Edgar Filing: TRAVELERS COMPANIES, INC.

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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 October 16, 2017 was 273,695,876.

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The Travelers Companies, Inc.

Quarterly Report on Form 10-Q

For Quarterly Period Ended September 30, 2017

TABLE OF CONTENTS

		Page
Part I — Financial Information

Item 1.	Financial Statements:

	Consolidated Statement of Income (Unaudited) — Three Months and Nine Months Ended September 30, 2017 and 2016	3

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

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

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

	Consolidated Statement of Cash Flows (Unaudited) — Nine Months Ended September 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	75

Item 4.	Controls and Procedures	75

Part II — Other Information

Item 1.	Legal Proceedings	76

Item 1A.	Risk Factors	76

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	76

Item 5.	Other Information	76

Item 6.	Exhibits	77

	SIGNATURES	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 September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016

Revenues
Premiums	$	6,523	$	6,209	$	19,057	$	18,257
Net investment income	588		582		1,796		1,675
Fee income	113		116		342		352
Net realized investment gains (1)	61		23		146		33
Other revenues	40		31		110		115
Total revenues	7,325		6,961		21,451		20,432

Claims and expenses
Claims and claim adjustment expenses	4,806		3,856		13,125		11,330
Amortization of deferred acquisition costs	1,059		1,012		3,094		2,972
General and administrative expenses	1,045		1,057		3,086		3,106
Interest expense	95		89		276		273
Total claims and expenses	7,005		6,014		19,581		17,681

Income before income taxes	320		947		1,870		2,751
Income tax expense	27		231		365		680
Net income	$	293	$	716	$	1,505	$	2,071

Net income per share
Basic	$	1.06	$	2.48	$	5.39	$	7.09
Diluted	$	1.05	$	2.45	$	5.34	$	7.00

Weighted average number of common shares outstanding
Basic	274.1		286.0		277.1		290.0
Diluted	276.6		289.8		279.6		293.6
Cash dividends declared per common share	$	0.72	$	0.67	$	2.11	$	1.95

(1) Total other-than-temporary impairment (OTTI) losses were $(5) million and $(4) million for the three months ended September 30, 2017 and 2016, respectively, and $(11) million and $(36) million for the nine months ended September 30, 2017 and 2016, respectively. Of total OTTI, credit losses of $(5) million and $(4) million for the three months ended September 30, 2017 and 2016, respectively, and $(12) million and $(26) million for the nine months ended September 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 September 30, 2017 and 2016, and $1 million and $(10) million for the nine months ended September 30, 2017 and 2016, 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 September 30,						Nine Months Ended September 30,
	2017			2016			2017		2016

Net income	$	293		$	716		$	1,505	$	2,071

Other comprehensive income (loss):
Changes in net unrealized gains on investment securities:
Having no credit losses recognized in the consolidated statement of income	(42		)	(455		)	429		1,138
Having credit losses recognized in the consolidated statement of income	2			6			4		23
Net changes in benefit plan assets and obligations	(9		)	16			25		50
Net changes in unrealized foreign currency translation	113			(31		)	202		37
Other comprehensive income (loss) before income taxes	64			(464		)	660		1,248
Income tax expense (benefit)	5			(159		)	190		431
Other comprehensive income (loss), net of taxes	59			(305		)	470		817
Comprehensive income	$	352		$	411		$	1,975	$	2,888

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

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in millions)

	September 30, 2017			December 31, 2016
	(Unaudited)
Assets
Fixed maturities, available for sale, at fair value (amortized cost $60,727 and $59,650)	$	62,157		$	60,515
Equity securities, available for sale, at fair value (cost $509 and $504)	601			732
Real estate investments	923			928
Short-term securities	5,859			4,865
Other investments	3,552			3,448
Total investments	73,092			70,488

Cash	379			307
Investment income accrued	568			630
Premiums receivable	7,267			6,722
Reinsurance recoverables	8,345			8,287
Ceded unearned premiums	688			589
Deferred acquisition costs	2,077			1,923
Deferred taxes	243			465
Contractholder receivables	4,757			4,609
Goodwill	3,946			3,580
Other intangible assets	345			268
Other assets	2,604			2,377
Total assets	$	104,311		$	100,245

