressions are used to identify these forward-looking statements. Specifically, statements about the Company’s outlook, share repurchase plans, expected margin improvement, potential returns, future pension plan contributions and the potential impact of investment markets and other economic conditions on the Company’s investment portfolio and underwriting results, among others, are forward looking, and the Company may also make forward-looking statements about, among other things:

 

·                  its results of operations and financial condition (including, among other things, premium volume, premium rates, net and operating income, investment income and performance, loss costs, return on equity, and expected current returns and combined ratios);

·                  the sufficiency of the Company’s asbestos and other reserves;

·                  the impact of emerging claims issues as well as other insurance and non-insurance litigation;

·                  the cost and availability of reinsurance coverage;

·                  catastrophe losses;

·                  the impact of investment, economic (including rapid changes in commodity prices, such as a significant decline in oil and gas prices, as well as fluctuations in foreign currency exchange rates) and underwriting market conditions; and

 

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·                  strategic initiatives, including initiatives, such as in Personal Insurance, to improve profitability and competitiveness.

 

The Company cautions investors that such statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond the Company’s control, that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements.

 

Some of the factors that could cause actual results to differ include, but are not limited to, the following:

 

·                  catastrophe losses could materially and adversely affect the Company’s results of operations, its financial position and/or liquidity, and could adversely impact the Company’s ratings, the Company’s ability to raise capital and the availability and cost of reinsurance;

·                  during or following a period of financial market disruption or economic downturn, the Company’s business could be materially and adversely affected;

·                  if actual claims exceed the Company’s claims and claim adjustment expense reserves, or if changes in the estimated level of claims and claim adjustment expense reserves are necessary, the Company’s financial results could be materially and adversely affected;

·                  the Company’s investment portfolio may suffer reduced returns or material realized or unrealized losses;

·                  the Company’s business could be harmed because of its potential exposure to asbestos and environmental claims and related litigation;

·                  the Company is exposed to, and may face adverse developments involving, mass tort claims such as those relating to exposure to potentially harmful products or substances;

·                  the effects of emerging claim and coverage issues on the Company’s business are uncertain;

·                  the intense competition that the Company faces could harm its ability to maintain or increase its business volumes and its profitability;

·                  consolidation within the insurance industry, including among insurance companies, reinsurance companies and brokers and independent insurance agencies, could alter the competitive environment in which the Company operates, which may impact the Company’s premium volume, the rate it can charge for its products, and the terms on which its products are offered;

·                  the Company may not be able to collect all amounts due to it from reinsurers and reinsurance coverage may not be available to the Company in the future at commercially reasonable rates or at all;

·                  the Company is exposed to credit risk in certain of its business and investment operations including reinsurance or structured settlements;

·                  within the United States, the Company’s businesses are heavily regulated by the states in which it conducts business, including licensing and supervision, and changes in regulation may reduce the Company’s profitability and limit its growth;

·                  changes in federal regulation could impose significant burdens on the Company and otherwise adversely impact the Company’s results;

·                  a downgrade in the Company’s claims-paying and financial strength ratings could adversely impact the Company’s business volumes, adversely impact the Company’s ability to access the capital markets and increase the Company’s borrowing costs;

·                  the inability of the Company’s insurance subsidiaries to pay dividends to the Company’s holding company in sufficient amounts would harm the Company’s ability to meet its obligations, pay future shareholder dividends or make future share repurchases;

·                  disruptions to the Company’s relationships with its independent agents and brokers could adversely affect the Company;

·                  the Company’s efforts to develop new products or expand in targeted markets may not be successful and may create enhanced risks;

·                  the Company may be adversely affected if its pricing and capital models provide materially different indications than actual results;

·                  the Company’s business success and profitability depend, in part, on effective information technology systems and on continuing to develop and implement improvements in technology;

·                  if the Company experiences difficulties with technology, data and network security and/or outsourcing relationships, including cloud-based, the Company’s ability to conduct its business could be negatively impacted;

 

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·                  the Company is subject to a number of risks associated with its business outside the United States;

·                  new regulations outside of the United States, including in the European Union, could adversely impact the Company’s results of operations and limit its growth;

·                  loss of or significant restrictions on the use of particular types of underwriting criteria, such as credit scoring, or other data or methodologies, in the pricing and underwriting of the Company’s products could reduce the Company’s future profitability;

·                  acquisitions and integration of acquired businesses may result in operating difficulties and other unintended consequences;

·                  the Company could be adversely affected if its controls designed to ensure compliance with guidelines, policies and legal and regulatory standards are not effective;

·                  the Company’s businesses may be adversely affected if it is unable to hire and retain qualified employees;

·                  intellectual property is important to the Company’s business, and the Company may be unable to protect and enforce its own intellectual property or the Company may be subject to claims for infringing the intellectual property of others;

·                  changes to existing accounting standards may adversely impact the Company’s reported results;

·                  changes in U.S. tax laws or in the tax laws of other jurisdictions in which the Company operates could adversely impact the Company; and

·                  the Company’s share repurchase plans depend on a variety of factors, including the Company’s financial position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Company’s desired ratings from independent rating agencies, funding of the Company’s qualified pension plan, capital requirements of the Company’s operating subsidiaries, legal requirements, regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions and other factors.

