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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 March 31, 2015

 

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 April 17, 2015 was 318,698,313.

 

 

 



Table of Contents

 

The Travelers Companies, Inc.

 

Quarterly Report on Form 10-Q

 

For Quarterly Period Ended March 31, 2015

 


 

TABLE OF CONTENTS

 

 

 

Page

 

Part I — Financial Information

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

Consolidated Statement of Income (Unaudited) — Three Months Ended March 31, 2015 and 2014

3

 

 

 

 

Consolidated Statement of Comprehensive Income (Unaudited) — Three Months Ended March 31, 2015 and 2014

4

 

 

 

 

Consolidated Balance Sheet — March 31, 2015 (Unaudited) and December 31, 2014

5

 

 

 

 

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) — Three Months Ended March 31, 2015 and 2014

6

 

 

 

 

Consolidated Statement of Cash Flows (Unaudited) — Three Months Ended March 31, 2015 and 2014

7

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

8

 

 

 

Item 2.

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

33

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

61

 

 

 

Item 4.

Controls and Procedures

61

 

 

 

 

Part II — Other Information

 

 

 

 

Item 1.

Legal Proceedings

61

 

 

 

Item 1A.

Risk Factors

61

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

61

 

 

 

Item 5.

Other Information

62

 

 

 

Item 6.

Exhibits

63

 

 

 

 

SIGNATURES

63

 

 

 

 

EXHIBIT INDEX

64

 

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)

 

For the three months ended March 31,

 

2015

 

2014

 

Revenues

 

 

 

 

 

Premiums

 

$

5,888

 

$

5,823

 

Net investment income

 

592

 

736

 

Fee income

 

111

 

107

 

Net realized investment gains (1)

 

10

 

1

 

Other revenues

 

25

 

41

 

 

 

 

 

 

 

Total revenues

 

6,626

 

6,708

 

 

 

 

 

 

 

Claims and expenses

 

 

 

 

 

Claims and claim adjustment expenses

 

3,431

 

3,315

 

Amortization of deferred acquisition costs

 

963

 

950

 

General and administrative expenses

 

992

 

881

 

Interest expense

 

92

 

92

 

 

 

 

 

 

 

Total claims and expenses

 

5,478

 

5,238

 

 

 

 

 

 

 

Income before income taxes

 

1,148

 

1,470

 

Income tax expense

 

315

 

418

 

 

 

 

 

 

 

Net income

 

$

833

 

$

1,052

 

 

 

 

 

 

 

Net income per share

 

 

 

 

 

Basic

 

$

2.58

 

$

2.98

 

Diluted

 

$

2.55

 

$

2.95

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

 

 

Basic

 

320.8

 

350.9

 

Diluted

 

324.5

 

354.6

 

 


(1)  Total other-than-temporary impairment (OTTI) losses were $(4) million and $(7) million for the three months ended March 31, 2015 and 2014, respectively.  Of total OTTI, credit losses of $(3) million and $(9) million for the three months ended March 31, 2015 and 2014, respectively, were recognized in net realized investment gains.  In addition, unrealized gains (losses) from other changes in total OTTI of $(1) million and $2 million for the three months ended March 31, 2015 and 2014, 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)

 

 

For the three months ended March 31, 

 

2015

 

2014

 

 

 

 

 

 

 

Net income

 

$

833

 

$

1,052

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

Changes in net unrealized gains on investment securities:

 

 

 

 

 

Having no credit losses recognized in the consolidated statement of income

 

169

 

537

 

Having credit losses recognized in the consolidated statement of income

 

(5

)

2

 

Net changes in benefit plan assets and obligations

 

24

 

15

 

Net changes in unrealized foreign currency translation

 

(274

)

(43

)

 

 

 

 

 

 

Other comprehensive income (loss) before income taxes

 

(86

)

511

 

Income tax expense

 

25

 

194

 

 

 

 

 

 

 

Other comprehensive income (loss), net of taxes

 

(111

)

317

 

 

 

 

 

 

 

Comprehensive income

 

$

722

 

$

1,369

 

 

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)

 

 

 

March 31,
2015

 

December  31,
 2014

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Fixed maturities, available for sale, at fair value (amortized cost $59,916 and $60,801)

 

$

62,769

 

$

63,474

 

Equity securities, available for sale, at fair value (cost $563 and $579)

 

866

 

899

 

Real estate investments

 

