Document
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________
FORM 10-Q
_________________________________________________________
 
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
___________________________________________________________________
 
Commission file number: 001-10898
___________________________________________________________________
The Travelers Companies, Inc.
(Exact name of registrant as specified in its charter)
 ____________________________________________________________________
Minnesota
 
41-0518860
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
485 Lexington Avenue
New York, NY 10017
(Address of principal executive offices) (Zip Code)
 
(917) 778-6000
(Registrant’s telephone number, including area code)
 _________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        Yes ý    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 ý    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
ý
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 ý 
The number of shares of the Registrant’s Common Stock, without par value, outstanding at July 16, 2018 was 267,683,231.


Table of Contents

The Travelers Companies, Inc.
 
Quarterly Report on Form 10-Q
 
For Quarterly Period Ended June 30, 2018
_________________________________________________________
 
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
Consolidated Statement of Income (Unaudited) — Three Months and Six Months Ended June 30, 2018 and 2017
 
 
 
 
Consolidated Statement of Comprehensive Income (Loss) (Unaudited) — Three Months and Six Months Ended June 30, 2018 and 2017
 
 
 
 
Consolidated Balance Sheet — June 30, 2018 (Unaudited) and December 31, 2017
 
 
 
 
Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) — Six Months Ended June 30, 2018 and 2017
 
 
 
 
Consolidated Statement of Cash Flows (Unaudited) — Six Months Ended June 30, 2018 and 2017
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 


2
Table of Contents

PART 1 — FINANCIAL INFORMATION
 
Item 1.  FINANCIAL STATEMENTS
 
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
(in millions, except per share amounts)
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
Premiums
 
$
6,695

 
$
6,351

 
$
13,232

 
$
12,534

Net investment income
 
595

 
598

 
1,198

 
1,208

Fee income
 
112

 
116

 
215

 
229

Net realized investment gains (1)
 
36

 
80

 
25

 
85

Other revenues
 
39

 
39

 
93

 
70

 
 
 
 
 
 
 
 
 
Total revenues
 
7,477

 
7,184

 
14,763

 
14,126

 
 
 
 
 
 
 
 
 
Claims and expenses
 
 
 
 
 
 
 
 
Claims and claim adjustment expenses
 
4,562

 
4,225

 
8,858

 
8,319

Amortization of deferred acquisition costs
 
1,081

 
1,032

 
2,142

 
2,035

General and administrative expenses
 
1,113

 
1,045

 
2,175

 
2,041

Interest expense
 
90

 
92

 
179

 
181

Total claims and expenses
 
6,846

 
6,394

 
13,354

 
12,576

 
 
 
 
 
 
 
 
 
Income before income taxes
 
631

 
790

 
1,409

 
1,550

Income tax expense
 
107

 
195

 
216

 
338

Net income
 
$
524

 
$
595

 
$
1,193

 
$
1,212

 
 
 
 
 
 
 
 
 
Net income per share
 
 
 
 
 
 
 
 
Basic
 
$
1.93

 
$
2.13

 
$
4.39

 
$
4.32

Diluted
 
$
1.92

 
$
2.11

 
$
4.35

 
$
4.28

 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
 
 
 
 
 
 
 
 
Basic
 
268.7

 
277.5

 
269.8

 
278.6

Diluted
 
271.1

 
280.0

 
272.5

 
281.2

 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
 
$
0.77

 
$
0.72

 
$
1.49

 
$
1.39


________________________________________________________
(1)
Total other-than-temporary impairment (OTTI) losses were $(1) million and $(5) million for the three months ended June 30, 2018 and 2017, respectively, and $(1) million and $(6) million for the six months ended June 30, 2018 and 2017, respectively.  Of total OTTI, credit losses of $(1) million and $(5) million for the three months ended June 30, 2018 and 2017, respectively, and $(1) million and $(7) million for the six months ended June 30, 2018 and 2017, 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, 2018 and 2017, respectively, and $0 million and $1 million for the six months ended June 30, 2018 and 2017, respectively, were recognized in other comprehensive income (loss) as part of changes in net unrealized gains (losses) on investment securities having credit losses recognized in the consolidated statement of income.
 