 

The Company’s forward-looking statements speak only as of the date of this report or as of the date they are made, and the Company undertakes no obligation to update forward-looking statements.  For a more detailed discussion of these factors, see the information under the caption “Part IItem 1A—Risk Factors” in the Company’s 2014 Annual Report filed with the Securities and Exchange Commission and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in the Company’s 2014 Annual Report.

 

WEBSITE AND SOCIAL MEDIA DISCLOSURE

 

From time to time, the Company may use its website and/or social media outlets, such as Facebook and Twitter, as distribution channels of material company information.  Financial and other important information regarding the Company is routinely posted on and accessible through and posted on the Company’s website at http://investor.travelers.com, its Facebook page at http://www.facebook.com/travelers and its Twitter account (@Travelers) at http://twitter.com/Travelers.  In addition, you may automatically receive email alerts and other information about the Company when you enroll your email address by visiting the “Email Notifications” section at http://investor.travelers.com.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

For the Company’s disclosures about market risk, please see “Part II—Item 7A—Quantitative and Qualitative Disclosures About Market Risk” in the Company’s 2014 Annual Report filed with the Securities and Exchange Commission.  There have been no material changes to the Company’s disclosures about market risk in Part II—Item 7A of the Company’s 2014 Annual Report.

 

Item 4. CONTROLS AND PROCEDURES

 

The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the

 

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effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2015.  Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2015, the design and operation of the Company’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.

 

In addition, there was no change in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

Item 1.         LEGAL PROCEEDINGS

 

The information required with respect to this item can be found under “Contingencies” in note 11 of notes to the Company’s unaudited consolidated financial statements contained in this quarterly report and is incorporated by reference into this Item 1.

 

Item 1A.  RISK FACTORS

 

For a discussion of the Company’s potential risks or uncertainties, please see “Part IItem 1A—Risk Factors” in the Company’s 2014 Annual Report filed with the Securities and Exchange Commission.  In addition, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Outlook” and “—Critical Accounting Estimates” herein and in the Company’s 2014 Annual Report.  There have been no material changes to the risk factors disclosed in Part I—Item 1A of the Company’s 2014 Annual Report.

 

Item 2.         UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On April 21, 2015, the board of directors approved a share repurchase authorization that added an additional $5.0 billion of repurchase capacity.

 

The table below sets forth information regarding repurchases by the Company of its common stock during the periods indicated.

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period Beginning

 

Period Ending

 

Total number of
shares
purchased

 

Average price paid
per share

 

Total number of
shares purchased
as part of
publicly announced
plans or programs

 

Approximate
dollar value of
shares that may
yet be purchased
under the
plans or programs
(in millions)

 

April 1, 2015

 

April 30, 2015

 

1,147,974

 

$

103.15

 

1,146,800

 

$

5,766

 

May 1, 2015

 

May 31, 2015

 

3,936,363

 

$

102.50

 

3,935,528

 

$

5,362

 

June 1, 2015

 

June 30, 2015

 

2,792,689

 

$

99.76

 

2,790,250

 

$

5,084

 

Total

 

 

 

7,877,026

 

$

101.62

 

7,872,578

 

$

5,084

 

 

The Company’s board of directors has approved common share repurchase authorizations under which repurchases may be made from time to time in the open market, pursuant to pre-set trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, in private transactions or otherwise.  The authorizations do not have a stated expiration date.  The timing and actual number of shares to be repurchased in the future will depend on a variety of factors, including the Company’s financial position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Company’s desired ratings from independent rating agencies, funding of the Company’s qualified pension plan, capital requirements of the Company’s operating subsidiaries, legal requirements, regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions and other factors.

 

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The Company acquired 4,448 shares for a total cost of approximately $0.5 million during the three months ended June 30, 2015 that were not part of the publicly announced share repurchase authorization.  These shares consisted of shares retained to cover payroll withholding taxes in connection with the vesting of restricted stock awards and shares used by employees to cover the exercise price of certain stock options that were exercised.

