Edgar Filing: TRAVELERS COMPANIES, INC.

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2016

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 18, 2016 was 288,281,317.

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The Travelers Companies, Inc.

Quarterly Report on Form 10-Q

For Quarterly Period Ended June 30, 2016

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		Page

Part I — Financial Information

Item 1.	Financial Statements:

	Consolidated Statement of Income (Unaudited) — Three Months and Six Months Ended June 30, 2016 and 2015	3

	Consolidated Statement of Comprehensive Income (Unaudited) — Three Months and Six Months Ended June 30, 2016 and 2015	4

	Consolidated Balance Sheet — June 30, 2016 (Unaudited) and December 31, 2015	5

	Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) — Six Months Ended June 30, 2016 and 2015	6

	Consolidated Statement of Cash Flows (Unaudited) — Six Months Ended June 30, 2016 and 2015	7

	Notes to Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	73

Item 4.	Controls and Procedures	73

Part II — Other Information

Item 1.	Legal Proceedings	73

Item 1A.	Risk Factors	74

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	74

Item 5.	Other Information	74

Item 6.	Exhibits	75

	SIGNATURES	75

	EXHIBIT INDEX	76

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PART 1 — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

(in millions, except per share amounts)

	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015

Revenues
Premiums	$	6,067	$	5,931	$	12,048	$	11,819
Net investment income	549		632		1,093		1,224
Fee income	119		115		236		229
Net realized investment gains (1)	19		10		10		20
Other revenues	31		22		84		47
Total revenues	6,785		6,710		13,471		13,339

Claims and expenses
Claims and claim adjustment expenses	3,762		3,547		7,474		6,978
Amortization of deferred acquisition costs	989		963		1,960		1,926
General and administrative expenses	1,054		1,032		2,049		2,027
Interest expense	93		92		184		184
Total claims and expenses	5,898		5,634		11,667		11,115

Income before income taxes	887		1,076		1,804		2,224
Income tax expense	223		264		449		579
Net income	$	664	$	812	$	1,355	$	1,645

Net income per share
Basic	$	2.27	$	2.56	$	4.60	$	5.14
Diluted	$	2.24	$	2.53	$	4.55	$	5.08

Weighted average number of common shares outstanding
Basic	290.1		314.8		292.1		317.7
Diluted	293.6		318.0		295.6		321.2

Cash dividends declared per common share	$	0.67	$	0.61	$	1.28	$	1.16

(1) Total other-than-temporary impairment (OTTI) losses were $(4) million and $(8) million for the three months ended June 30, 2016 and 2015, respectively, and $(32) million and $(12) million for the six months ended June 30, 2016 and 2015, respectively. Of total OTTI, credit losses of $(4) million and $(6) million for the three months ended June 30, 2016 and 2015, respectively, and $(22) million and $(9) million for the six months ended June 30, 2016 and 2015, respectively, were recognized in net realized investment gains. In addition, unrealized gains (losses) from other changes in total OTTI of $0 million and $(2) million for the three months ended June 30, 2016 and 2015, respectively, and $(10) million and $(3) million for the six months ended June 30, 2016 and 2015, respectively, were recognized in other comprehensive income (loss) as part of changes in net unrealized gains on investment securities having credit losses recognized in the consolidated statement of income.

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

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

(in millions)

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016		2015

Net income	$	664		$	812		$	1,355	$	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	879			(1,065		)	1,593		(896		)
Having credit losses recognized in the consolidated statement of income	12			(5		)	17		(10		)
Net changes in benefit plan assets and obligations	18			23			34		47
Net changes in unrealized foreign currency translation	(35		)	94			68		(180		)

Other comprehensive income (loss) before income taxes	874			(953		)	1,712		(1,039		)
Income tax expense (benefit)	323			(353		)	590		(328		)

Other comprehensive income (loss), net of taxes	551			(600		)	1,122		(711		)
Comprehensive income	$	1,215		$	212		$	2,477	$	934

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

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in millions)