The accompanying notes are an integral part of the consolidated financial statements.

3
Table of Contents

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(in millions)
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Net income
 
$
524

 
$
595

 
$
1,193

 
$
1,212

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Changes in net unrealized gains (losses) on investment securities:
 
 
 
 
 
 
 
 
Having no credit losses recognized in the consolidated statement of income
 
(298
)
 
327

 
(1,501
)
 
471

Having credit losses recognized in the consolidated statement of income
 
(12
)
 
2

 
(14
)
 
2

Net changes in benefit plan assets and obligations
 
21

 
17

 
43

 
34

Net changes in unrealized foreign currency translation
 
(158
)
 
48

 
(152
)
 
89

Other comprehensive income (loss) before income taxes
 
(447
)
 
394

 
(1,624
)
 
596

Income tax expense (benefit)
 
(81
)
 
123

 
(325
)
 
185

Other comprehensive income (loss), net of taxes
 
(366
)
 
271

 
(1,299
)
 
411

Comprehensive income (loss)
 
$
158

 
$
866

 
$
(106
)
 
$
1,623

 






























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


4
Table of Contents

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions)
 
 
 
June 30,
2018
 
December 31,
2017
 
 
(Unaudited)
 
 
Assets
 
 
 
 
Fixed maturities, available for sale, at fair value (amortized cost $62,674 and $61,316)
 
$
62,536

 
$
62,694

Equity securities, at fair value  (cost $409 and $440)
 
424

 
453

Real estate investments
 
954

 
932

Short-term securities
 
3,692

 
4,895

Other investments
 
3,555

 
3,528

Total investments
 
71,161

 
72,502

Cash
 
415

 
344

Investment income accrued
 
610

 
606

Premiums receivable
 
7,786

 
7,144

Reinsurance recoverables
 
8,258

 
8,309

Ceded unearned premiums
 
698

 
551

Deferred acquisition costs
 
2,161

 
2,025

Deferred taxes
 
463

 
70

Contractholder receivables
 
4,830

 
4,775

Goodwill
 
3,931

 
3,951

Other intangible assets
 
356

 
342

Other assets
 
2,854

 
2,864

Total assets
 
$
103,523

 
$
103,483

 
 
 
 
 
Liabilities
 
 

 
 

Claims and claim adjustment expense reserves
 
$
49,961

 
$
49,650

Unearned premium reserves
 
13,755

 
12,915

Contractholder payables
 
4,830

 
4,775

Payables for reinsurance premiums
 
396

 
274

Debt
 
6,464

 
6,571

Other liabilities
 
5,494

 
5,567

Total liabilities
 
80,900

 
79,752

 
 
 
 
 
Shareholders’ equity
 
 

 
 

Common stock (1,750.0 shares authorized; 267.8 and 271.5 shares issued, 267.7 and 271.4 shares outstanding)
 
23,040

 
22,886

Retained earnings
 
34,296

 
33,462

Accumulated other comprehensive loss
 
(1,688
)
 
(343
)
Treasury stock, at cost (506.4 and 500.9 shares)
 
(33,025
)
 
(32,274
)
Total shareholders’ equity
 
22,623

 
23,731

Total liabilities and shareholders’ equity
 
$
103,523

 
$
103,483





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


5
Table of Contents

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
(in millions)
 
For the six months ended June 30,
 
2018
 
2017
 
 
 
 
 
Common stock
 
 

 
 

Balance, beginning of year
 
$
22,886

 
$
22,614

Employee share-based compensation
 
77

 
94

Compensation amortization under share-based plans
 
77

 
73

Balance, end of period
 
23,040

 
22,781

 
 
 
 
 
Retained earnings
 
 

 
 

Balance, beginning of year
 
33,462

 
32,196

Cumulative effect of adoption of updated accounting guidance for equity financial instruments at January 1, 2018
 
22

 
—

Reclassification of certain tax effects from accumulated other comprehensive income at January 1, 2018
 
