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, 2017

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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)
		Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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, 2017 was 275,947,036.

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The Travelers Companies, Inc.

Quarterly Report on Form 10-Q

For Quarterly Period Ended June 30, 2017

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, 2017 and 2016	3

	Consolidated Statement of Comprehensive Income (Unaudited) — Three Months and Six Months Ended June 30, 2017 and 2016	4

	Consolidated Balance Sheet — June 30, 2017 (Unaudited) and December 31, 2016	5

	Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) — Six Months Ended June 30, 2017 and 2016	6

	Consolidated Statement of Cash Flows (Unaudited) — Six Months Ended June 30, 2017 and 2016	7

	Notes to Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	74

Item 4.	Controls and Procedures	74

	Part II — Other Information

Item 1.	Legal Proceedings	75

Item 1A.	Risk Factors	75

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	75

Item 5.	Other Information	76

Item 6.	Exhibits	76

	SIGNATURES	77

	EXHIBIT INDEX	78

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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,
	2017		2016		2017		2016

Revenues
Premiums	$	6,351	$	6,067	$	12,534	$	12,048
Net investment income	598		549		1,208		1,093
Fee income	116		119		229		236
Net realized investment gains (1)	80		19		85		10
Other revenues	39		31		70		84
Total revenues	7,184		6,785		14,126		13,471

Claims and expenses
Claims and claim adjustment expenses	4,225		3,762		8,319		7,474
Amortization of deferred acquisition costs	1,032		989		2,035		1,960
General and administrative expenses	1,045		1,054		2,041		2,049
Interest expense	92		93		181		184
Total claims and expenses	6,394		5,898		12,576		11,667

Income before income taxes	790		887		1,550		1,804
Income tax expense	195		223		338		449
Net income	$	595	$	664	$	1,212	$	1,355

Net income per share
Basic	$	2.13	$	2.27	$	4.32	$	4.60
Diluted	$	2.11	$	2.24	$	4.28	$	4.55

Weighted average number of common shares outstanding
Basic	277.5		290.1		278.6		292.1
Diluted	280.0		293.6		281.2		295.6

Cash dividends declared per common share	$	0.72	$	0.67	$	1.39	$	1.28

(1) Total other-than-temporary impairment (OTTI) losses were $(5) million and $(4) million for the three months ended June 30, 2017 and 2016, respectively, and $(6) million and $(32) million for the six months ended June 30, 2017 and 2016, respectively. Of total OTTI, credit losses of $(5) million and $(4) million for the three months ended June 30, 2017 and 2016, respectively, and $(7) million and $(22) million for the six months ended June 30, 2017 and 2016, respectively, were recognized in net realized investment gains. In addition, unrealized gains (losses) from other changes in total OTTI of $0 million for each of the three months ended June 30, 2017 and 2016, and $1 million and $(10) million for the six months ended June 30, 2017 and 2016, respectively, were recognized in other comprehensive income 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,
	2017		2016			2017		2016

Net income	$	595	$	664		$	1,212	$	1,355

Other comprehensive income:
Changes in net unrealized gains on investment securities:
Having no credit losses recognized in the consolidated statement of income	327		879			471		1,593
Having credit losses recognized in the consolidated statement of income	2		12			2		17
Net changes in benefit plan assets and obligations	17		18			34		34
Net changes in unrealized foreign currency translation	48		(35		)	89		68
Other comprehensive income before income taxes	394		874			596		1,712
Income tax expense	123		323			185		590
Other comprehensive income, net of taxes	271		551			411		1,122
Comprehensive income	$	866	$	1,215		$	1,623	$	2,477

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, 2017			December 31, 2016
	(Unaudited)
Assets
Fixed maturities, available for sale, at fair value (amortized cost $60,482 and $59,650)	$	61,907		$	60,515
Equity securities, available for sale, at fair value (cost $558 and $504)	700			732
Real estate investments	920			928
Short-term securities	5,292			4,865
Other investments	3,512			3,448
Total investments	72,331			70,488

Cash	328			307
Investment income accrued	602			630
Premiums receivable	7,345			6,722
Reinsurance recoverables	8,150			8,287
Ceded unearned premiums	665			589
Deferred acquisition costs	2,051			1,923
Deferred taxes	201			465
Contractholder receivables	4,700			4,609
Goodwill	3,589			3,580
Other intangible assets	264			268
Other assets	2,443			2,377
Total assets	$	102,669		$	100,245