Liabilities
Claims and claim adjustment expense reserves	$	49,750		$	47,949
Unearned premium reserves	13,247			12,329
Contractholder payables	4,757			4,609
Payables for reinsurance premiums	423			273
Debt	6,921			6,437
Other liabilities	5,475			5,427
Total liabilities	80,573			77,024

Shareholders’ equity
Common stock (1,750.0 shares authorized; 273.8 and 279.6 shares issued, 273.7 and 279.6 shares outstanding)	22,836			22,614
Retained earnings	33,110			32,196
Accumulated other comprehensive loss	(285		)	(755		)
Treasury stock, at cost (498.3 and 489.5 shares)	(31,923		)	(30,834		)
Total shareholders’ equity	23,738			23,221
Total liabilities and shareholders’ equity	$	104,311		$	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 nine months ended September 30,	2017			2016
Common stock
Balance, beginning of year	$	22,614		$	22,172
Employee share-based compensation	118			123
Compensation amortization under share-based plans and other changes	104			124
Balance, end of period	22,836			22,419

Retained earnings
Balance, beginning of year	32,196			29,945
Net income	1,505			2,071
Dividends	(591		)	(571		)
Other	—			(2		)
Balance, end of period	33,110			31,443

Accumulated other comprehensive income (loss), net of tax
Balance, beginning of year	(755		)	(157		)
Other comprehensive income	470			817
Balance, end of period	(285		)	660

Treasury stock (at cost)
Balance, beginning of year	(30,834		)	(28,362		)
Treasury stock acquired — share repurchase authorization	(1,028		)	(1,650		)
Net shares acquired related to employee share-based compensation plans	(61		)	(71		)
Balance, end of period	(31,923		)	(30,083		)
Total shareholders’ equity	$	23,738		$	24,439

Common shares outstanding
Balance, beginning of year	279.6			295.9
Treasury stock acquired — share repurchase authorization	(8.3		)	(14.7		)
Net shares issued under employee share-based compensation plans	2.4			2.9
Balance, end of period	273.7			284.1

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

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

(in millions)

For the nine months ended September 30,	2017			2016
Cash flows from operating activities
Net income	$	1,505		$	2,071
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment gains	(146		)	(33		)
Depreciation and amortization	611			624
Deferred federal income tax expense	88			29
Amortization of deferred acquisition costs	3,094			2,972
Equity in income from other investments	(300		)	(114		)
Premiums receivable	(517		)	(340		)
Reinsurance recoverables	(19		)	248
Deferred acquisition costs	(3,237		)	(3,096		)
Claims and claim adjustment expense reserves	1,561			(139		)
Unearned premium reserves	852			725
Other	(268		)	116
Net cash provided by operating activities	3,224			3,063

Cash flows from investing activities
Proceeds from maturities of fixed maturities	6,581			6,648
Proceeds from sales of investments:
Fixed maturities	860			865
Equity securities	340			71
Real estate investments	23			69
Other investments	603			569
Purchases of investments:
Fixed maturities	(8,403		)	(9,004		)
Equity securities	(193		)	(36		)
Real estate investments	(40		)	(30		)
Other investments	(392		)	(422		)
Net purchases of short-term securities	(990		)	(135		)
Securities transactions in course of settlement	122			511
Acquisition, net of cash acquired	(439		)	—
Other	(187		)	(240		)
Net cash used in investing activities	(2,115		)	(1,134		)

Cash flows from financing activities
Treasury stock acquired — share repurchase authorization	(1,028		)	(1,650		)
Treasury stock acquired — net employee share-based compensation	(61		)	(71		)
Dividends paid to shareholders	(589		)	(569		)
Payment of debt	(207		)	(400		)
Issuance of debt	689			491
Issuance of common stock — employee share options	148			164
Net cash used in financing activities	(1,048		)	(2,035		)
Effect of exchange rate changes on cash	11			(5		)
Net increase (decrease) in cash	72			(111		)
Cash at beginning of year	307			380
Cash at end of period	$	379		$	269