929

 

938

 

Short-term securities

 

4,490

 

4,364

 

Other investments

 

3,565

 

3,586

 

 

 

 

 

 

 

Total investments

 

72,619

 

73,261

 

 

 

 

 

 

 

Cash

 

308

 

374

 

Investment income accrued

 

628

 

685

 

Premiums receivable

 

6,528

 

6,298

 

Reinsurance recoverables

 

9,142

 

9,260

 

Ceded unearned premiums

 

830

 

678

 

Deferred acquisition costs

 

1,847

 

1,835

 

Deferred taxes

 

 

33

 

Contractholder receivables

 

4,396

 

4,362

 

Goodwill

 

3,590

 

3,611

 

Other intangible assets

 

292

 

304

 

Other assets

 

2,511

 

2,377

 

 

 

 

 

 

 

Total assets

 

$

102,691

 

$

103,078

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Claims and claim adjustment expense reserves

 

$

48,994

 

$

49,850

 

Unearned premium reserves

 

11,954

 

11,839

 

Contractholder payables

 

4,396

 

4,362

 

Payables for reinsurance premiums

 

485

 

336

 

Deferred taxes

 

126

 

 

Debt

 

6,349

 

6,349

 

Other liabilities

 

5,540

 

5,506

 

 

 

 

 

 

 

Total liabilities

 

77,844

 

78,242

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Common stock (1,750.0 shares authorized; 318.7 and 322.2 shares issued and outstanding)

 

21,982

 

21,843

 

Retained earnings

 

27,906

 

27,251

 

Accumulated other comprehensive income

 

769

 

880

 

Treasury stock, at cost (443.6 and 437.3 shares)

 

(25,810

)

(25,138

)

 

 

 

 

 

 

Total shareholders’ equity

 

24,847

 

24,836

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

102,691

 

$

103,078

 

 

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 three months ended March 31,

 

2015

 

2014

 

Common stock

 

 

 

 

 

Balance, beginning of year

 

$

21,843

 

$

21,500

 

Employee share-based compensation

 

66

 

45

 

Compensation amortization under share-based plans and other changes

 

73

 

58

 

 

 

 

 

 

 

Balance, end of period

 

21,982

 

21,603

 

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

Balance, beginning of year

 

27,251

 

24,291

 

Net income

 

833

 

1,052

 

Dividends

 

(178

)

(177

)

Other

 

 

1

 

 

 

 

 

 

 

Balance, end of period

 

27,906

 

25,167

 

 

 

 

 

 

 

Accumulated other comprehensive income, net of tax

 

 

 

 

 

Balance, beginning of year

 

880

 

810

 

Other comprehensive income (loss)

 

(111

)

317

 

 

 

 

 

 

 

Balance, end of period

 

769

 

1,127

 

 

 

 

 

 

 

Treasury stock (at cost)

 

 

 

 

 

Balance, beginning of year

 

(25,138

)

(21,805

)

Treasury stock acquired — share repurchase authorization

 

(600

)

(650

)

Net shares acquired related to employee share-based compensation plans

 

(72

)

(55

)

 

 

 

 

 

 

Balance, end of period

 

(25,810

)

(22,510

)

 

 

 

 

 

 

Total shareholders’ equity

 

$

24,847

 

$

25,387

 

 

 

 

 

 

 

Common shares outstanding

 

 

 

 

 

Balance, beginning of year

 

322.2

 

353.5

 

Treasury stock acquired — share repurchase authorization

 

(5.6

)

(7.8

)

Net shares issued under employee share-based compensation plans

 

2.1

 

1.8

 

 

 

 

 

 

 

Balance, end of period

 

318.7

 

347.5

 

 

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 three months ended March 31,

 

2015

 

2014

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

833

 

$

1,052

 

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

 

 

 

 

 

Net realized investment gains

 

(10

)

(1

)

Depreciation and amortization

 

225

 

227

 

Deferred federal income tax expense

 

133

 

153

 

Amortization of deferred acquisition costs

 

963

 

950

 

Equity in income from other investments

 

(43

)

(139

)

Premiums receivable

 

(258

)

(189

)

Reinsurance recoverables

 

69

 

106

 

Deferred acquisition costs

 

(987

)

(986

)

Claims and claim adjustment expense reserves

 

(561

)

(209

)

Unearned premium reserves

 

185

 

94

 

Other

 

(350

)

