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Section 1: 10-Q (10-Q)

Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

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

 

For the quarterly period ended September 30, 2014

 

or

 

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

 

For the transition period from              to             

 


 

Commission file number: 001-10898

 


 

The Travelers Companies, Inc.

(Exact name of registrant as specified in its charter)

 


 

Minnesota

 

41-0518860

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

485 Lexington Avenue

New York, NY 10017

(Address of principal executive offices) (Zip Code)

 

(917) 778-6000

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The number of shares of the Registrant’s Common Stock, without par value, outstanding at October 17, 2014 was 331,396,299.

 

 

 



Table of Contents

 

The Travelers Companies, Inc.

 

Quarterly Report on Form 10-Q

 

For Quarterly Period Ended September 30, 2014

 


 

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, 2014 and 2013

3

 

 

 

 

Consolidated Statement of Comprehensive Income (Loss) (Unaudited) — Three Months and Nine Months Ended September 30, 2014 and 2013

4

 

 

 

 

Consolidated Balance Sheet — September 30, 2014 (Unaudited) and December 31, 2013

5

 

 

 

 

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) — Nine Months Ended September 30, 2014 and 2013

6

 

 

 

 

Consolidated Statement of Cash Flows (Unaudited) — Nine Months Ended September 30, 2014 and 2013

7

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

48

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

84

 

 

 

Item 4.

Controls and Procedures

84

 

 

 

 

Part II — Other Information

 

 

 

 

Item 1.

Legal Proceedings

84

 

 

 

Item 1A.

Risk Factors

85

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

85

 

 

 

Item 5.

Other Information

85

 

 

 

Item 6.

Exhibits

86

 

 

 

 

SIGNATURES

86

 

 

 

 

EXHIBIT INDEX

87

 

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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Premiums

 

$

5,983

 

$

5,666

 

$

17,734

 

$

16,786

 

Net investment income

 

719

 

657

 

2,150

 

2,014

 

Fee income

 

110

 

107

 

329

 

286

 

Net realized investment gains (losses) (1)

 

40

 

(22

)

57

 

155

 

Other revenues

 

34

 

44

 

109

 

213

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

6,886

 

6,452

 

20,379

 

19,454

 

 

 

 

 

 

 

 

 

 

 

Claims and expenses

 

 

 

 

 

 

 

 

 

Claims and claim adjustment expenses

 

3,520

 

3,297

 

10,661

 

9,980

 

Amortization of deferred acquisition costs

 

984

 

953

 

2,899

 

2,851

 

General and administrative expenses

 

1,031

 

934

 

2,913

 

2,780

 

Interest expense

 

93

 

91

 

277

 

269

 

 

 

 

 

 

 

 

 

 

 

Total claims and expenses

 

5,628

 

5,275

 

16,750

 

15,880

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

1,258

 

1,177

 

3,629

 

3,574

 

Income tax expense

 

339

 

313

 

975

 

889

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

919

 

$

864

 

$

2,654

 

$

2,685

 

 

 

 

 

 

 

 

 

 

 

Net income per share

 

 

 

 

 

 

 

 

 

Basic

 

$

2.72

 

$

2.33

 

$

7.68

 

$

7.12

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

2.69

 

$

2.30

 

$

7.60

 

$

7.05

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

335.1

 

368.9

 

342.9

 

374.1

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

338.9

 

372.9

 

346.5

 

378.1

 

 


(1)         Total other-than-temporary impairment (OTTI) gains (losses) were $(8) million and $0 million for the three months ended September 30, 2014 and 2013, respectively, and $(16) million and $(1) million for the nine months ended September 30, 2014 and 2013, respectively.  Of total OTTI, credit losses of $(10) million and $(3) million for the three months ended September 30, 2014 and 2013, respectively, and $(20) million and $(10) million for the nine months ended September 30, 2014 and 2013, respectively, were recognized in net realized investment gains (losses).  In addition, unrealized gains from other changes in total OTTI of $2 million and $3 million for the three months ended September 30, 2014 and 2013, respectively, and $4 million and $9 million for the nine months ended September 30, 2014 and 2013, respectively, were recognized in other comprehensive income (loss) as part of changes in net unrealized gains on investment securities having credit losses recognized in the consolidated statement of income.