	June 30, 2016			December 31, 2015
	(Unaudited)
Assets
Fixed maturities, available for sale, at fair value (amortized cost $59,975 and $58,878)	$	63,311		$	60,658
Equity securities, available for sale, at fair value (cost $525 and $528)	752			705
Real estate investments	929			989
Short-term securities	3,988			4,671
Other investments	3,490			3,447
Total investments	72,470			70,470

Cash	265			380
Investment income accrued	627			642
Premiums receivable	7,014			6,437
Reinsurance recoverables	8,603			8,910
Ceded unearned premiums	726			656
Deferred acquisition costs	1,954			1,849
Deferred taxes	—			296
Contractholder receivables	4,541			4,374
Goodwill	3,588			3,573
Other intangible assets	274			279
Other assets	2,384			2,318
Total assets	$	102,446		$	100,184

Liabilities
Claims and claim adjustment expense reserves	$	47,953		$	48,295
Unearned premium reserves	12,520			11,971
Contractholder payables	4,541			4,374
Payables for reinsurance premiums	401			296
Deferred taxes	370			—
Debt	6,436			6,344
Other liabilities	5,511			5,306
Total liabilities	77,732			76,586

Shareholders’ equity
Common stock (1,750.0 shares authorized; 288.3 and 295.9 shares issued and outstanding)	22,349			22,172
Retained earnings	30,921			29,945
Accumulated other comprehensive income (loss)	965			(157		)
Treasury stock, at cost (478.1 and 467.6 shares)	(29,521		)	(28,362		)
Total shareholders’ equity	24,714			23,598
Total liabilities and shareholders’ equity	$	102,446		$	100,184

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

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(in millions)

For the six months ended June 30,	2016			2015
Common stock
Balance, beginning of year	$	22,172		$	21,843
Employee share-based compensation	95			87
Compensation amortization under share-based plans and other changes	82			109
Balance, end of period	22,349			22,039

Retained earnings
Balance, beginning of year	29,945			27,251
Net income	1,355			1,645
Dividends	(378		)	(372		)
Other	(1		)	—
Balance, end of period	30,921			28,524

Accumulated other comprehensive income (loss), net of tax
Balance, beginning of year	(157		)	880
Other comprehensive income (loss)	1,122			(711		)
Balance, end of period	965			169

Treasury stock (at cost)
Balance, beginning of year	(28,362		)	(25,138		)
Treasury stock acquired — share repurchase authorization	(1,100		)	(1,400		)
Net shares acquired related to employee share-based compensation plans	(59		)	(73		)
Balance, end of period	(29,521		)	(26,611		)
Total shareholders’ equity	$	24,714		$	24,121

Common shares outstanding
Balance, beginning of year	295.9			322.2
Treasury stock acquired — share repurchase authorization	(10.0		)	(13.5		)
Net shares issued under employee share-based compensation plans	2.4			2.5
Balance, end of period	288.3			311.2

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

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

(in millions)

For the six months ended June 30,	2016			2015
Cash flows from operating activities
Net income	$	1,355		$	1,645
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment gains	(10		)	(20		)
Depreciation and amortization	413			429
Deferred federal income tax expense	75			142
Amortization of deferred acquisition costs	1,960			1,926
Equity in income from other investments	(44		)	(134		)
Premiums receivable	(567		)	(486		)
Reinsurance recoverables	316			263
Deferred acquisition costs	(2,062		)	(1,991		)
Claims and claim adjustment expense reserves	(387		)	(826		)
Unearned premium reserves	531			362
Other	(287		)	(435		)
Net cash provided by operating activities	1,293			875

Cash flows from investing activities
Proceeds from maturities of fixed maturities	3,773			5,314
Proceeds from sales of investments:
Fixed maturities	739			1,226
Equity securities	38			28
Real estate investments	69			10
Other investments	343			354
Purchases of investments:
Fixed maturities	(5,705		)	(6,239		)
Equity securities	(26		)	(22		)
Real estate investments	(20		)	(69		)
Other investments	(290		)	(275		)
Net sales of short-term securities	681			433
Securities transactions in course of settlement	461			183
Other	(154		)	(178		)
Net cash provided by (used in) investing activities	(91		)	765