24

 
—

Net income
 
1,193

 
1,212

Dividends
 
(406
)
 
(391
)
Other
 
1

 
(1
)
Balance, end of period
 
34,296

 
33,016

 
 
 
 
 
Accumulated other comprehensive loss, net of tax
 
 

 
 

Balance, beginning of year
 
(343
)
 
(755
)
Cumulative effect of adoption of updated accounting guidance for equity financial instruments at January 1, 2018
 
(22
)
 
—

Reclassification of certain tax effects from accumulated other comprehensive income at January 1, 2018
 
(24
)
 
—

Other comprehensive income (loss)
 
(1,299
)
 
411

Balance, end of period
 
(1,688
)
 
(344
)
 
 
 
 
 
Treasury stock, at cost
 
 

 
 

Balance, beginning of year
 
(32,274
)
 
(30,834
)
Treasury stock acquired — share repurchase authorization
 
(700
)
 
(700
)
Net shares acquired related to employee share-based compensation plans
 
(51
)
 
(61
)
Balance, end of period
 
(33,025
)
 
(31,595
)
 
 
 
 
 
Total shareholders’ equity
 
$
22,623

 
$
23,858

 
 
 
 
 
Common shares outstanding
 
 

 
 

Balance, beginning of year
 
271.4

 
279.6

Treasury stock acquired — share repurchase authorization
 
(5.2
)
 
(5.7
)
Net shares issued under employee share-based compensation plans
 
1.5

 
2.0

Balance, end of period
 
267.7

 
275.9

 


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


6
Table of Contents

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(in millions)
For the six months ended June 30,
 
2018
 
2017
Cash flows from operating activities
 
 

 
 

Net income
 
$
1,193

 
$
1,212

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

 
 

Net realized investment gains
 
(25
)
 
(85
)
Depreciation and amortization
 
411

 
409

Deferred federal income tax expense (benefit)
 
(70
)
 
106

Amortization of deferred acquisition costs
 
2,142

 
2,035

Equity in income from other investments
 
(169
)
 
(210
)
Premiums receivable
 
(660
)
 
(609
)
Reinsurance recoverables
 
29

 
157

Deferred acquisition costs
 
(2,284
)
 
(2,157
)
Claims and claim adjustment expense reserves
 
435

 
498

Unearned premium reserves
 
879

 
689

Other
 
(183
)
 
(291
)
Net cash provided by operating activities
 
1,698

 
1,754

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Proceeds from maturities of fixed maturities
 
3,657

 
4,300

Proceeds from sales of investments:
 
 

 
 

Fixed maturities
 
2,607

 
563

Equity securities
 
92

 
200

Real estate investments
 
—

 
20

Other investments
 
189

 
233

Purchases of investments:
 
 

 
 

Fixed maturities
 
(7,952
)
 
(5,673
)
Equity securities
 
(60
)
 
(166
)
Real estate investments
 
(44
)
 
(26
)
Other investments
 
(275
)
 
(259
)
Net (purchases) sales of short-term securities
 
1,202

 
(424
)
Securities transactions in course of settlement
 
279

 
170

Other
 
(152
)
 
(128
)
Net cash used in investing activities
 
(457
)
 
(1,190
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Treasury stock acquired — share repurchase authorization
 
(700
)
 
(700
)
Treasury stock acquired — net employee share-based compensation
 
(51
)
 
(61
)
Dividends paid to shareholders
 
(404
)
 
(389
)
Payment of debt
 
(600
)
 
(207
)
Issuance of debt
 
491

 
689

Issuance of common stock — employee share options
 
98

 
118

Net cash used in financing activities
 
(1,166
)
 
(550
)
Effect of exchange rate changes on cash
 
(4
)
 
7

Net increase in cash
 
71

 
21

Cash at beginning of year
 
344

 
307

Cash at end of period
 
$
415

 
$
328

 
 
 
 
 
Supplemental disclosure of cash flow information
 
 

 
 

Income taxes paid
 
$
238

 
$
323

Interest paid
 
$
175

 
$
178

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

7
Table of Contents

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
1.                       BASIS OF PRESENTATION AND ACCOUNTING POLICIES
 
Basis of Presentation
 
The interim consolidated financial statements include the accounts of The Travelers Companies, Inc. (together with its subsidiaries, the Company). These financial statements are prepared in conformity with U.S. generally accepted accounting principles (GAAP) and are unaudited.  In the opinion of the Company’s management, all adjustments necessary for a fair presentation have been reflected.  Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted.  All material intercompany transactions and balances have been eliminated.  The accompanying interim consolidated financial statements and related notes should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (the Company’s 2017 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 2017 financial statements to conform to the 2018 presentation.
 