Liabilities
Claims and claim adjustment expense reserves	$	48,574		$	47,949
Unearned premium reserves	13,052			12,329
Contractholder payables	4,700			4,609
Payables for reinsurance premiums	364			273
Debt	6,920			6,437
Other liabilities	5,201			5,427
Total liabilities	78,811			77,024

Shareholders’ equity
Common stock (1,750.0 shares authorized; 275.9 and 279.6 shares issued and outstanding)	22,781			22,614
Retained earnings	33,016			32,196
Accumulated other comprehensive loss	(344		)	(755		)
Treasury stock, at cost (495.7 and 489.5 shares)	(31,595		)	(30,834		)
Total shareholders’ equity	23,858			23,221
Total liabilities and shareholders’ equity	$	102,669		$	100,245

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,	2017			2016
Common stock
Balance, beginning of year	$	22,614		$	22,172
Employee share-based compensation	94			95
Compensation amortization under share-based plans and other changes	73			82
Balance, end of period	22,781			22,349

Retained earnings
Balance, beginning of year	32,196			29,945
Net income	1,212			1,355
Dividends	(391		)	(378		)
Other	(1		)	(1		)
Balance, end of period	33,016			30,921

Accumulated other comprehensive income (loss), net of tax
Balance, beginning of year	(755		)	(157		)
Other comprehensive income	411			1,122
Balance, end of period	(344		)	965

Treasury stock (at cost)
Balance, beginning of year	(30,834		)	(28,362		)
Treasury stock acquired — share repurchase authorization	(700		)	(1,100		)
Net shares acquired related to employee share-based compensation plans	(61		)	(59		)
Balance, end of period	(31,595		)	(29,521		)

Total shareholders’ equity	$	23,858		$	24,714

Common shares outstanding
Balance, beginning of year	279.6			295.9
Treasury stock acquired — share repurchase authorization	(5.7		)	(10.0		)
Net shares issued under employee share-based compensation plans	2.0			2.4
Balance, end of period	275.9			288.3

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,	2017			2016
Cash flows from operating activities
Net income	$	1,212		$	1,355
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment gains	(85		)	(10		)
Depreciation and amortization	409			413
Deferred federal income tax expense	106			75
Amortization of deferred acquisition costs	2,035			1,960
Equity in income from other investments	(210		)	(44		)
Premiums receivable	(609		)	(567		)
Reinsurance recoverables	157			316
Deferred acquisition costs	(2,157		)	(2,062		)
Claims and claim adjustment expense reserves	498			(387		)
Unearned premium reserves	689			531
Other	(460		)	(287		)
Net cash provided by operating activities	1,585			1,293

Cash flows from investing activities
Proceeds from maturities of fixed maturities	4,300			3,773
Proceeds from sales of investments:
Fixed maturities	563			739
Equity securities	200			38
Real estate investments	20			69
Other investments	403			343
Purchases of investments:
Fixed maturities	(5,673		)	(5,705		)
Equity securities	(166		)	(26		)
Real estate investments	(26		)	(20		)
Other investments	(259		)	(290		)
Net (purchases) sales of short-term securities	(424		)	681
Securities transactions in course of settlement	170			461
Other	(129		)	(154		)
Net cash used in investing activities	(1,021		)	(91		)

Cash flows from financing activities
Treasury stock acquired — share repurchase authorization	(700		)	(1,100		)
Treasury stock acquired — net employee share-based compensation	(61		)	(59		)
Dividends paid to shareholders	(389		)	(375		)
Payment of debt	(207		)	(400		)
Issuance of debt	689			491
Issuance of common stock — employee share options	118			129
Net cash used in financing activities	(550		)	(1,314		)
Effect of exchange rate changes on cash	7			(3		)
Net increase (decrease) in cash	21			(115		)
Cash at beginning of year	307			380
Cash at end of period	$	328		$	265

Supplemental disclosure of cash flow information
Income taxes paid	$	323		$	467
Interest paid	$	178		$	180

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, 2016 (the Company’s 2016 Annual Report) as updated by the Company’s Current Report on Form 8-K filed on June 20, 2017. The Form 8-K was filed to reclassify certain of the Company’s historical segment information to conform the presentation of such segment information to the manner in which the Company’s businesses have been managed beginning April 1, 2017 (as described in more detail below) and reflect the revised names and descriptions of certain businesses comprising these segments and other related changes.

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.