Cash flows from financing activities
Treasury stock acquired — share repurchase authorization	(1,100		)	(1,400		)
Treasury stock acquired — net employee share-based compensation	(59		)	(72		)
Dividends paid to shareholders	(375		)	(369		)
Payment of debt	(400		)	—
Issuance of debt	491			—
Issuance of common stock — employee share options	129			117
Excess tax benefits from share-based payment arrangements	—			31
Net cash used in financing activities	(1,314		)	(1,693		)

Effect of exchange rate changes on cash	(3		)	(4		)
Net decrease in cash	(115		)	(57		)
Cash at beginning of year	380			374
Cash at end of period	$	265		$	317

Supplemental disclosure of cash flow information
Income taxes paid	$	467		$	597
Interest paid	$	180		$	183

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

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Basis of Presentation

The interim consolidated financial statements include the accounts of The Travelers Companies, Inc. (together with its subsidiaries, the Company). These financial statements are prepared in conformity with U.S. generally accepted accounting principles (GAAP) and are unaudited. In the opinion of the Company’s management, all adjustments necessary for a fair presentation have been reflected. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted. All material intercompany transactions and balances have been eliminated. The accompanying interim consolidated financial statements and related notes should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the Company’s 2015 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 2015 financial statements to conform to the 2016 presentation.

Adoption of Accounting Standards

Compensation — Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period

In June 2014, the Financial Accounting Standards Board (FASB) issued updated guidance to resolve diversity in practice concerning employee share-based payments that contain performance targets that could be achieved after the requisite service period. The updated guidance requires that a performance target that affects vesting and that can be achieved after the requisite service period be treated as a performance condition. As such, the performance target that affects vesting should not be reflected in estimating the fair value of the award at the grant date. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which service has been rendered. If the performance target becomes probable of being achieved before the end of the service period, the remaining unrecognized compensation cost for which requisite service has not yet been rendered is recognized prospectively over the remaining service period. The total amount of compensation cost recognized during and after the service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The updated guidance was effective for reporting periods beginning after December 15, 2015. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

Derivatives and Hedging: Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity

In November 2014, the FASB issued updated guidance to clarify when the separation of certain embedded derivative features in a hybrid financial instrument that is issued in the form of a share is required. That is, an entity will continue to evaluate whether the economic characteristics and risks of the embedded derivative feature are clearly and closely related to those of the host contract. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument. The updated guidance was effective for reporting periods beginning after December 15, 2015. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES, Continued

Consolidation: 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 was effective for reporting periods beginning after December 15, 2015. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

Interest — Imputation of Interest: 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 reported as interest expense. The recognition and measurement guidance for debt issuance costs are not affected by the updated guidance. The updated guidance was effective for reporting periods beginning after December 15, 2015. The updated guidance is consistent with the Company’s accounting policy and its adoption did not have any effect on the Company’s results of operations, financial position or liquidity.

Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments

In September 2015, the FASB issued updated guidance regarding business combinations that requires an acquirer to recognize post-close measurement adjustments for provisional amounts in the period the adjustment amounts are determined rather than retrospectively. The acquirer is also required to recognize, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the provisional amount, calculated as if the accounting had been completed at the acquisition date. The updated guidance is to be applied prospectively effective for reporting periods beginning after December 15, 2015. In connection with business combinations which have already been completed, the adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

Compensation — Stock Compensation: Improvements to Employee Share-Based Payment Accounting

In March 2016, the FASB issued updated guidance to simplify several aspects of accounting for share-based payment transactions as follows:

Accounting for Income Taxes

Under current accounting guidance, if the deduction for a share-based payment award for tax purposes exceeds, or is less than, the compensation cost recognized for financial reporting purposes, the resulting excess tax benefit, or tax deficiency, is reported as part of additional paid-in capital. Under the updated guidance, these excess tax benefits, or tax deficiencies, are reported as part of income tax expense or benefit in the income statement. The updated guidance also removes the requirement to delay recognition of any excess tax benefit when there are no current taxes payable to which the benefit would be applied. The tax-related cash flows resulting from share-based payments are to be included with other income tax cash flows as an operating activity rather than being reported separately as a financing activity.