Adoption of Accounting Standards
 
Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the Financial Accounting Standards Board (FASB) issued updated guidance to address the recognition, measurement, presentation and disclosure of certain financial instruments. The updated guidance requires equity investments, except those accounted for under the equity method of accounting, that have readily determinable fair value to be measured at fair value with any changes in fair value recognized in net income. Equity securities that do not have readily determinable fair values may be measured at estimated fair value or cost less impairment, if any, adjusted for subsequent observable price changes, with changes in the carrying value recognized in net income. A qualitative assessment for impairment is required for equity investments without readily determinable fair values. The updated guidance also eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet. The updated guidance was effective for the quarter ended March 31, 2018. The adoption of this guidance resulted in the recognition of $22 million of net after-tax unrealized gains on equity investments as a cumulative effect adjustment that increased retained earnings as of January 1, 2018 and decreased accumulated other comprehensive income (AOCI) by the same amount. The Company elected to report changes in the fair value of equity investments in net realized investment gains (losses). At December 31, 2017, equity investments were classified as available-for-sale on the Company's balance sheet. However, upon adoption, the updated guidance eliminated the available-for-sale balance sheet classification for equity investments.
 
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

On February 14, 2018, the FASB issued updated guidance that allows a reclassification from AOCI to retained earnings of the stranded tax effects that occurred due to the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA). The updated guidance is effective for reporting periods beginning after December 15, 2018 and is to be applied retrospectively to each period in which there are items impacted by the TCJA remaining in AOCI or at the beginning of the period of adoption. Early adoption is permitted. The Company adopted the updated guidance effective January 1, 2018 and elected to reclassify the income tax effects of the TCJA from AOCI to retained earnings as of January 1, 2018. This reclassification resulted in an increase in retained earnings of $24 million as of January 1, 2018 and a decrease in AOCI by the same amount.
 
Revenue from Contracts with Customers

In May 2014, the FASB issued updated guidance to clarify the principles for recognizing revenue. The updated guidance was effective for reporting periods beginning after December 15, 2017, and requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. For the six months ended June 30, 2018, approximately $83 million,

8
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
1.                       BASIS OF PRESENTATION AND ACCOUNTING POLICIES, Continued

or less than 1% of the Company's total revenues, were within the scope of this updated guidance and were generated from the services described below.

While insurance contracts are not within the scope of this updated guidance, the Company’s revenue related to certain services with no underlying insurance risk is subject to the updated guidance. These services include the following: (i) insurance-related services, such as risk management services, claims administration, loss control and risk management information services on behalf of non-insureds; (ii) servicing carrier fees for various residual market pools and associations; and (iii) administrative fees related to servicing third-party insurers’ obligations to participate in the Workers' Compensation Residual Market Plans in certain states. The revenues earned from these service contracts were not impacted by the adoption of the updated guidance. These revenues are earned on a pro rata basis over the contract service period and reported in fee income in the Company’s consolidated statement of income.

Commissions earned from on-line insurance brokerage services are also subject to this updated guidance and were also not impacted by the adoption of the updated guidance. Commissions are earned upon collection of the gross premium in accordance with the contracts and an accrual is made to recognize policy cancellations, either at the policyholder’s direction or for non-payment. Commissions are reported in other revenues in the Company's consolidated statement of income.

The Company does not capitalize the costs to obtain or fulfill the contracts for which revenues are reported in fee income and other income, and has not recognized any impairment losses on the receivables related to these contracts during the six months ended June 30, 2018.