 

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

 

3



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

(in millions)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

919

 

$

864

 

$

2,654

 

$

2,685

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Changes in net unrealized gains on investment securities:

 

 

 

 

 

 

 

 

 

Having no credit losses recognized in the consolidated statement of income

 

(154

)

(204

)

901

 

(2,370

)

Having credit losses recognized in the consolidated statement of income

 

1

 

(2

)

4

 

2

 

Net changes in benefit plan assets and obligations

 

15

 

24

 

45

 

78

 

Net changes in unrealized foreign currency translation

 

(203

)

112

 

(149

)

(57

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before income taxes

 

(341

)

(70

)

801

 

(2,347

)

Income tax expense (benefit)

 

(79

)

(55

)

311

 

(816

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of taxes

 

(262

)

(15

)

490

 

(1,531

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

657

 

$

849

 

$

3,144

 

$

1,154

 

 

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)

 

 

 

September 30,
2014

 

December 31,
2013

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Fixed maturities, available for sale, at fair value (amortized cost $61,043 and $62,196)

 

$

63,622

 

$

63,956

 

Equity securities, available for sale, at fair value (cost $609 and $686)

 

949

 

943

 

Real estate investments

 

949

 

938

 

Short-term securities

 

5,033

 

3,882

 

Other investments

 

3,637

 

3,441

 

 

 

 

 

 

 

Total investments

 

74,190

 

73,160

 

 

 

 

 

 

 

Cash

 

367

 

294

 

Investment income accrued

 

663

 

734

 

Premiums receivable

 

6,439

 

6,125

 

Reinsurance recoverables

 

9,279

 

9,713

 

Ceded unearned premiums

 

848

 

801

 

Deferred acquisition costs

 

1,890

 

1,804

 

Deferred taxes

 

 

303

 

Contractholder receivables

 

4,367

 

4,328

 

Goodwill

 

3,621

 

3,634

 

Other intangible assets

 

316

 

351

 

Other assets

 

2,542

 

2,565

 

 

 

 

 

 

 

Total assets

 

$

104,522

 

$

103,812

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Claims and claim adjustment expense reserves

 

$

50,402

 

$

50,895

 

Unearned premium reserves

 

12,181

 

11,850

 

Contractholder payables

 

4,367

 

4,328

 

Payables for reinsurance premiums

 

491

 

298

 

Deferred taxes

 

122

 

 

Debt

 

6,348

 

6,346

 

Other liabilities

 

5,290

 

5,299

 

 

 

 

 

 

 

Total liabilities

 

79,201

 

79,016

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Common stock (1,750.0 shares authorized; 331.4 and 353.5 shares issued and outstanding)

 

21,764

 

21,500

 

Retained earnings

 

26,394

 

24,291

 

Accumulated other comprehensive income

 

1,300

 

810

 

Treasury stock, at cost (427.6 and 401.5 shares)

 

(24,137

)

(21,805

)

 

 

 

 

 

 

Total shareholders’ equity

 

25,321

 

24,796

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

104,522

 

$

103,812

 

 

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 nine months ended September 30,

 

2014

 

2013

 

Common stock

 

 

 

 

 

Balance, beginning of year

 

$

21,500

 

$

21,161

 

Employee share-based compensation

 

120

 

122

 

Compensation amortization under share-based plans and other changes

 

144

 

142

 

 

 

 

 

 

 

Balance, end of period

 

21,764

 

21,425

 

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

Balance, beginning of year

 

24,291

 

21,352

 

Net income

 

2,654

 

2,685

 

Dividends

 

(553

)

(552

)

Other

 

2

 

 

 

 

 

 

 

 

Balance, end of period

 

26,394

 

23,485

 

 

 

 

 

 

 

Accumulated other comprehensive income, net of tax

 

 

 

 

 

Balance, beginning of year

 

810

 

2,236

 

Other comprehensive income (loss)

 

490

 

(1,531

)

 

 

 

 

 

 

Balance, end of period

 

1,300

 

705

 

 

 

 

 

 

 