On March 13, 2017, the Company announced an agreement to acquire Simply Business, a leading digital provider of insurance policies to small businesses in the United Kingdom, for total consideration of approximately $490 million, which includes the repayment of debt and other obligations at the completion of the transaction. The transaction is expected to close in the third quarter of 2017, subject to regulatory approvals and other customary closing conditions. The Company will use a portion of the net proceeds from the issuance of senior notes in May 2017 (described in more detail in note 8) and internal resources to fund this transaction.

Adoption of Accounting Standards

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

In March 2016, the Financial Accounting Standards Board (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 was effective for reporting periods beginning after December 15, 2016, and was applied prospectively. 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: 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 was effective for reporting periods beginning after December 15, 2016. 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

Compensation — Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

In March 2017, the FASB issued updated guidance to improve the presentation of net periodic pension cost and net periodic post retirement cost (net benefit costs). Net benefit costs comprise several components that reflect different aspects of an employer’s financial arrangements as well as the cost of benefits provided to employees. The update requires that the employer service cost component be reported in the same lines as other employee compensation cost and that the other components (non-service costs) be presented separately from the service cost and outside of a subtotal of income from operations if one is presented. The update also allows only the service cost component to be eligible for capitalization in assets when applicable.

The updated guidance is effective for reporting periods beginning after December 15, 2017. The update is to be applied retrospectively with respect to the presentation of service cost and non-service cost and prospectively with respect to applying the service cost only eligible for capitalization in assets guidance. Early adoption is permitted as of the first interim period of an annual period if an entity issues interim financial statements.

The Company adopted the updated guidance effective January 1, 2017. See note 12 which has been expanded to disclose the amount of service cost and non-service cost components of net periodic benefit cost and the line items in the consolidated statement of income in which such amounts are reported. The updated guidance with respect to only service costs being eligible for capitalization in assets was not applicable.

For information regarding accounting standards that the Company adopted during the years presented, see the “Adoption of Accounting Standards” section of note 1 of notes to the consolidated financial statements in the Company’s 2016 Annual Report as updated by the Company’s Current Report on Form 8-K filed on June 20, 2017.

Compensation — Stock Compensation: Scope of Modification Accounting

In May 2017, the FASB issued updated guidance related to a change to the terms or conditions (modification) of a share-based payment award. The updated guidance provides that an entity should account for the effects of a modification unless the fair value and vesting conditions of the modified award and the classification of the modified award (equity or liability instrument) are the same as the original award immediately before the modification.

The updated guidance is effective for the quarter ending March 31, 2018. The update is to be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted in any interim periods for which financial statements have not yet been made available for issuance.

The Company adopted the updated guidance effective April 1, 2017. The adoption did not have an effect on the Company’s results of operations, financial position or liquidity.

Accounting Standards Not Yet Adopted

For information regarding 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 2016 Annual Report as updated by the Company’s Current Report on Form 8-K filed on June 20, 2017.

Nature of Operations

Effective April 1, 2017, the Company’s results are reported in the following three business segments — Business Insurance, Bond & Specialty Insurance and Personal Insurance, reflecting a change in the manner in which the Company’s businesses are managed as of that date, as well as the aggregation of products and services based on the type of customer, how the business is marketed and the manner in which risks are underwritten. While the segmentation of the Company’s domestic businesses is unchanged, the Company’s international businesses, which were previously managed and reported in total within the Business and International Insurance segment, are now disaggregated by product type among the three newly aligned reportable business segments. All prior periods presented have been reclassified to conform to this presentation. In connection with these changes, the Company has revised the names and descriptions of certain businesses comprising the Company’s segments and has reflected other related changes.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

The new reportable business segments are as follows:

Business Insurance

Business Insurance offers a broad array of property and casualty insurance and insurance related services to its customers, primarily in the United States, as well as in Canada, the United Kingdom, the Republic of Ireland, Brazil and throughout other parts of the world as a corporate member of Lloyd’s.

Business Insurance is comprised of Select Accounts, Middle Market, National Accounts, National Property and Other, and International. Business Insurance also includes the Special Liability Group (which manages the Company’s asbestos and environmental liabilities) and the assumed reinsurance and certain other runoff operations, which are collectively referred to as Business Insurance Other.

Bond & Specialty Insurance

Bond & Specialty Insurance provides surety, fidelity, management liability, professional liability, and other property and casualty coverages and related risk management services to its customers in the United States and certain specialty insurance products in Canada, the United Kingdom, the Republic of Ireland and Brazil, utilizing various degrees of financially-based underwriting approaches.