The Company adopted the updated guidance effective January 1, 2018. The adoption did not have an effect on the Company’s results of operations, financial position or liquidity.

Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued updated guidance on the classification of cash flows related to certain activities in the statement of cash flows to reduce diversity in practice. The updated guidance was effective for reporting periods beginning after December 15, 2017 and was applied retrospectively to all periods presented. Under the new guidance, distributions received on equity method investments that are considered to be a return on investment are reported as cash flows from operating activities. These distributions were previously reported as cash flows from investing activities. The adoption of this guidance had no effect on the Company’s results of operations, financial position or liquidity.
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 2017 Annual Report.

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 2017 Annual Report.
 
Nature of Operations
 
The Company’s results are reported in the following three business segments — Business 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 the 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 2017 Annual Report.
 

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Table of Contents
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 (loss) 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
 
 
 
 
 
 
 
 
 
2018
 
 

 
 

 
 

 
 

Premiums
 
$
3,641

 
$
601

 
$
2,453

 
$
6,695

Net investment income
 
440

 
57

 
98

 
595

Fee income
 
107

 
—

 
5

 
112

Other revenues
 
20

 
5

 
14

 
39

Total segment revenues (1)
 
$
4,208

 
$
663

 
$
2,570

 
$
7,441

 
 
 
 
 
 
 
 
 
Segment income (loss) (1)
 
$
385

 
$
204

 
$
(17
)
 
$
572

 
 
 
 
 
 
 
 
 
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

(1)
Segment revenues for reportable business segments exclude net realized investment gains (losses). Segment income (loss) 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
2018
 
 

 
 

 
 

 
 

Premiums
 
$
7,209

 
$
1,183

 
$
4,840

 
$
13,232

Net investment income
 
886

 
115

 
197

 
1,198

Fee income
 
206

 
—

 
9

 
215

Other revenues
 
51

 
11

 
31

 
93

Total segment revenues (1)
 
$
8,352

 
$
1,309

 
$
5,077

 
$
14,738

 
 
 
 
 
 
 
 
 
Segment income (1)
 
$
837

 
$
377

 
$
112

 
$
1,326

 
 
 
 
 
 
 
 
 
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

 
(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).

10
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
2.             SEGMENT INFORMATION, Continued

Business Segment Reconciliations
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2018
 
2017
 
2018
 
2017
Revenue reconciliation
 
 

 
 

 
 

 
 

Earned premiums
 
 

 
 

 
 

 
 

Business Insurance:
 
 

 
 

 
 

 
 

Domestic:
 
 

 
 

 
 

 
 

Workers’ compensation
 
$
973

 
$
999

 
$
1,944

 
$
1,975

Commercial automobile
 
587

 
521

 
1,149

 
1,027

Commercial property
 
453

 
443

 
891

 
878

General liability
 
535

 
498

 
1,056

 
989

Commercial multi-peril
 
822

 
797

 
1,627

 
1,571

Other
 
6

 
7

 
13

 
14

Total Domestic
 
3,376

 
3,265

 
6,680

 
6,454

International
 
265

 
239

 
529

 
479

Total Business Insurance
 
3,641

 
3,504

 
7,209

 
6,933

Bond & Specialty Insurance:
 
 

 
 

 
 

 
 

Domestic:
 
 

 
 

 
 

 
 

Fidelity and surety
 
253

 
245

 
499

 
479

General liability
 
248

 
239

 
490

 
474

Other
 
49

 
46

 
96

 
91

Total Domestic
 
550

 
530

 
1,085

 
1,044

International
 
51

 
45

 
98

 
86

Total Bond & Specialty Insurance
 
601

 
575

 
1,183

 
1,130

Personal Insurance:
 
 

 
 

 
 

 
 

Domestic:
 
 

 
 

 
 

 
 