Supplemental disclosure of cash flow information
Income taxes paid	$	467		$	648
Interest paid	$	217		$	223

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 August 4, 2017, the Company completed its previously announced acquisition of all issued and outstanding shares of Simply Business Holdings LTD (Simply Business), a leading provider of small business insurance policies in the United Kingdom, for a purchase price of approximately $464 million, which included the repayment of debt and other obligations of Simply Business. In addition, the Company issued 95,953 shares of restricted common stock valued at approximately $12 million to certain employees of Simply Business who were equity holders of Simply Business. Subject to the satisfaction of certain conditions, 50% of the restricted stock will vest two years from the issuance date and the remainder will vest three years from the issuance date. The Company used 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, and as reported in the Company’s Form 10-Q for the quarter ended June 30, 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 were being 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 was unchanged, the Company’s international businesses, which were previously managed and reported in total within the Business and International Insurance segment, were 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 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 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 Simply Business, as well as Business Insurance Other, which comprises the Special Liability Group (which manages the Company’s asbestos and environmental liabilities) and the assumed reinsurance and certain other runoff operations.

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 September 30, in millions)	Business Insurance		Bond & Specialty Insurance		Personal Insurance		Total Reportable Segments
2017
Premiums	$	3,576	$	591	$	2,356	$	6,523
Net investment income	437		57		94		588
Fee income	108		—		5		113
Other revenues	19		5		14		38

Total segment revenues (1)	$	4,140	$	653	$	2,469	$	7,262

Segment income (1)	$	105	$	136	$	77	$	318

2016
Premiums	$	3,497	$	573	$	2,139	$	6,209
Net investment income	431		59		92		582
Fee income	111		—		5		116
Other revenues	7		5		16		28

Total segment revenues (1)	$	4,046	$	637	$	2,252	$	6,935

Segment income (1)	$	433	$	165	$	163	$	761

(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 nine months ended September 30, in millions)	Business Insurance		Bond & Specialty Insurance		Personal Insurance		Total Reportable Segments
2017
Premiums	$	10,509	$	1,721	$	6,827	$	19,057
Net investment income	1,337		174		285		1,796
Fee income	329		—		13		342
Other revenues	43		16		45		104

Total segment revenues (1)	$	12,218	$	1,911	$	7,170	$	21,299

Segment income (1)	$	976	$	444	$	178	$	1,598

2016
Premiums	$	10,350	$	1,684	$	6,223	$	18,257
Net investment income	1,234		177		264		1,675
Fee income	340		—		12		352
Other revenues	45		14		47		106

Total segment revenues (1)	$	11,969	$	1,875	$	6,546	$	20,390

Segment income (1)	$	1,281	$	540	$	410	$	2,231

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

2. SEGMENT INFORMATION, Continued

Business Segment Reconciliations

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2017			2016			2017			2016
Revenue reconciliation
Earned premiums
Business Insurance:
Domestic:
Workers’ compensation	$	998		$	1,003		$	2,973		$	2,971
Commercial automobile	544			503			1,571			1,497
Commercial property	448			441			1,326			1,320
General liability	523			504			1,512			1,471
Commercial multi-peril	806			788			2,377			2,356
Other	7			9			21			23

Total Domestic	3,326			3,248			9,780			9,638
International	250			249			729			712

Total Business Insurance	3,576			3,497			10,509			10,350

Bond & Specialty Insurance:
Domestic:
Fidelity and surety	249			245			728			714
General liability	243			239			717			708
Other	48			45			139			133

Total Domestic	540			529			1,584			1,555
International	51			44			137			129

Total Bond & Specialty Insurance	591			573			1,721			1,684

Personal Insurance:
Domestic:
Automobile	1,192			1,026			3,431			2,936
Homeowners and Other	999			962			2,931			2,844

Total Domestic	2,191			1,988			6,362			5,780
International	165			151			465			443

Total Personal Insurance	2,356			2,139			6,827			6,223

Total earned premiums	6,523			6,209			19,057			18,257
Net investment income	588			582			1,796			1,675
Fee income	113			116			342			352
Other revenues	38			28			104			106