Treasury stock (at cost)

 

 

 

 

 

Balance, beginning of year

 

(21,805

)

(19,344

)

Treasury stock acquired — share repurchase authorization

 

(2,275

)

(1,400

)

Net shares acquired related to employee share-based compensation plans

 

(57

)

(60

)

 

 

 

 

 

 

Balance, end of period

 

(24,137

)

(20,804

)

 

 

 

 

 

 

Total shareholders’ equity

 

$

25,321

 

$

24,811

 

 

 

 

 

 

 

Common shares outstanding

 

 

 

 

 

Balance, beginning of year

 

353.5

 

377.4

 

Treasury stock acquired — share repurchase authorization

 

(25.4

)

(17.0

)

Net shares issued under employee share-based compensation plans

 

3.3

 

3.7

 

 

 

 

 

 

 

Balance, end of period

 

331.4

 

364.1

 

 

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 nine months ended September 30,

 

2014

 

2013

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

2,654

 

$

2,685

 

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

 

 

 

 

 

Net realized investment gains

 

(57

)

(155

)

Depreciation and amortization

 

653

 

642

 

Deferred federal income tax expense

 

93

 

132

 

Amortization of deferred acquisition costs

 

2,899

 

2,851

 

Equity in income from other investments

 

(412

)

(247

)

Premiums receivable

 

(334

)

(242

)

Reinsurance recoverables

 

403

 

1,102

 

Deferred acquisition costs

 

(2,993

)

(2,862

)

Claims and claim adjustment expense reserves

 

(298

)

(1,684

)

Unearned premium reserves

 

379

 

483

 

Other

 

181

 

184

 

 

 

 

 

 

 

Net cash provided by operating activities

 

3,168

 

2,889

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Proceeds from maturities of fixed maturities

 

7,975

 

5,917

 

Proceeds from sales of investments:

 

 

 

 

 

Fixed maturities

 

927

 

1,160

 

Equity securities

 

128

 

57

 

Real estate investments

 

5

 

 

Other investments

 

612

 

545

 

Purchases of investments:

 

 

 

 

 

Fixed maturities

 

(8,237

)

(6,492

)

Equity securities

 

(47

)

(50

)

Real estate investments

 

(41

)

(65

)

Other investments

 

(406

)

(312

)

Net purchases of short-term securities

 

(1,163

)

(1,893

)

Securities transactions in course of settlement

 

119

 

280

 

Acquisition, net of cash acquired

 

(12

)

 

Other

 

(262

)

(254

)

 

 

 

 

 

 

Net cash used in investing activities

 

(402

)

(1,107

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Payment of debt

 

 

(500

)

Issuance of debt

 

 

494

 

Dividends paid to shareholders

 

(549

)

(549

)

Issuance of common stock — employee share options

 

154

 

158

 

Treasury stock acquired — share repurchase authorization

 

(2,275

)

(1,400

)

Treasury stock acquired — net employee share-based compensation

 

(56

)

(60

)

Excess tax benefits from share-based payment arrangements

 

38

 

43

 

 

 

 

 

 

 

Net cash used in financing activities

 

(2,688

)

(1,814

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(5

)

(3

)

 

 

 

 

 

 

Net increase (decrease) in cash

 

73

 

(35

)

Cash at beginning of year

 

294

 

330

 

 

 

 

 

 

 

Cash at end of period

 

$

367

 

$

295

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

Income taxes paid

 

$

785

 

$

724

 

Interest paid

 

$

217

 

$

206

 

 

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 2013 Annual Report on Form 10-K as updated by the Company’s Form 8-K filed on September 10, 2014.

 

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 November 1, 2013, the Company acquired all of the issued and outstanding shares of The Dominion of Canada General Insurance Company (Dominion) for an aggregate purchase price of approximately $1.035 billion. Dominion primarily markets personal lines and small commercial insurance business in Canada.  At the acquisition date, the Company recorded at fair value $3.91 billion of assets acquired and $2.88 billion of liabilities assumed as part of purchase accounting, including $16 million of identifiable intangible assets and $273 million of goodwill. Dominion is included in the Company’s Business and International Insurance segment.