Personal Insurance

Personal Insurance writes a broad range of property and casualty insurance covering individuals’ personal risks, primarily in the United States, as well as in Canada. The primary products of automobile and homeowners insurance are complemented by a broad suite of related coverages.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

2. SEGMENT INFORMATION

The following tables summarize the components of the Company’s revenues, income and total assets by reportable business segments:

(for the three months ended June 30, in millions)	Business Insurance		Bond & Specialty Insurance		Personal Insurance		Total Reportable Segments
2017
Premiums	$	3,504	$	575	$	2,272	$	6,351
Net investment income	447		56		95		598
Fee income	112		—		4		116
Other revenues	15		6		15		36
Total segment revenues (1)	$	4,078	$	637	$	2,386	$	7,101
Segment income (1)	$	429	$	163	$	12	$	604

2016
Premiums	$	3,439	$	559	$	2,069	$	6,067
Net investment income	404		58		87		549
Fee income	115		—		4		119
Other revenues	8		5		15		28
Total segment revenues (1)	$	3,966	$	622	$	2,175	$	6,763
Segment income (1)	$	401	$	215	$	95	$	711

(1) Segment revenues for reportable business segments exclude net realized investment gains (losses). Segment 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 Insurance		Bond & Specialty Insurance		Personal Insurance		Total Reportable Segments
2017
Premiums	$	6,933	$	1,130	$	4,471	$	12,534
Net investment income	900		117		191		1,208
Fee income	221		—		8		229
Other revenues	24		11		31		66
Total segment revenues (1)	$	8,078	$	1,258	$	4,701	$	14,037
Segment income (1)	$	871	$	308	$	101	$	1,280

2016
Premiums	$	6,853	$	1,111	$	4,084	$	12,048
Net investment income	803		118		172		1,093
Fee income	229		—		7		236
Other revenues	38		9		31		78
Total segment revenues (1)	$	7,923	$	1,238	$	4,294	$	13,455
Segment income (1)	$	848	$	375	$	247	$	1,470

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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)	2017			2016			2017			2016
Revenue reconciliation
Earned premiums
Business Insurance:
Domestic:
Workers’ compensation	$	999		$	987		$	1,975		$	1,968
Commercial automobile	521			503			1,027			994
Commercial property	443			442			878			879
General liability	498			485			989			967
Commercial multi-peril	797			786			1,571			1,568
Other	7			9			14			14
Total Domestic	3,265			3,212			6,454			6,390
International	239			227			479			463
Total Business Insurance	3,504			3,439			6,933			6,853

Bond & Specialty Insurance:
Domestic:
Fidelity and surety	245			239			479			469
General liability	239			235			474			469
Other	46			44			91			88
Total Domestic	530			518			1,044			1,026
International	45			41			86			85
Total Bond & Specialty Insurance	575			559			1,130			1,111

Personal Insurance:
Domestic:
Automobile	1,145			974			2,239			1,910
Homeowners and Other	977			944			1,932			1,882
Total Domestic	2,122			1,918			4,171			3,792
International	150			151			300			292
Total Personal Insurance	2,272			2,069			4,471			4,084
Total earned premiums	6,351			6,067			12,534			12,048
Net investment income	598			549			1,208			1,093
Fee income	116			119			229			236
Other revenues	36			28			66			78
Total segment revenues	7,101			6,763			14,037			13,455
Other revenues	3			3			4			6
Net realized investment gains	80			19			85			10
Total revenues	$	7,184		$	6,785		$	14,126		$	13,471

Income reconciliation, net of tax
Total segment income	$	604		$	711		$	1,280		$	1,470
Interest Expense and Other (1)	(61		)	(62		)	(123		)	(123		)
Core income	543			649			1,157			1,347
Net realized investment gains	52			15			55			8
Net income	$	595		$	664		$	1,212		$	1,355

(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, 2017 and 2016, and $118 million and $120 million in the six months ended June 30, 2017 and 2016, respectively.