(355

)

 

 

 

 

 

 

Net cash provided by operating activities

 

199

 

703

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Proceeds from maturities of fixed maturities

 

2,830

 

2,312

 

Proceeds from sales of investments:

 

 

 

 

 

Fixed maturities

 

906

 

406

 

Equity securities

 

11

 

36

 

Real estate investments

 

7

 

1

 

Other investments

 

146

 

167

 

Purchases of investments:

 

 

 

 

 

Fixed maturities

 

(3,325

)

(2,715

)

Equity securities

 

(8

)

(18

)

Real estate investments

 

(6

)

(9

)

Other investments

 

(168

)

(113

)

Net purchases of short-term securities

 

(134

)

(160

)

Securities transactions in course of settlement

 

305

 

240

 

Acquisition, net of cash acquired

 

 

(12

)

Other

 

(90

)

(60

)

 

 

 

 

 

 

Net cash provided by investing activities

 

474

 

75

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Treasury stock acquired — share repurchase authorization

 

(600

)

(650

)

Treasury stock acquired — net employee share-based compensation

 

(71

)

(54

)

Dividends paid to shareholders

 

(177

)

(176

)

Issuance of common stock — employee share options

 

90

 

57

 

Excess tax benefits from share-based payment arrangements

 

27

 

13

 

 

 

 

 

 

 

Net cash used in financing activities

 

(731

)

(810

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(8

)

(2

)

 

 

 

 

 

 

Net decrease in cash

 

(66

)

(34

)

Cash at beginning of year

 

374

 

294

 

 

 

 

 

 

 

Cash at end of period

 

$

308

 

$

260

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

Income taxes paid

 

$

126

 

$

93

 

Interest paid

 

$

34

 

$

34

 

 

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, 2014 (the Company’s 2014 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 2014 financial statements to conform to the 2015 presentation, including reclassifications related to the realignment of the Company’s reportable business segments in July 2014 described in the Company’s 2014 Annual Report.

 

Adoption of Accounting Standards Updates

 

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

 

In April 2014, the Financial Accounting Standards Board (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 was effective for the quarter ending March 31, 2015. The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.

 

Accounting Standards Not Yet Adopted

 

Amendments to the Consolidation Analysis

 

In February 2015, the FASB issued updated guidance that makes targeted amendments to the current consolidation accounting guidance. The update is in response to accounting complexity concerns, particularly from the asset management industry. The guidance simplifies consolidation accounting by reducing the number of approaches to consolidation, provides a scope exception to registered money market funds and similar unregistered money market funds and ends the indefinite deferral granted to investment companies from applying the variable interest entity guidance.

 

The updated guidance is effective for annual and interim periods beginning after December 15, 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.

 

Simplifying the Presentation of Debt Issuance Costs

 

In April 2015, the FASB issued updated guidance to clarify the required presentation of debt issuance costs.   The amended guidance requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying amount of the recognized debt liability, consistent with the treatment of debt discounts.   Amortization of debt issuance costs is to be

 

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

 

reported as interest expense.   The recognition and measurement guidance for debt issuance costs are not affected by the updated guidance.

 

The updated guidance is effective for reporting periods beginning after December 15, 2015.   Early adoption is permitted.  The adoption of this guidance will not have any effect on the Company’s results of operations, financial position or liquidity.

 

Additional Accounting Standards Not Yet Adopted

 

For information regarding additional accounting standards that the Company has not yet adopted, see the “Accounting Standards Not Yet Adopted section of note 1 of notes to the consolidated financial statements in the Company’s 2014 Annual Report.

 

Nature of Operations

 

The Company is organized into three reportable business segments: Business and International Insurance; Bond & Specialty Insurance; and Personal Insurance. These segments reflect the manner in which the Company’s businesses are currently managed and represent an aggregation of products and services based on type of customer, how the business is marketed and the manner in which risks are underwritten.  For more information regarding the Company’s nature of operations, see the Nature of Operations” section of note 1 of notes to the consolidated financial statements in the Company’s 2014 Annual Report.