 

Adoption of Accounting Standards Updates

 

Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date

 

In February 2013, the Financial Accounting Standards Board (FASB) issued updated guidance to resolve diversity in practice concerning the recognition, measurement and disclosure of obligations resulting from certain joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date.  The guidance requires that the reporting entity measure joint and several liability arrangements as the amount the reporting entity agreed to pay on the basis of its arrangement among the co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors.  The updated guidance was effective for the quarter ending March 31, 2014. The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.

 

Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity

 

In March 2013, the FASB issued updated guidance to resolve diversity in practice concerning the release of the cumulative foreign currency translation adjustment into net income when a parent sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity.  When a company ceases to have a controlling financial interest in a subsidiary within a foreign entity, the company should recognize any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary had resided. Upon the partial sale of an equity method investment that is a foreign entity, the company should release into earnings a pro rata portion of the cumulative translation adjustment. Upon the partial sale of an equity method investment that is not a foreign entity, the company should release into earnings the cumulative translation adjustment if the partial sale represents a complete or substantially complete liquidation of the foreign entity that holds the equity method investment.  The updated guidance was effective for the quarter ending March 31, 2014.  The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.

 

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

 

Accounting Standards Not Yet Adopted

 

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity

 

In April 2014, the FASB issued revised guidance to reduce diversity in practice for reporting discontinued operations. Under the previous guidance, any component of an entity that was a reportable segment, an operating segment, a reporting unit, a subsidiary or an asset group was eligible for discontinued operations presentation. The revised guidance only allows disposals of components of an entity that represent a strategic shift (e.g., disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity) and that have a major effect on a reporting entity’s operations and financial results to be reported as discontinued operations. The revised guidance also requires expanded disclosure in the financial statements for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. The updated guidance is effective for the quarter ending March 31, 2015. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Revenue from Contracts with Customers

 

In May 2014, the FASB issued updated guidance to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company’s fee income related to providing claims and policy management services as well as claim and loss prevention services will be subject to this updated guidance.

 

The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services.  The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation.

 

The updated guidance is effective for the quarter ending March 31, 2017.  The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

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

 

In June 2014, the FASB issued updated guidance to resolve diversity in practice concerning employee share-based payments that contain performance targets that could be achieved after the requisite service period. Many reporting entities account for performance targets that could be achieved after the requisite service period as performance conditions that affect the vesting of the award and, therefore, do not reflect the performance targets in the estimate of the grant-date fair value of the award. Other reporting entities treat those performance targets as nonvesting conditions that affect the grant-date fair value of the award.

 

The updated guidance requires that a performance target that affects vesting and that can be achieved after the requisite service period be treated as a performance condition. As such, the performance target that affects vesting should not be reflected in estimating that fair value of the award at the grant date. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which service has been rendered. If the performance target becomes probable of being achieved before the end of the service period, the remaining unrecognized compensation cost for which requisite service has not yet been rendered is recognized prospectively over the remaining service period. The total amount of compensation cost recognized during and after the service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest.

 

The updated guidance is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

1.                       BASIS OF PRESENTATION AND ACCOUNTING POLICIES, Continued

 

Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern

 

In August 2014, the FASB issued guidance to address the diversity in practice in determining when there is substantial doubt about an entity’s ability to continue as a going concern and when an entity must disclose certain relevant conditions and events.  The new guidance requires an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued).  The new guidance allows the entity to consider the mitigating effects of management’s plans that will alleviate the substantial doubt and requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans.  If conditions or events raise substantial doubt that is not alleviated, an entity should disclose that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued), along with the principal conditions or events that raise substantial doubt, management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations and management’s plans that are intended to mitigate those conditions.

 

The guidance is effective for annual periods ending after December 15, 2016, and interim and annual periods thereafter.

 

Nature of Operations

 

On June 10, 2014, the Company announced a realignment of its management team, effective July 1, 2014, that gave rise to a realignment of two of its three reportable business segments, as follows:

 

·                  The Company’s International Insurance group, which had previously been included in the Financial, Professional & International Insurance segment, was combined with the Company’s previous Business Insurance segment to create a new Business and International Insurance segment.