Total segment revenues	7,262			6,935			21,299			20,390
Other revenues	2			3			6			9
Net realized investment gains	61			23			146			33

Total revenues	$	7,325		$	6,961		$	21,451		$	20,432

Income reconciliation, net of tax
Total segment income	$	318		$	761		$	1,598		$	2,231
Interest Expense and Other (1)	(65		)	(60		)	(188		)	(183		)

Core income	253			701			1,410			2,048
Net realized investment gains	40			15			95			23

Net income	$	293		$	716		$	1,505		$	2,071

(1) The primary component of Interest Expense and Other was after-tax interest expense of $61 million and $57 million in the three months ended September 30, 2017 and 2016, respectively, and $179 million and $177 million in the nine months ended September 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)	September 30, 2017		December 31, 2016
Asset reconciliation
Business Insurance	$	78,985	$	75,730
Bond & Specialty Insurance	9,005		8,726
Personal Insurance	15,962		15,426

Total segment assets	103,952		99,882
Other assets (1)	359		363

Total consolidated assets	$	104,311	$	100,245

(1) The primary components of other assets at September 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 September 30, 2017, in millions)

Cost

Gains

Losses

Value

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

2,064

2,068

Obligations of states, municipalities and political subdivisions:

Local general obligation

13,798

410

14,141

Revenue

11,341

324

11,614

State general obligation

1,555

1,591

Pre-refunded

3,666

163

—

3,829

Total obligations of states, municipalities and political subdivisions

30,360

942

127

31,175

Debt securities issued by foreign governments

1,559

1,565

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

2,082

2,173

All other corporate bonds

24,572

587

25,080

Redeemable preferred stock

—

Total

60,727

1,658

228

62,157

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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 $3.83 billion and $5.16 billion at September 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 $860 million and $865 million during the nine months ended September 30, 2017 and 2016, respectively. Gross gains of $28 million and $60 million and gross losses of $6 million and $10 million were realized on those sales during the nine months ended September 30, 2017 and 2016, respectively.

Equity Securities

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

			Gross Unrealized				Fair
(at September 30, 2017, in millions)	Cost		Gains		Losses		Value
Public common stock	$	392	$	80	$	2	$	470
Non-redeemable preferred stock	117		20		6		131

Total	$	509	$	100	$	8	$	601

			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 $340 million and $71 million during the nine months ended September 30, 2017 and 2016, respectively. Gross gains of $146 million and $12 million and gross losses of $1 million and $3 million were realized on those sales during the nine months ended September 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 September 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 September 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	$	1,348	$	4	$	72	$	1	$	1,420	$	5
Obligations of states, municipalities and political subdivisions	4,131		58		1,598		69		5,729		127
Debt securities issued by foreign governments	538		11		—		—		538		11
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	729		5		81		1		810		6
All other corporate bonds	4,896		57		679		22		5,575		79

Total fixed maturities	11,642		135		2,430		93		14,072		228

Equity securities
Public common stock	39		1		6		1		45		2
Non-redeemable preferred stock	—		—		60		6		60		6

Total equity securities	39		1		66		7		105		8

Total	$	11,681	$	136	$	2,496	$	100	$	14,177	$	236

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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 September 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 September 30, 2017 and 2016, respectively, and $12 million and $26 million for the nine months ended September 30, 2017 and 2016, respectively.

The cumulative amount of credit losses on fixed maturities held at September 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 $82 million and $86 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 nine months ended September 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 September 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 nine months ended September 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 September 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 $123 million and $99 million at September 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 $75 million and $85 million at September 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 September 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	$	2,068	$	2,068	$	—	$	—
Obligations of states, municipalities and political subdivisions	31,175		18		31,153		4
Debt securities issued by foreign governments	1,565		—		1,565		—
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	2,173		—		2,143		30
All other corporate bonds	25,080		2		24,914		164
Redeemable preferred stock	96		3		93		—

Total fixed maturities	62,157		2,091		59,868		198

Equity securities
Public common stock	470		470		—		—
Non-redeemable preferred stock	131		68		63		—

Total equity securities	601		538		63		—

Other investments	56		18		—		38

Total	$	62,814	$	2,647	$	59,931	$	236

(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