Forfeitures

The updated guidance permits an entity to make an accounting policy election to either account for forfeitures when they occur or continue to apply the current method of accruing the compensation cost based on the number of awards that are expected to vest.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES, Continued

Minimum Statutory Tax Withholding Requirements

The updated guidance changes the threshold amount an entity can withhold for taxes when settling an equity award and still qualify for equity classification. A company can withhold up to the maximum statutory tax rates in the employees’ applicable jurisdiction rather than withholding up to the employers’ minimum statutory withholding requirement. The update also clarifies that all cash payments made to taxing authorities on behalf of employees for withheld shares are to be presented in financing activities on the statement of cash flows.

Transition

The updated guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted in any interim period; if early adoption is elected, the entity must adopt all of the amendments in the same reporting period and reflect any adjustments as of the beginning of the fiscal year.

The Company adopted the updated guidance effective January 1, 2016. With respect to the forfeiture accounting policy election, the Company elected to retain its policy of accruing the compensation cost based on the number of awards that are expected to vest. The adoption did not result in any cumulative effect adjustments or restatement and did not have a material effect on the Company’s results of operations, financial position or liquidity.

Accounting Standards Not Yet Adopted

Leases

In February 2016, the FASB issued updated guidance to require lessees to recognize a right-to-use asset and a lease liability for leases with terms of more than 12 months. The updated guidance retains the two classifications of a lease as either an operating or finance lease (previously referred to as a capital lease). Both lease classifications require the lessee to record the right-to-use asset and the lease liability based upon the present value of cash flows. Finance leases will reflect the financial arrangement by recognizing interest expense on the lease liability separately from the amortization expense of the right-to-use asset. Operating leases will recognize lease expense (with no separate recognition of interest expense) on a straight-line basis over the term of the lease. The accounting by lessors is not significantly changed by the updated guidance. The updated guidance requires expanded qualitative and quantitative disclosures, including additional information about the amounts recorded in the financial statements.

The updated guidance is effective for reporting periods beginning after December 15, 2018, and will require that the earliest comparative period presented include the measurement and recognition of existing leases with an adjustment to equity as if the updated guidance had always been applied. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

Investments — Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting

In March 2016, the FASB issued updated guidance that eliminates the requirement to retroactively apply the equity method of accounting when an investment that was previously accounted for using another method of accounting becomes qualified to apply the equity method due to an increase in the level of ownership interest or degree of influence. If the investment was previously accounted for as an available-for-sale security, any related unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for the equity method is recognized through earnings. The updated guidance is effective for reporting periods beginning after December 15, 2016, and is to be applied prospectively. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES, Continued

Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments

In March 2016, the FASB issued updated guidance clarifying that when a call (put) option in a debt instrument can accelerate the repayment of principal on the debt instrument, a reporting entity does not need to assess whether the contingent event that triggers the ability to exercise the call (put) option is related to interest rates or credit risk in determining whether the option should be accounted for separately. The updated guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued updated guidance for the accounting for credit losses for financial instruments. The updated guidance applies a new credit loss model (current expected credit losses or CECL) for determining credit-related impairments for financial instruments measured at amortized cost (e.g. reinsurance recoverables) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected.

The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists.

The updated guidance is effective for reporting periods beginning after December 15, 2019. Early adoption is permitted for reporting periods beginning after December 15, 2018. The Company will not be able to determine the impact that the updated guidance will have on its results of operations, financial position or liquidity until the updated guidance is adopted.