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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, 2017		December 31, 2016
Asset reconciliation
Business Insurance	$	77,653	$	75,730
Bond & Specialty Insurance	8,998		8,726
Personal Insurance	15,666		15,426
Total segment assets	102,317		99,882
Other assets (1)	352		363
Total consolidated assets	$	102,669	$	100,245

(1) The primary components of other assets at June 30, 2017 and December 31, 2016 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, 2017, in millions)

Cost

Gains

Losses

Value

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

2,023

2,028

Obligations of states, municipalities and political subdivisions:

Local general obligation

14,010

410

14,341

Revenue

11,589

317

11,843

State general obligation

1,612

1,646

Pre-refunded

4,112

172

—

4,284

Total obligations of states, municipalities and political subdivisions

31,323

944

153

32,114

Debt securities issued by foreign governments

1,537

1,556

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

1,675

1,767

All other corporate bonds

23,835

589

24,347

Redeemable preferred stock

—

Total

60,482

1,670

245

61,907

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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, 2016, in millions)	Cost		Gains		Losses		Value
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities	$	2,031	$	9	$	5	$	2,035
Obligations of states, municipalities and political subdivisions:
Local general obligation	13,955		271		182		14,044
Revenue	10,910		215		147		10,978
State general obligation	1,717		36		22		1,731
Pre-refunded	4,968		190		1		5,157
Total obligations of states, municipalities and political subdivisions	31,550		712		352		31,910

Debt securities issued by foreign governments	1,631		34		3		1,662
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	1,614		100		6		1,708
All other corporate bonds	22,737		508		138		23,107
Redeemable preferred stock	87		6		—		93
Total	$	59,650	$	1,369	$	504	$	60,515

Pre-refunded bonds of $4.28 billion and $5.16 billion at June 30, 2017 and December 31, 2016, respectively, were bonds for which states or municipalities have established irrevocable trusts, almost exclusively comprised of U.S. Treasury securities and obligations of U.S. government and government agencies and authorities. These trusts were created to fund the payment of principal and interest due under the bonds.

Proceeds from sales of fixed maturities classified as available for sale were $563 million and $739 million during the six months ended June 30, 2017 and 2016, respectively. Gross gains of $17 million and $46 million and gross losses of $4 million and $8 million were realized on those sales during the six months ended June 30, 2017 and 2016, respectively.

Equity Securities

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

			Gross Unrealized				Fair
(at June 30, 2017, in millions)	Cost		Gains		Losses		Value
Public common stock	$	443	$	130	$	6	$	567
Non-redeemable preferred stock	115		23		5		133
Total	$	558	$	153	$	11	$	700

			Gross Unrealized				Fair
(at December 31, 2016, in millions)	Cost		Gains		Losses		Value
Public common stock	$	390	$	216	$	3	$	603
Non-redeemable preferred stock	114		20		5		129
Total	$	504	$	236	$	8	$	732

Proceeds from sales of equity securities classified as available for sale were $200 million and $38 million during the six months ended June 30, 2017 and 2016, respectively. Gross gains of $88 million and $8 million and gross losses of $1 million and $2 million were realized on those sales during the six months ended June 30, 2017 and 2016, 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, 2017 and December 31, 2016, 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 2016 Annual Report as updated by the Company’s Current Report on Form 8-K filed on June 20, 2017. The Company also relies upon estimates of several factors in its review and evaluation of individual investments, using the process described in note 1 of notes to the consolidated financial statements in the Company’s 2016 Annual Report as updated by the Company’s Current Report on Form 8-K filed on June 20, 2017, in determining whether such investments are other-than-temporarily impaired.

	Less than 12 months				12 months or longer				Total
(at June 30, 2017, 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	$	1,342	$	5	$	5	$	—	$	1,347	$	5
Obligations of states, municipalities and political subdivisions	6,088		142		179		11		6,267		153
Debt securities issued by foreign governments	432		5		—		—		432		5
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	470		5		37		—		507		5
All other corporate bonds	4,980		66		279		11		5,259		77
Total fixed maturities	13,312		223		500		22		13,812		245
Equity securities
Public common stock	150		3		14		3		164		6
Non-redeemable preferred stock	—		—		61		5		61		5
Total equity securities	150		3		75		8		225		11
Total	$	13,462	$	226	$	575	$	30	$	14,037	$	256

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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, 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	$		1,124	$			5	$		—		$		—		$		1,124		$		5
Obligations of states, municipalities and political subdivisions	9,781			352				12				—				9,793				352
Debt securities issued by foreign governments	360			3				—				—				360				3
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	528			5				43				1				571				6
All other corporate bonds	6,470			115				437				23				6,907				138
Total fixed maturities	18,263			480				492				24				18,755				504

Equity securities
Public common stock	45			2				10				1				55				3
Non-redeemable preferred stock	2			—				59				5				61				5
Total equity securities	47			2				69				6				116				8
Total	$	18,310			$	482			$		561		$		30		$		18,871		$		512

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, 2017 totaled $1 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 $5 million and $4 million for the three months ended June 30, 2017 and 2016, respectively, and $7 million and $22 million for the six months ended June 30, 2017 and 2016, respectively.