Automobile
 
1,261

 
1,145

 
2,486

 
2,239

Homeowners and Other
 
1,022

 
977

 
2,017

 
1,932

Total Domestic
 
2,283

 
2,122

 
4,503

 
4,171

International
 
170

 
150

 
337

 
300

Total Personal Insurance
 
2,453

 
2,272

 
4,840

 
4,471

Total earned premiums
 
6,695

 
6,351

 
13,232

 
12,534

Net investment income
 
595

 
598

 
1,198

 
1,208

Fee income
 
112

 
116

 
215

 
229

Other revenues
 
39

 
36

 
93

 
66

Total segment revenues
 
7,441

 
7,101

 
14,738

 
14,037

Other revenues
 
—

 
3

 
—

 
4

Net realized investment gains
 
36

 
80

 
25

 
85

Total revenues
 
$
7,477

 
$
7,184

 
$
14,763

 
$
14,126

Income reconciliation, net of tax
 
 

 
 

 
 

 
 

Total segment income
 
$
572

 
$
604

 
$
1,326

 
$
1,280

Interest Expense and Other (1)
 
(78
)
 
(61
)
 
(154
)
 
(123
)
Core income
 
494

 
543

 
1,172

 
1,157

Net realized investment gains
 
30

 
52

 
21

 
55

Net income
 
$
524

 
$
595

 
$
1,193

 
$
1,212

_________________________________________________________
(1) The primary component of Interest Expense and Other was after-tax interest expense of $71 million and $60 million in the three months ended June 30, 2018 and 2017, respectively, and $141 million and $118 million in the six months ended June 30, 2018 and 2017, respectively.

11
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
2.             SEGMENT INFORMATION, Continued

(in millions)
 
June 30,
2018
 
December 31,
2017
Asset reconciliation
 
 

 
 

Business Insurance
 
$
78,500

 
$
78,082

Bond & Specialty Insurance
 
8,757

 
8,776

Personal Insurance
 
15,697

 
15,949

Total segment assets
 
102,954

 
102,807

Other assets (1)
 
569

 
676

Total consolidated assets
 
$
103,523

 
$
103,483

 _________________________________________________________
(1)
The primary components of other assets at June 30, 2018 were accrued over-funded benefit plan assets related to the Company’s qualified domestic pension plan and other intangible assets, and the primary components at December 31, 2017 were accrued over-funded benefit plan assets related to the Company’s qualified domestic pension plan, 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, 2018, in millions)
 
Cost
 
Gains
 
Losses
 
Value
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities
 
$
2,041

 
$
1

 
$
23

 
$
2,019

Obligations of states, municipalities and political subdivisions:
 
 

 
 

 
 

 
 

Local general obligation
 
13,992

 
201

 
136

 
14,057

Revenue
 
9,857

 
171

 
88

 
9,940

State general obligation
 
1,384

 
19

 
12

 
1,391

Pre-refunded
 
3,432

 
111

 
1

 
3,542

Total obligations of states, municipalities and political subdivisions
 
28,665

 
502

 
237

 
28,930

Debt securities issued by foreign governments
 
1,281

 
8

 
8

 
1,281

Mortgage-backed securities, collateralized mortgage obligations and pass-through securities
 
2,499

 
66

 
49

 
2,516

All other corporate bonds
 
28,102

 
161

 
563

 
27,700

Redeemable preferred stock
 
86

 
4

 
—

 
90

Total
 
$
62,674

 
$
742

 
$
880

 
$
62,536


 

12
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
3.             INVESTMENTS, Continued

 
 
Amortized
 
Gross Unrealized
 
Fair
(at December 31, 2017, in millions)
 
Cost
 
Gains
 
Losses
 
Value
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities
 
$
2,080

 
$
4

 
$
8

 
$
2,076

Obligations of states, municipalities and political subdivisions:
 
 

 
 

 
 

 
 

Local general obligation
 
13,488

 
444

 
26

 
13,906

Revenue
 
11,307

 
338

 
19

 
11,626

State general obligation
 
1,443

 
44

 
3

 
1,484

Pre-refunded
 
3,758

 
142

 
1

 
3,899

Total obligations of states, municipalities and political subdivisions
 
29,996

 
968

 
49

 
30,915

Debt securities issued by foreign governments
 
1,505

 
14

 
10

 
1,509

Mortgage-backed securities, collateralized mortgage obligations and pass-through securities
 