 

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 March 31,
 in millions)

 

Business and
International

Insurance

 

Bond & Specialty
Insurance

 

Personal
Insurance

 

Total
Reportable
Segments

 

2015

 

 

 

 

 

 

 

 

 

Premiums

 

$

3,620

 

$

504

 

$

1,764

 

$

5,888

 

Net investment income

 

454

 

56

 

82

 

592

 

Fee income

 

111

 

 

 

111

 

Other revenues

 

8

 

5

 

12

 

25

 

 

 

 

 

 

 

 

 

 

 

Total operating revenues (1)

 

$

4,193

 

$

565

 

$

1,858

 

$

6,616

 

 

 

 

 

 

 

 

 

 

 

Operating income (1)

 

$

515

 

$

124

 

$

252

 

$

891

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

Premiums

 

$

3,558

 

$

503

 

$

1,762

 

$

5,823

 

Net investment income

 

570

 

66

 

100

 

736

 

Fee income

 

107

 

 

 

107

 

Other revenues

 

12

 

4

 

26

 

42

 

 

 

 

 

 

 

 

 

 

 

Total operating revenues (1)

 

$

4,247

 

$

573

 

$

1,888

 

$

6,708

 

 

 

 

 

 

 

 

 

 

 

Operating income (1)

 

$

694

 

$

154

 

$

268

 

$

1,116

 

 


(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).

 

9



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
March 31,

 

(in millions)

 

2015

 

2014

 

Revenue reconciliation

 

 

 

 

 

Earned premiums

 

 

 

 

 

Business and International Insurance:

 

 

 

 

 

Domestic:

 

 

 

 

 

Workers’ compensation

 

$

962

 

$

908

 

Commercial automobile

 

469

 

468

 

Commercial property

 

441

 

428

 

General liability

 

472

 

447

 

Commercial multi-peril

 

775

 

755

 

Other

 

10

 

10

 

 

 

 

 

 

 

Total Domestic

 

3,129

 

3,016

 

International

 

491

 

542

 

 

 

 

 

 

 

Total Business and International Insurance

 

3,620

 

3,558

 

 

 

 

 

 

 

Bond & Specialty Insurance:

 

 

 

 

 

Fidelity and surety

 

225

 

222

 

General liability

 

236

 

237

 

Other

 

43

 

44

 

 

 

 

 

 

 

Total Bond & Specialty Insurance

 

504

 

503

 

 

 

 

 

 

 

Personal Insurance:

 

 

 

 

 

Automobile

 

836

 

815

 

Homeowners and Other

 

928

 

947

 

 

 

 

 

 

 

Total Personal Insurance

 

1,764

 

1,762

 

 

 

 

 

 

 

Total earned premiums

 

5,888

 

5,823

 

Net investment income

 

592

 

736

 

Fee income

 

111

 

107

 

Other revenues

 

25

 

42

 

 

 

 

 

 

 

Total operating revenues for reportable segments

 

6,616

 

6,708

 

Other revenues

 

 

(1

)

Net realized investment gains

 

10

 

1

 

 

 

 

 

 

 

Total consolidated revenues

 

$

6,626

 

$

6,708

 

 

 

 

 

 

 

Income reconciliation, net of tax

 

 

 

 

 

Total operating income for reportable segments

 

$

891

 

$

1,116

 

Interest Expense and Other (1)

 

(64

)

(64

)

 

 

 

 

 

 

Total operating income

 

827

 

1,052

 

Net realized investment gains

 

6

 

 

 

 

 

 

 

 

Total consolidated net income

 

$

833

 

$

1,052

 

 


(1)  The primary component of Interest Expense and Other for the three months ended March 31, 2015 and 2014 was after-tax interest expense of $60 million.

 

10



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

2.                       SEGMENT INFORMATION, Continued

 

(in millions)

 

March 31,
2015

 

December 31,
2014

 

Asset reconciliation:

 

 

 

 

 

Business and International Insurance

 

$

81,892

 

$

82,309

 

Bond & Specialty Insurance

 

7,637

 

7,525

 

Personal Insurance

 

12,859

 

12,798

 

 

 

 

 

 

 

Total assets for reportable segments

 

102,388

 

102,632

 

Other assets (1)

 

303

 

446

 

 

 

 

 

 

 

Total consolidated assets

 

$

102,691

 

$

103,078

 

 


(1)                  The primary component of other assets at March 31, 2015 was other intangible assets.  The primary components of other assets at December 31, 2014 were other intangible assets and deferred taxes.