·                  The Bond & Financial Products group, which comprised the remaining businesses in the Financial, Professional & International Insurance segment, now comprises the new Bond & Specialty Insurance segment.

·                  The Personal Insurance segment was not impacted by these changes.

 

The realignment of segments described above was made to reflect the realignment of the Company’s senior management responsibilities and the manner in which the Company’s businesses have been managed starting July 1, 2014, and 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.

 

In connection with these changes, the Company has realigned and revised the names of several businesses that comprise the Business and International Insurance segment.  The new reportable business segments are as follows:

 

Business and International Insurance

 

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

 

Business and International Insurance is comprised of: Select Accounts; Middle Market; National Accounts; First Party; Specialized Distribution; and International.  International includes Dominion, which the Company acquired in November 2013 and which writes personal lines and small commercial insurance business in Canada.

 

International also includes the Company’s 49.5% ownership of the common stock of J. Malucelli Participações em Seguros e Resseguros S.A. (JMalucelli), its joint venture in Brazil.  JMalucelli primarily writes surety business in Brazil, as well as other property and casualty insurance business in Brazil.  The Company’s investment in JMalucelli is accounted for using the equity method and is included in “other investments” on the consolidated balance sheet.

 

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Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

1.                       BASIS OF PRESENTATION AND ACCOUNTING POLICIES, Continued

 

Business and International 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 and International Insurance Other.

 

Bond & Specialty Insurance

 

The Bond & Specialty Insurance segment includes surety and financial liability coverages, which primarily use credit-based underwriting processes, and provide a wide range of primarily domestic customers with bond and insurance products and risk management services.

 

Personal Insurance

 

The Personal Insurance segment writes a broad range of property and casualty insurance covering individuals’ personal risks. The primary products of automobile and homeowners insurance are complemented by a broad suite of related coverages.

 

11



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, operating income and total assets by reportable business segments:

 

(for the three months
ended September 30,

in millions)

 

Business and
International

Insurance

 

Bond & Specialty
Insurance

 

Personal
Insurance

 

Total
Reportable
Segments

 

2014

 

 

 

 

 

 

 

 

 

Premiums

 

$

3,660

 

$

527

 

$

1,796

 

$

5,983

 

Net investment income

 

557

 

64

 

98

 

719

 

Fee income

 

110

 

 

 

110

 

Other revenues

 

10

 

5

 

19

 

34

 

Total operating revenues (1)

 

$

4,337

 

$

596

 

$

1,913

 

$

6,846

 

Operating income (1)

 

$

552

 

$

165

 

$

239

 

$

956

 

 

 

 

 

 

 

 

 

 

 

2013

 

 

 

 

 

 

 

 

 

Premiums

 

$

3,325

 

$

506

 

$

1,835

 

$

5,666

 

Net investment income

 

504

 

63

 

90

 

657

 

Fee income

 

107

 

 

 

107

 

Other revenues

 

8

 

5

 

34

 

47

 

Total operating revenues (1)

 

$

3,944

 

$

574

 

$

1,959

 

$

6,477

 

Operating income (1)

 

$

566

 

$

120

 

$

262

 

$

948

 

 


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

 

(for the nine months
ended September 30,

in millions)

 

Business and
International

Insurance

 

Bond & Specialty
Insurance

 

Personal
Insurance

 

Total
Reportable
Segments

 

2014

 

 

 

 

 

 

 

 

 

Premiums

 

$

10,849

 

$

1,554

 

$

5,331

 

$

17,734

 

Net investment income

 

1,666

 

192

 

292

 

2,150

 

Fee income

 

329

 

 

 

329

 

Other revenues

 

32

 

15

 

62

 

109

 

Total operating revenues (1)

 

$

12,876

 

$

1,761

 

$

5,685

 

$

20,322

 

Operating income (1)

 

$

1,717

 

$

511

 

$

582

 

$

2,810

 

 

 

 

 

 

 

 

 

 

 

2013

 

 

 

 

 

 

 

 

 

Premiums

 

$

9,801

 

$

1,476

 

$

5,509

 

$

16,786

 

Net investment income

 

1,544

 

195

 