 

Item 5.         OTHER INFORMATION

 

Executive Ownership and Sales.  All of the Company’s executive officers hold equity in the Company in excess of the required level under the Company’s executive stock ownership policy.  For a summary of this policy as currently in effect, see “Compensation Discussion and Analysis — Stock Ownership Guidelines, Anti-Hedging and Pledging Policies, and Other Trading Restrictions” in the Company’s proxy statement filed with the Securities and Exchange Commission on April 3, 2015.  From time to time, some of the Company’s executives may determine that it is advisable to diversify their investments for personal financial planning reasons, or may seek liquidity for other reasons, and may sell shares of common stock of the Company in the open market, in private transactions or to the Company.  To effect such sales, some of the Company’s executives have entered into, and may in the future enter into, trading plans designed to comply with the Company’s Securities Trading Policy and the provisions of Rule 10b5-1 under the Securities Exchange Act of 1934.  The trading plans will not reduce any of the executives’ ownership of the Company’s shares below the applicable executive stock ownership guidelines.  The Company does not undertake any obligation to report Rule 10b5-1 plans that may be adopted by any employee or director of the Company in the future, or to report any modifications or termination of any publicly announced plan.

 

As of the date of this report, Jay S. Fishman, Chairman and Chief Executive Officer, and Jay S. Benet, Vice Chairman and Chief Financial Officer, were the only “named executive officers” (i.e., an executive officer named in the compensation disclosures in the Company’s most recent proxy statement) that have entered into Rule 10b5-1 trading plans that remain in effect. The trading plans extend from approximately one to four months from the date of this report. Under the Company’s stock ownership guidelines, Mr. Fishman has a target ownership level established as the lesser of 150,000 shares or the equivalent value of 500% of base salary, and Mr. Benet has a target ownership level established as the lesser of 30,000 shares or the equivalent value of 300% of base salary (as such amount is calculated for purposes of the stock ownership guidelines).

 

Item 6.         EXHIBITS

 

See Exhibit Index.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, The Travelers Companies, Inc. has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

THE TRAVELERS COMPANIES, INC.

 

 

(Registrant)

 

 

 

Date: July 21, 2015

By

/S/   KENNETH F. SPENCE III

 

 

Kenneth F. Spence III

Executive Vice President and General Counsel

(Authorized Signatory)

 

 

 

Date: July 21, 2015

By

/S/    DOUGLAS K. RUSSELL

 

 

Douglas K. Russell

Senior Vice President and Corporate Controller

(Principal Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit Number

 

Description of Exhibit

 

 

 

3.1

 

Amended and Restated Articles of Incorporation of The Travelers Companies, Inc. (the Company), as amended and restated May 23, 2013, were filed as Exhibit 3.1 to the Company’s current report on Form 8-K filed on May 24, 2013, and are incorporated herein by reference.

 

 

 

3.2

 

Amended and Restated Bylaws of the Company, effective as of August 5, 2014, were filed as Exhibit 3.2 to the Company’s current report on Form 8-K filed on August 11, 2014, and are incorporated herein by reference.

 

 

 

12.1†

 

Statement regarding the computation of the ratio of earnings to fixed charges.

 

 

 

31.1†

 

Certification of Jay S. Fishman, Chairman and Chief Executive Officer of the Company, as required by Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2†

 

Certification of Jay S. Benet, Vice Chairman and Chief Financial Officer of the Company, as required by Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1†

 

Certification of Jay S. Fishman, Chairman and Chief Executive Officer of the Company, as required by Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2†

 

Certification of Jay S. Benet, Vice Chairman and Chief Financial Officer of the Company, as required by Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.1†

 

The following financial information from The Travelers Companies, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 formatted in XBRL: (i) Consolidated Statement of Income for the three months and six months ended June 30, 2015 and 2014; (ii) Consolidated Statement of Comprehensive Income for the three months and six months ended June 30, 2015 and 2014; (iii) Consolidated Balance Sheet at June 30, 2015 and December 31, 2014; (iv) Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2015 and 2014; (v) Consolidated Statement of Cash Flows for the six months ended June 30, 2015 and 2014; and (vi) Notes to Consolidated Financial Statements.

 


                          Filed herewith.

 

The total amount of securities authorized pursuant to any instrument defining rights of holders of long-term debt of the Company does not exceed 10% of the total assets of the Company and its consolidated subsidiaries.  Therefore, the Company is not filing any instruments evidencing long-term debt.  However, the Company will furnish copies of any such instrument to the Securities and Exchange Commission upon request.

 

Copies of any of the exhibits referred to above will be furnished to security holders who make written request therefor to The Travelers Companies, Inc., 385 Washington Street, Saint Paul, MN 55102, Attention: Corporate Secretary.

 

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than the terms of the agreements or other documents themselves, and you should not rely on them for that purpose.  In particular, any representations and warranties made by the Company in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs at the date they were made or at any other time.

 

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