 

3.                       INVESTMENTS

 

Fixed Maturities

 

The amortized cost and fair value of investments in fixed maturities classified as available for sale were as follows:

 

 

 

Amortized

 

Gross Unrealized

 

Fair

 

(at March 31, 2015, in millions)

 

Cost

 

Gains

 

Losses

 

Value

 

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

 

$

2,036

 

$

45

 

$

2

 

$

2,079

 

Obligations of states, municipalities and political subdivisions:

 

 

 

 

 

 

 

 

 

Pre-refunded

 

6,893

 

324

 

 

7,217

 

All other

 

24,591

 

1,276

 

24

 

25,843

 

 

 

 

 

 

 

 

 

 

 

Total obligations of states, municipalities and political subdivisions

 

31,484

 

1,600

 

24

 

33,060

 

Debt securities issued by foreign governments

 

2,117

 

65

 

 

2,182

 

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

 

1,986

 

170

 

3

 

2,153

 

All other corporate bonds

 

22,180

 

1,036

 

45

 

23,171

 

Redeemable preferred stock

 

113

 

11

 

 

124

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

59,916

 

$

2,927

 

$

74

 

$

62,769

 

 

 

 

Amortized

 

Gross Unrealized

 

Fair

 

(at December 31, 2014, in millions)

 

Cost

 

Gains

 

Losses

 

Value

 

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

 

$

2,022

 

$

36

 

$

5

 

$

2,053

 

Obligations of states, municipalities and political subdivisions:

 

 

 

 

 

 

 

 

 

Pre-refunded

 

7,229

 

332

 

 

7,561

 

All other

 

24,666

 

1,356

 

10

 

26,012

 

 

 

 

 

 

 

 

 

 

 

Total obligations of states, municipalities and political subdivisions

 

31,895

 

1,688

 

10

 

33,573

 

Debt securities issued by foreign governments

 

2,320

 

48

 

 

2,368

 

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

 

2,052

 

165

 

4

 

2,213

 

All other corporate bonds

 

22,390

 

844

 

99

 

23,135

 

Redeemable preferred stock

 

122

 

10

 

 

132

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

60,801

 

$

2,791

 

$

118

 

$

63,474

 

 

11



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

3.                       INVESTMENTS, Continued

 

Pre-refunded bonds of $7.22 billion and $7.56 billion at March 31, 2015 and December 31, 2014, respectively, were bonds for which states or municipalities have established irrevocable trusts, almost exclusively comprised of U.S. Treasury securities, which were created to satisfy their responsibility for payments of principal and interest.

 

Proceeds from sales of fixed maturities classified as available for sale were $906 million and $406 million during the three months ended March 31, 2015 and 2014, respectively. Gross gains of $19 million and $13 million and gross losses of $1 million and $4 million were realized on those sales during the three months ended March 31, 2015 and 2014, respectively.

 

Equity Securities

 

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

 

 

 

 

 

Gross Unrealized

 

Fair

 

(at March 31, 2015, in millions)

 

Cost

 

Gains

 

Losses

 

Value

 

Public common stock

 

$

399

 

$

278

 

$

3

 

$

674

 

Non-redeemable preferred stock

 

164

 

30

 

2

 

192

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

563

 

$

308

 

$

5

 

$

866

 

 

 

 

 

 

Gross Unrealized

 

Fair

 

(at December 31, 2014, in millions)

 

Cost

 

Gains

 

Losses

 

Value

 

Public common stock

 

$

400

 

$

295

 

$

4

 

$

691

 

Non-redeemable preferred stock

 

179

 

31

 

2

 

208

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

579

 

$

326

 

$

6

 

$

899

 

 

Proceeds from sales of equity securities were $11 million and $36 million during the three months ended March 31, 2015 and 2014, respectively.  Gross gains and losses realized on those sales during the three months ended March 31, 2015 and 2014 were insignificant in both periods.

 

Unrealized Investment Losses

 

The following tables summarize, for all investments in an unrealized loss position at March 31, 2015 and December 31, 2014, 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 2014 Annual Report.