275

 

2,014

 

Fee income

 

286

 

 

 

286

 

Other revenues

 

135

 

15

 

67

 

217

 

Total operating revenues (1)

 

$

11,766

 

$

1,686

 

$

5,851

 

$

19,303

 

Operating income (1)

 

$

1,773

 

$

399

 

$

601

 

$

2,773

 

 


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

 

12



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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)

 

2014

 

2013

 

2014

 

2013

 

Revenue reconciliation

 

 

 

 

 

 

 

 

 

Earned premiums

 

 

 

 

 

 

 

 

 

Business and International Insurance:

 

 

 

 

 

 

 

 

 

Domestic:

 

 

 

 

 

 

 

 

 

Workers’ compensation

 

$

928

 

$

896

 

$

2,759

 

$

2,640

 

Commercial automobile

 

481

 

476

 

1,422

 

1,425

 

Commercial property

 

442

 

432

 

1,310

 

1,259

 

General liability

 

472

 

452

 

1,376

 

1,333

 

Commercial multi-peril

 

774

 

779

 

2,292

 

2,320

 

Other

 

10

 

11

 

31

 

29

 

Total Domestic

 

3,107

 

3,046

 

9,190

 

9,006

 

International

 

553

 

279

 

1,659

 

795

 

Total Business and International Insurance

 

3,660

 

3,325

 

10,849

 

9,801

 

 

 

 

 

 

 

 

 

 

 

Bond & Specialty Insurance:

 

 

 

 

 

 

 

 

 

Fidelity and surety

 

240

 

235

 

700

 

683

 

General liability

 

243

 

227

 

721

 

661

 

Other

 

44

 

44

 

133

 

132

 

Total Bond & Specialty Insurance

 

527

 

506

 

1,554

 

1,476

 

 

 

 

 

 

 

 

 

 

 

Personal Insurance:

 

 

 

 

 

 

 

 

 

Automobile

 

835

 

855

 

2,471

 

2,591

 

Homeowners and other

 

961

 

980

 

2,860

 

2,918

 

Total Personal Insurance

 

1,796

 

1,835

 

5,331

 

5,509

 

Total earned premiums

 

5,983

 

5,666

 

17,734

 

16,786

 

Net investment income

 

719

 

657

 

2,150

 

2,014

 

Fee income

 

110

 

107

 

329

 

286

 

Other revenues

 

34

 

47

 

109

 

217

 

Total operating revenues for reportable segments

 

6,846

 

6,477

 

20,322

 

19,303

 

Other revenues

 

 

(3

)

 

(4

)

Net realized investment gains (losses)

 

40

 

(22

)

57

 

155

 

Total consolidated revenues

 

$

6,886

 

$

6,452

 

$

20,379

 

$

19,454

 

 

 

 

 

 

 

 

 

 

 

Income reconciliation, net of tax

 

 

 

 

 

 

 

 

 

Total operating income for reportable segments

 

$

956

 

$

948

 

$

2,810

 

$

2,773

 

Interest Expense and Other (1)

 

(63

)

(65

)

(192

)

(187

)

Total operating income

 

893

 

883

 

2,618

 

2,586

 

Net realized investment gains (losses)

 

26

 

(19

)

36

 

99

 

Total consolidated net income

 

$

919

 

$

864

 

$

2,654

 

$

2,685

 

 


(1)                  The primary component of Interest Expense and Other is after-tax interest expense of $60 million and $59 million for the three months ended September 30, 2014 and 2013, respectively, and $180 million and $175 million for the nine months ended September 30, 2014 and 2013, respectively.

 

13



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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,
2014

 

December 31,
2013

 

Asset reconciliation:

 

 

 

 

 

Business and International Insurance

 

$

83,218

 

$

82,789

 

Bond & Specialty Insurance

 

7,871

 

7,648

 

Personal Insurance

 

12,975

 

12,870

 

Total assets for reportable segments

 

104,064

 

103,307

 

Other assets (1)

 

458

 

505

 

Total consolidated assets

 

$

104,522

 

$

103,812

 

 


(1)                  The primary components of other assets at both dates were other intangible assets and accrued over-funded benefit plan assets related to the Company’s qualified domestic pension plan.