2,334

 
87

 
11

 
2,410

All other corporate bonds
 
25,311

 
478

 
100

 
25,689

Redeemable preferred stock
 
90

 
5

 
—

 
95

Total
 
$
61,316

 
$
1,556

 
$
178

 
$
62,694

 
Pre-refunded bonds of $3.54 billion and $3.90 billion at June 30, 2018 and December 31, 2017, 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 $2.61 billion and $563 million during the six months ended June 30, 2018 and 2017, respectively. Gross gains of $24 million and $17 million and gross losses of $11 million and $4 million were realized on those sales during the six months ended June 30, 2018 and 2017, respectively.
 
Equity Securities
 
The cost and fair value of investments in equity securities were as follows:
 
 
 
 
 
 
Fair
(at June 30, 2018, in millions)
 
Cost
 
Gross Gains
 
Gross Losses
 
Value
Public common stock
 
$
335

 
$
12

 
$
5

 
$
342

Non-redeemable preferred stock
 
74

 
11

 
3

 
82

Total
 
$
409

 
$
23

 
$
8

 
$
424

 
 
 
 
 
 
 
Fair
(at December 31, 2017, in millions)
 
Cost
 
Gross Gains
 
Gross Losses
 
Value
Public common stock
 
$
332

 
$
8

 
$
1

 
$
339

Non-redeemable preferred stock
 
108

 
12

 
6

 
114

Total
 
$
440

 
$
20

 
$
7

 
$
453

 
For the six months ended June 30, 2018, the Company recognized $3 million of net gains on equity securities still held as of June 30, 2018.



13
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
3.             INVESTMENTS, Continued

Proceeds from sales of equity securities previously classified as available for sale were $200 million during the six months ended June 30, 2017.  Gross gains of $88 million and gross losses of $1 million were realized on those sales during the six months ended June 30, 2017.
 
Unrealized Investment Losses
 
The following tables summarize, for all investments in an unrealized loss position at June 30, 2018 and December 31, 2017, 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 2017 Annual Report.  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 2017 Annual Report in determining whether such investments are other-than-temporarily impaired.
 
 
Less than 12 months
 
12 months or longer
 
Total
(at June 30, 2018, 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
 
$
1,410

 
$
20

 
$
458

 
$
3

 
$
1,868

 
$
23

Obligations of states, municipalities and political subdivisions
 
6,321

 
101

 
2,856

 
136

 
9,177

 
237

Debt securities issued by foreign governments
 
206

 
2

 
241

 
6

 
447

 
8

Mortgage-backed securities, collateralized mortgage obligations and pass-through securities
 
1,557

 
41

 
256

 
8

 
1,813

 
49

All other corporate bonds
 
17,584

 
441

 
2,313

 
122

 
19,897

 
563

Total fixed maturities
 
$
27,078

 
$
605

 
$
6,124

 
$
275

 
$
33,202

 
$
880

 

14
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
3.             INVESTMENTS, Continued

 
 
Less than 12 months
 
12 months or
longer
 
Total
(at December 31, 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
 
$
1,150

 
$
5

 
$
470

 
$
3

 
$
1,620

 
$
8

Obligations of states, municipalities and political subdivisions
 
505

 
2

 
2,959

 
47

 
3,464

 
49

Debt securities issued by foreign governments
 
394

 
6

 
111

 
4

 
505

 
10

Mortgage-backed securities, collateralized mortgage obligations and pass-through securities
 
1,021

 
7

 
250

 
4

 
1,271

 
11

All other corporate bonds
 
6,062

 
48

 
1,990

 
52

 
8,052

 
100

Total fixed maturities
 
9,132

 
68

 
5,780

 
110

 
14,912

 
178

Equity securities
 
 
 
 

 
 

 
 

 
 

 
 

Public common stock
 
18

 
—

 
34

 
1

 
52

 
1

Non-redeemable preferred stock
 
3

 
—

 
56

 
6

 
59

 
6

Total equity securities
 
21

 
—

 
90

 
7

 
111

 
7

Total
 
$
9,153

 
$
68

 
$
5,870

 
$
117

 
$
15,023

 
$
185

 
At June 30, 2018, the amount of gross unrealized losses for all fixed maturity investments reported at fair value for which fair value was less than 80% of amortized cost was not significant.
 