Additional Accounting Standards Not Yet Adopted

For information regarding additional accounting standards that the Company has not yet adopted, see the “Other Accounting Standards Not Yet Adopted” section of note 1 of notes to the consolidated financial statements in the Company’s 2015 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 2015 Annual Report.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

2. SEGMENT INFORMATION

The following tables summarize the components of the Company’s operating 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
2016
Premiums	$	3,631	$	518	$	1,918	$	6,067
Net investment income	420		51		78		549
Fee income	115		—		4		119
Other revenues	8		6		14		28
Total operating revenues (1)	$	4,174	$	575	$	2,014	$	6,763
Operating income (1)	$	393	$	202	$	116	$	711

2015
Premiums	$	3,609	$	524	$	1,798	$	5,931
Net investment income	487		57		88		632
Fee income	111		—		4		115
Other revenues	5		5		12		22
Total operating revenues (1)	$	4,212	$	586	$	1,902	$	6,700
Operating income (1)	$	543	$	151	$	174	$	868

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

(for the six months ended June 30, in millions)	Business and International Insurance		Bond & Specialty Insurance		Personal Insurance		Total Reportable Segments
2016
Premiums	$	7,230	$	1,026	$	3,792	$	12,048
Net investment income	835		103		155		1,093
Fee income	229		—		7		236
Other revenues	41		9		28		78
Total operating revenues (1)	$	8,335	$	1,138	$	3,982	$	13,455
Operating income (1)	$	869	$	346	$	255	$	1,470

2015
Premiums	$	7,229	$	1,028	$	3,562	$	11,819
Net investment income	941		113		170		1,224
Fee income	222		—		7		229
Other revenues	13		10		24		47
Total operating revenues (1)	$	8,405	$	1,151	$	3,763	$	13,319
Operating income (1)	$	1,058	$	275	$	426	$	1,759

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

2. SEGMENT INFORMATION, Continued

Business Segment Reconciliations

	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2016			2015			2016			2015
Revenue reconciliation
Earned premiums
Business and International Insurance:
Domestic:
Workers’ compensation	$	987		$	957		$	1,968		$	1,919
Commercial automobile	503			477			994			945
Commercial property	442			440			879			880
General liability	485			469			967			937
Commercial multi-peril	786			779			1,568			1,553
Other	9			10			14			20
Total Domestic	3,212			3,132			6,390			6,254
International	419			477			840			975
Total Business and International Insurance	3,631			3,609			7,230			7,229

Bond & Specialty Insurance:
Fidelity and surety	239			240			469			465
General liability	235			240			469			476
Other	44			44			88			87
Total Bond & Specialty Insurance	518			524			1,026			1,028

Personal Insurance:
Automobile	974			863			1,910			1,699
Homeowners and Other	944			935			1,882			1,863
Total Personal Insurance	1,918			1,798			3,792			3,562
Total earned premiums	6,067			5,931			12,048			11,819
Net investment income	549			632			1,093			1,224
Fee income	119			115			236			229
Other revenues	28			22			78			47
Total operating revenues for reportable segments	6,763			6,700			13,455			13,319
Other revenues	3			—			6			—
Net realized investment gains	19			10			10			20
Total consolidated revenues	$	6,785		$	6,710		$	13,471		$	13,339

Income reconciliation, net of tax
Total operating income for reportable segments	$	711		$	868		$	1,470		$	1,759
Interest Expense and Other (1)	(62		)	(62		)	(123		)	(126		)
Total operating income	649			806			1,347			1,633
Net realized investment gains	15			6			8			12
Total consolidated net income	$	664		$	812		$	1,355		$	1,645

(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, 2016 and 2015, and $120 million in each of the six months ended June 30, 2016 and 2015.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

2. SEGMENT INFORMATION, Continued

(in millions)	June 30, 2016		December 31, 2015
Asset reconciliation:
Business and International Insurance	$	81,214	$	79,692
Bond & Specialty Insurance	7,745		7,360
Personal Insurance	13,109		12,748
Total assets for reportable segments	102,068		99,800
Other assets (1)	378		384
Total consolidated assets	$	102,446	$	100,184

(1) The primary component of other assets at June 30, 2016 was other intangible assets and the primary components at December 31, 2015 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, 2016, in millions)

Cost

Gains

Losses

Value

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

2,038

2,073

Obligations of states, municipalities and political subdivisions:

Local general obligation

13,816

954

14,769

Revenue

10,270

787

—

11,057

State general obligation

1,958

124

—

2,082

Pre-refunded

5,490

234

—

5,724

Total obligations of states, municipalities and political subdivisions

31,534

2,099

33,632

Debt securities issued by foreign governments

1,745

—

1,801

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

1,702

132

1,833

All other corporate bonds

22,858

1,062

23,868

Redeemable preferred stock

—

104

Total

59,975

3,391

63,311

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

3. INVESTMENTS, Continued

	Amortized		Gross Unrealized				Fair
(at December 31, 2015, in millions)	Cost		Gains		Losses		Value
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities	$	2,202	$	8	$	16	$	2,194
Obligations of states, municipalities and political subdivisions:
Local general obligation	12,744		577		3		13,318
Revenue	9,492		472		4		9,960
State general obligation	1,978		97		2		2,073
Pre-refunded	5,813		247		—		6,060
Total obligations of states, municipalities and political subdivisions	30,027		1,393		9		31,411

Debt securities issued by foreign governments	1,829		45		1		1,873
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	1,863		124		6		1,981
All other corporate bonds	22,854		523		288		23,089
Redeemable preferred stock	103		7		—		110
Total	$	58,878	$	2,100	$	320	$	60,658

Pre-refunded bonds of $5.72 billion and $6.06 billion at June 30, 2016 and December 31, 2015, 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 $739 million and $1.23 billion during the six months ended June 30, 2016 and 2015, respectively. Gross gains of $46 million and $40 million and gross losses of $8 million and $3 million were realized on those sales during the six months ended June 30, 2016 and 2015, respectively.

Equity Securities

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

			Gross Unrealized				Fair
(at June 30, 2016, in millions)	Cost		Gains		Losses		Value
Public common stock	$	386	$	214	$	3	$	597
Non-redeemable preferred stock	139		23		7		155
Total	$	525	$	237	$	10	$	752

			Gross Unrealized				Fair
(at December 31, 2015, in millions)	Cost		Gains		Losses		Value
Public common stock	$	386	$	164	$	7	$	543
Non-redeemable preferred stock	142		26		6		162
Total	$	528	$	190	$	13	$	705

Proceeds from sales of equity securities classified as available for sale were $38 million and $28 million during the six months ended June 30, 2016 and 2015, respectively. Gross gains of $8 million and $5 million and gross losses of $2 million and $3 million were realized on those sales during the six months ended June 30, 2016 and 2015, respectively.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

3. INVESTMENTS, Continued

Unrealized Investment Losses

The following tables summarize, for all investments in an unrealized loss position at June 30, 2016 and December 31, 2015, 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 2015 Annual Report.

	Less than 12 months				12 months or longer				Total
(at June 30, 2016, 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	$	37	$	—	$	10	$	1	$	47	$	1
Obligations of states, municipalities and political subdivisions	639		1		14		—		653		1
Debt securities issued by foreign governments	3		—		—		—		3		—
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	42		—		37		1		79		1
All other corporate bonds	779		12		720		40		1,499		52
Redeemable preferred stock	7		—		—		—		7		—
Total fixed maturities	1,507		13		781		42		2,288		55

Equity securities
Public common stock	24		2		34		1		58		3
Non-redeemable preferred stock	30		1		58		6		88		7
Total equity securities	54		3		92		7		146		10
Total	$	1,561	$	16	$	873	$	49	$	2,434	$	65

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

3. INVESTMENTS, Continued

	Less than 12 months				12 months or longer				Total
(at December 31, 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	$	1,820	$	15	$	28	$	1	$	1,848	$	16
Obligations of states, municipalities and political subdivisions	928		7		142		2		1,070		9
Debt securities issued by foreign governments	172		1		—		—		172		1
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	473		4		57		2		530		6
All other corporate bonds	7,725		197		710		91		8,435		288
Redeemable preferred stock	8		—		—		—		8		—
Total fixed maturities	11,126		224		937		96		12,063		320

Equity securities
Public common stock	48		6		33		1		81		7
Non-redeemable preferred stock	47		3		38		3		85		6
Total equity securities	95		9		71		4		166		13
Total	$	11,221	$	233	$	1,008	$	100	$	12,229	$	333

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, 2016 totaled $11 million, representing less than 1% of the combined fixed maturity and equity security portfolios on a pre-tax 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 $4 million and $6 million for the three months ended June 30, 2016 and 2015, respectively, and $22 million and $9 million for the six months ended June 30, 2016 and 2015, respectively.