 

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, 2014, in millions)

 

Cost

 

Gains

 

Losses

 

Value

 

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

 

$

2,050

 

$

31

 

$

7

 

$

2,074

 

Obligations of states, municipalities and political subdivisions:

 

 

 

 

 

 

 

 

 

Pre-refunded

 

7,459

 

348

 

 

7,807

 

All other

 

24,787

 

1,336

 

33

 

26,090

 

Total obligations of states, municipalities and political subdivisions

 

32,246

 

1,684

 

33

 

33,897

 

Debt securities issued by foreign governments

 

2,435

 

34

 

1

 

2,468

 

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

 

2,114

 

167

 

7

 

2,274

 

All other corporate bonds

 

22,072

 

828

 

126

 

22,774

 

Redeemable preferred stock

 

126

 

9

 

 

135

 

Total

 

$

61,043

 

$

2,753

 

$

174

 

$

63,622

 

 

 

 

Amortized

 

Gross Unrealized

 

Fair

 

(at December 31, 2013, in millions)

 

Cost

 

Gains

 

Losses

 

Value

 

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

 

$

2,288

 

$

39

 

$

12

 

$

2,315

 

Obligations of states, municipalities and political subdivisions:

 

 

 

 

 

 

 

 

 

Pre-refunded

 

9,074

 

445

 

1

 

9,518

 

All other

 

25,414

 

991

 

361

 

26,044

 

Total obligations of states, municipalities and political subdivisions

 

34,488

 

1,436

 

362

 

35,562

 

Debt securities issued by foreign governments

 

2,552

 

33

 

8

 

2,577

 

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

 

2,263

 

179

 

18

 

2,424

 

All other corporate bonds

 

20,472

 

767

 

299

 

20,940

 

Redeemable preferred stock

 

133

 

6

 

1

 

138

 

Total

 

$

62,196

 

$

2,460

 

$

700

 

$

63,956

 

 

14



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

3.                       INVESTMENTS, Continued

 

Pre-refunded bonds of $7.81 billion and $9.52 billion at September 30, 2014 and December 31, 2013, respectively, were bonds for which states or municipalities have established irrevocable trusts, almost exclusively comprised of U.S. Treasury securities, which were created to satisfy their responsibility for payments of principal and interest.

 

Equity Securities

 

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

 

 

 

 

 

Gross Unrealized

 

Fair

 

(at September 30, 2014, in millions)

 

Cost

 

Gains

 

Losses

 

Value

 

Public common stock

 

$

396

 

$

312

 

$

 

$

708

 

Non-redeemable preferred stock

 

213

 

30

 

2

 

241

 

Total

 

$

609

 

$

342

 

$

2

 

$

949

 

 

 

 

 

 

Gross Unrealized

 

Fair

 

(at December 31, 2013, in millions)

 

Cost

 

Gains

 

Losses

 

Value

 

Public common stock

 

$

385

 

$

226

 

$

1

 

$

610

 

Non-redeemable preferred stock

 

301

 

34

 

2

 

333

 

Total

 

$

686

 

$

260

 

$

3

 

$

943

 

 

Unrealized Investment Losses

 

The following tables summarize, for all investments in an unrealized loss position at September 30, 2014 and December 31, 2013, 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.

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

(at September 30, 2014, in millions)

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fixed maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

172

 

$

2

 

$

105

 

$

5

 

$

277

 

$

7

 

Obligations of states, municipalities and political subdivisions

 

1,033

 

1

 

1,736

 

32

 

2,769

 

33

 

Debt securities issued by foreign governments

 

226

 

 

143

 

1

 

369

 

1

 

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

 

157

 

1

 

257

 

6

 

414

 

7

 

All other corporate bonds

 

3,161

 

34

 

2,658

 

92

 

5,819

 

126

 

Total fixed maturities

 

4,749

 

38

 

4,899

 

136

 

9,648

 

174

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Public common stock

 

36

 

 

1

 

 

37

 

 

Non-redeemable preferred stock

 

108

 

2

 

 

 

108

 

2

 

Total equity securities

 

144

 