Impairment Charges
 
Impairment charges included in net realized investment gains in the consolidated statement of income were $1 million and $5 million for the three months ended June 30, 2018 and 2017, respectively, and $1 million and $7 million for the six months ended June 30, 2018 and 2017, respectively.
 
The cumulative amount of credit losses on fixed maturities held at June 30, 2018 and 2017 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 $67 million and $83 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, 2018 and 2017 from that disclosed in note 3 of notes to the consolidated financial statements in the Company’s 2017 Annual Report.
 
Derivative Financial Instruments
 
From time to time, the Company enters into U.S. Treasury note futures contracts to modify the effective duration of specific assets within the investment portfolio.  U.S. Treasury futures contracts require a daily mark-to-market and settlement with the broker.  At June 30, 2018 and December 31, 2017, the Company had $100 million and $400 million notional value of open U.S. Treasury futures contracts, respectively.  Net realized investment gains and losses related to U.S. Treasury futures contracts for the three months and six months ended June 30, 2018 and 2017 were not significant.
 

15
Table of Contents
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, 2018 and December 31, 2017.
 
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 $62 million and $127 million at June 30, 2018 and December 31, 2017, 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 $139 million and $77 million at June 30, 2018 and December 31, 2017, 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 2017 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.  An investment transferred between levels during a period is transferred at its fair value as of the beginning of that period.
 

16
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
4.     FAIR VALUE MEASUREMENTS, Continued

(at June 30, 2018, 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
 
$
2,019

 
$
2,019

 
$
—

 
$
—

Obligations of states, municipalities and political subdivisions
 
28,930

 
—

 
28,918

 
12

Debt securities issued by foreign governments
 
1,281

 
—

 
1,281

 
—

Mortgage-backed securities, collateralized mortgage obligations and pass-through securities
 
2,516

 
—

 
2,492

 
24

All other corporate bonds
 
27,700

 
—

 
27,535

 
165

Redeemable preferred stock
 
90

 
3

 
87

 
—

Total fixed maturities
 
62,536

 
2,022

 
60,313

 
201

Equity securities
 
 

 
 

 
 

 
 

Public common stock
 
342

 
342

 
—

 
—

Non-redeemable preferred stock
 
82

 
35

 
47

 
—

Total equity securities
 
424

 
377

 
47

 
—

Other investments
 
61

 
17

 
—

 
44

Total
 
$
63,021

 
$
2,416

 
$
60,360

 
$
245

 
(at December 31, 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
 
$
2,076

 
$
2,076

 
$
—

 
$
—

Obligations of states, municipalities and political subdivisions
 
30,915

 
—

 
30,910

 
5

Debt securities issued by foreign governments
 
1,509

 
—

 
1,509

 
—

Mortgage-backed securities, collateralized mortgage obligations and pass-through securities
 
2,410

 
—

 
2,371

 
39

All other corporate bonds
 
25,689

 
11

 
25,518

 
160

Redeemable preferred stock
 
95

 
3

 
92

 
—

Total fixed maturities
 
62,694

 
2,090

 
60,400

 
204

Equity securities
 
 

 
 

 
 

 
 

Public common stock
 
339

 
339

 
—

 
—

Non-redeemable preferred stock
 
114

 
45

 
69

 
—

Total equity securities
 
453

 
384

 
69

 
—

Other investments
 
57

 
19

 
—

 
38

Total
 
$
63,204

 
$
2,493

 
$
60,469

 
$
242

 
During the six months ended June 30, 2018 and the year ended December 31, 2017, 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, 2018 or the year ended December 31, 2017.
 

17
Table of Contents
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, 2018, in millions)
 
Carrying
Value
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 

 
 

 
 

 
 

 
 

Short-term securities
 
$
3,692

 
$
3,692

 
$
574

&#