For fixed maturities held at June 30, 2016 and 2015, the cumulative amount of credit losses recognized in the consolidated statement of income from other-than-temporary impairments (OTTI) was $88 million at both dates, on investments for which a portion of the OTTI was recognized in other comprehensive income (loss). These credit losses represent less than 1% of the fixed maturity portfolio on a pre-tax 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 six months ended June 30, 2016 and 2015 from that disclosed in note 3 of notes to the consolidated financial statements in the Company’s 2015 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 both June 30, 2016 and December 31, 2015, the Company had $400 million notional value of open U.S. Treasury futures contracts. Net realized investment gains and losses related to U.S. Treasury futures contracts in the three months and six months ended June 30, 2016 and 2015 were not significant.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

4. FAIR VALUE MEASUREMENTS

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

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

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

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

Valuation of Investments Reported at Fair Value in Financial Statements

The Company utilized a pricing service to estimate fair value measurements for approximately 98% of its fixed maturities at both June 30, 2016 and December 31, 2015.

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 $96 million and $101 million at June 30, 2016 and December 31, 2015, 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 $87 million and $117 million at June 30, 2016 and December 31, 2015, 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 2015 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, 2016 and December 31, 2015. An investment transferred between levels during a period is transferred at its fair value as of the beginning of that period.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

4. FAIR VALUE MEASUREMENTS, Continued

(at June 30, 2016, 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	$	2,073	$	2,073	$	—	$	—
Obligations of states, municipalities and political subdivisions	33,632		11		33,608		13
Debt securities issued by foreign governments	1,801		—		1,801		—
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	1,833		—		1,833		—
All other corporate bonds	23,868		3		23,702		163
Redeemable preferred stock	104		3		94		7
Total fixed maturities	63,311		2,090		61,038		183

Equity securities
Public common stock	597		597		—		—
Non-redeemable preferred stock	155		66		89		—
Total equity securities	752		663		89		—

Other investments	61		17		—		44
Total	$	64,124	$	2,770	$	61,127	$	227

(at December 31, 2015, in millions)	Total		Level 1		Level 2		Level 3

Invested assets:
Fixed maturities
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities	$	2,194	$	2,194	$	—	$	—
Obligations of states, municipalities and political subdivisions	31,411		—		31,398		13
Debt securities issued by foreign governments	1,873		—		1,873		—
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	1,981		—		1,957		24
All other corporate bonds	23,089		—		22,915		174
Redeemable preferred stock	110		3		100		7
Total fixed maturities	60,658		2,197		58,243		218

Equity securities
Public common stock	543		543		—		—
Non-redeemable preferred stock	162		55		107		—
Total equity securities	705		598		107		—

Other investments	56		18		—		38
Total	$	61,419	$	2,813	$	58,350	$	256

During the six months ended June 30, 2016 and the year ended December 31, 2015, 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, 2016 or the year ended December 31, 2015.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

4. FAIR VALUE MEASUREMENTS, Continued

Financial Instruments Disclosed, But Not Carried, At Fair Value

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, and the level within the fair value hierarchy at which such assets and liabilities are categorized.

(at June 30, 2016, in millions)	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Short-term securities	$	3,988	$	3,988	$	792	$	3,151	$	45

Financial liabilities:
Debt	$	6,336	$	7,743	$	—	$	7,743	$	—
Commercial paper	$	100	$	100	$	—	$	100	$	—

(at December 31, 2015, in millions)	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Short-term securities	$	4,671	$	4,671	$	1,685	$	2,958	$	28

Financial liabilities:
Debt	$	6,244	$	7,180	$	—	$	7,180	$	—
Commercial paper	$	100	$