The cumulative amount of credit losses on fixed maturities held at June 30, 2017 and 2016, that were recognized in the consolidated statement of income from other-than-temporary impairments (OTTI) and for which a portion of the OTTI was recognized in other comprehensive income (loss) in the consolidated balance sheet was $83 million and $88 million, respectively. 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, 2017 and 2016 from that disclosed in note 3 of notes to the consolidated financial statements in the Company’s 2016 Annual Report as updated by the Company’s Current Report on Form 8-K filed on June 20, 2017.

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, 2017 and December 31, 2016, the Company had $400 million notional value of open U.S. Treasury futures contracts. Net realized investment losses related to U.S. Treasury futures contracts for the three months and six months ended June 30, 2017 and 2016 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, 2017 and December 31, 2016.

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 $108 million and $99 million at June 30, 2017 and December 31, 2016, 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 $97 million and $85 million at June 30, 2017 and December 31, 2016, 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 2016 Annual Report as updated by the Company’s Current Report on Form 8-K filed on June 20, 2017.

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. 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, 2017, 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	$	2,028	$	2,028	$	—	$	—
Obligations of states, municipalities and political subdivisions	32,114		—		32,109		5
Debt securities issued by foreign governments	1,556		—		1,556		—
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	1,767		—		1,735		32
All other corporate bonds	24,347		2		24,177		168
Redeemable preferred stock	95		3		92		—
Total fixed maturities	61,907		2,033		59,669		205

Equity securities
Public common stock	567		567		—		—
Non-redeemable preferred stock	133		61		72		—
Total equity securities	700		628		72		—
Other investments	54		18		—		36
Total	$	62,661	$	2,679	$	59,741	$	241

(at December 31, 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	$	2,035	$	2,035	$	—	$	—
Obligations of states, municipalities and political subdivisions	31,910		—		31,898		12
Debt securities issued by foreign governments	1,662		—		1,662		—
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	1,708		—		1,704		4
All other corporate bonds	23,107		—		22,939		168
Redeemable preferred stock	93		3		90		—
Total fixed maturities	60,515		2,038		58,293		184

Equity securities
Public common stock	603		603		—		—
Non-redeemable preferred stock	129		51		78		—
Total equity securities	732		654		78		—
Other investments	53		17		—		36
Total	$	61,300	$	2,709	$	58,371	$	220

During the six months ended June 30, 2017 and the year ended December 31, 2016, 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, 2017 or the year ended December 31, 2016.

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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, 2017, in millions)	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Short-term securities	$	5,292	$	5,292	$	1,134	$	4,124	$	34

Financial liabilities:
Debt	$	6,920	$	8,023	$	—	$	8,023	$	—

(at December 31, 2016, in millions)	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Short-term securities	$	4,865	$	4,865	$	1,223	$	3,607	$	35

Financial liabilities:
Debt	$	6,337	$	7,262	$	—	$	7,262	$	—
Commercial paper	$	100	$	100	$	—	$	100	$	—

The Company utilized a pricing service to estimate fair value for approximately 95% and 98% of short-term securities at June 30, 2017 and December 31, 2016, respectively. For a description of the process and inputs used by the pricing service to estimate fair value, see the “Fixed Maturities” section in note 4 of notes to the consolidated financial statements in the Company’s 2016 Annual Report as updated by the Company’s Current Report on Form 8-K filed on June 20, 2017.

The Company utilized a pricing service to estimate fair value for 100% of its debt at June 30, 2017 and December 31, 2016.

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, 2017 or year ended December 31, 2016.

5. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The following table presents the carrying amount of the Company’s goodwill by segment. Each reportable segment includes goodwill associated with the Company’s international business which is subject to the impact of changes in foreign currency exchange rates.

(in millions)	June 30, 2017		December 31, 2016
Business Insurance	$	2,229	$	2,227
Bond & Specialty Insurance	550		549
Personal Insurance	784		778
Other	26		26
Total	$	3,589	$	3,580

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

5. GOODWILL AND OTHER INTANGIBLE ASSETS, Continued

Other Intangible Assets

The following tables present a summary of the Company’s other intangible assets by major asset class:

(at June 30, 2017, in millions)

Gross
Carrying
Amount

Accumulated
Amortization