2

 

1

 

 

145

 

2

 

Total

 

$

4,893

 

$

40

 

$

4,900

 

$

136

 

$

9,793

 

$

176

 

 

15



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, 2013, 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

 

$

433

 

$

12

 

$

 

$

 

$

433

 

$

12

 

Obligations of states, municipalities and political subdivisions

 

4,785

 

298

 

432

 

64

 

5,217

 

362

 

Debt securities issued by foreign governments

 

907

 

8

 

1

 

 

908

 

8

 

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

 

542

 

17

 

21

 

1

 

563

 

18

 

All other corporate bonds

 

6,887

 

253

 

421

 

46

 

7,308

 

299

 

Redeemable preferred stock

 

82

 

1

 

 

 

82

 

1

 

Total fixed maturities

 

13,636

 

589

 

875

 

111

 

14,511

 

700

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Public common stock

 

53

 

1

 

 

 

53

 

1

 

Non-redeemable preferred stock

 

147

 

2

 

 

 

147

 

2

 

Total equity securities

 

200

 

3

 

 

 

200

 

3

 

Total

 

$

13,836

 

$

592

 

$

875

 

$

111

 

$

14,711

 

$

703

 

 

The following table summarizes, 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, 2014, the gross unrealized investment loss by length of time those securities have continuously been in an unrealized loss position of greater than 20% of amortized cost:

 

 

 

Period For Which Fair Value Is Less Than 80% of Amortized Cost

 

(at September 30, 2014, in millions)

 

3 Months
or Less

 

Greater Than 3
Months, 6 Months
or Less

 

Greater Than 6
Months, 12 Months
or Less

 

Greater Than
12 Months

 

Total

 

Fixed maturities

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

 

$

 

$

 

$

 

$

 

Other

 

 

 

2

 

2

 

4

 

Total fixed maturities

 

 

 

2

 

2

 

4

 

Equity securities

 

 

 

 

 

 

Total

 

$

 

$

 

$

2

 

$

2

 

$

4

 

 

These unrealized losses at September 30, 2014 represented less than 1% of the combined fixed maturity and equity security portfolios on a pretax basis and less than 1% of shareholders’ equity on an after-tax basis.

 

16



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

3.                       INVESTMENTS, Continued

 

Impairment Charges

 

Impairment charges included in net realized investment gains (losses) in the consolidated statement of income were as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(in millions)

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

 

 

 

 

 

 

 

 

 

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

 

$

 

$

 

$

 

$

 

Obligations of states, municipalities and political subdivisions

 

 

 

 

 

Debt securities issued by foreign governments

 

 

 

 

 

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

 

 

 

1

 

2

 

All other corporate bonds

 

9

 

 

12

 

 

Redeemable preferred stock

 

 

 

 

 

Total fixed maturities

 

9

 

 

13

 

2

 

Equity securities

 

 

 

 

 

 

 

 

 

Public common stock

 

1

 

2

 

6

 

3

 

Non-redeemable preferred stock

 

 

 

 

 

Total equity securities

 

1

 

2

 

6

 

3

 

Other investments

 

 

1

 

1

 

5

 

Total

 

$

10

 

$

3

 

$

20

 

$

10

 

 

The following tables present the cumulative amount of and the changes during the reporting period in the credit losses of other-than-temporary impairments (OTTI) on fixed maturities recognized in the consolidated statement of income for which a portion of the OTTI was recognized in other comprehensive income:

 

17



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

3.                       INVESTMENTS, Continued

 

 

 

2014

 

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

 

Cumulative
OTTI Credit
Losses
Recognized for
Securities
Held,
Beginning of
Period

 

Additions for
OTTI Securities
Where No
Credit Losses
Were Previously
Recognized

 

Additions for
OTTI
Securities
Where Credit
Losses Have
Been
Previously
Recognized

 

Reductions
Due to
Sales/Defaults
of Credit-
Impaired
Securities

 

Adjustments to
Book Value of
Credit-
Impaired
Securities due
to Changes in
Cash Flows

 

Cumulative
OTTI Credit
Losses
Recognized for
Securities Still
Held, End of
Period

 

Fixed maturities