 

12



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

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(at March 31, 2015, in millions)

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Fixed maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

500

 

$

2

 

$

15

 

$

 

$

515

 

$

2

 

Obligations of states, municipalities and political subdivisions

 

1,884

 

20

 

143

 

4

 

2,027

 

24

 

Debt securities issued by foreign governments

 

75

 

 

 

 

75

 

 

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

 

60

 

 

133

 

3

 

193

 

3

 

All other corporate bonds

 

1,494

 

27

 

593

 

18

 

2,087

 

45

 

Redeemable preferred stock

 

1

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

 

4,014

 

49

 

884

 

25

 

4,898

 

74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Public common stock

 

74

 

3

 

1

 

 

75

 

3

 

Non-redeemable preferred stock

 

72

 

1

 

30

 

1

 

102

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity securities

 

146

 

4

 

31

 

1

 

177

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,160

 

$

53

 

$

915

 

$

26

 

$

5,075

 

$

79

 

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(at December 31, 2014, in millions)

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Fixed maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

180

 

$

2

 

$

125

 

$

3

 

$

305

 

$

5

 

Obligations of states, municipalities and political subdivisions

 

173

 

1

 

797

 

9

 

970

 

10

 

Debt securities issued by foreign governments

 

50

 

 

24

 

 

74

 

 

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

 

68

 

 

192

 

4

 

260

 

4

 

All other corporate bonds

 

2,148

 

38

 

2,355

 

61

 

4,503

 

99

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

 

2,619

 

41

 

3,493

 

77

 

6,112

 

118

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Public common stock

 

81

 

4

 

1

 

 

82

 

4

 

Non-redeemable preferred stock

 

44

 

1

 

42

 

1

 

86

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity securities

 

125

 

5

 

43

 

1

 

168

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,744

 

$

46

 

$

3,536

 

$

78

 

$

6,280

 

$

124

 

 

13



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

3.                   INVESTMENTS, Continued

 

Unrealized losses for all fixed maturities and equity securities reported at fair value for which fair value is less than 80% of amortized cost at March 31, 2015 totaled $9 million, representing 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.

 

Impairment Charges

 

Impairment charges included in net realized investment gains in the consolidated statement of income were $3 million and $9 million for the three months ended March 31, 2015 and 2014, respectively.

 

The cumulative credit component 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 for fixed maturities held at March 31, 2015 and 2014 totaled $94 million and $111 million, respectively, representing less than 1% of the fixed maturity portfolio on a pretax 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 three months ended March 31, 2015 and 2014 from that disclosed in note 3 of notes to the consolidated financial statements in the Company’s 2014 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 March 31, 2015 and December 31, 2014, the Company had $400 million and $350 million notional value of open U.S. Treasury futures contracts, respectively.  Net realized investment gains in the three months ended March 31, 2015 and 2014 included net losses of $10 million and net gains of $1 million, respectively, related to U.S. Treasury futures contracts.

 

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 March 31, 2015 and December 31, 2014.

 

14



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

4.                   FAIR VALUE MEASUREMENTS, Continued

 

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 $92 million at both March 31, 2015 and December 31, 2014. 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 $120 million and $140 million at March 31, 2015 and December 31, 2014, 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 2014 Annual Report.

 

Fair Value Hierarchy

 

The following tables present the level within the fair value hierarchy at which the Company’s financial assets and financial liabilities are measured on a recurring basis at March 31, 2015 and December 31, 2014.  An investment transferred between levels during a period is transferred at its fair value as of the beginning of that period.

 

(at March 31, 2015, in millions)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Invested assets:

 

 

 

 

 

 

 

 

 

Fixed maturities

 

 

 

 

 

 

 

 

 

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

 

$

2,079

 

$

2,075

 

$

4

 

$

 

Obligations of states, municipalities and political subdivisions

 

33,060

 

67

 

32,980

 

13

 

Debt securities issued by foreign governments

 

2,182

 

 

2,182

 

 

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

 

2,153

 

 

2,135

 

18

 

All other corporate bonds

 

23,171

 

12

 

22,985

 

174

 

Redeemable preferred stock

 

124

 

 

117

 

7

 

Total fixed maturities

 

62,769

 

2,154

 

60,403

 

212

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

Public common stock

 

674

 

674

 

 

 

Non-redeemable preferred stock

 

192

 

73

 

119

 

 

Total equity securities

 

866

 

747

 

119

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

56

 

18

 

 

38

 

Total

 

$

63,691

 

$

2,919

 

$

60,522

 

$

250

 

 

During the quarter ended March 31, 2015, the Company’s transfers between Level 1 and Level 2 were not significant.

 

15



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

4.                   FAIR VALUE MEASUREMENTS, Continued

 

(at December 31, 2014, 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

 

$

2,053

 

$

2,049

 

$

4

 

$

 

Obligations of states, municipalities and political subdivisions

 

33,573

 

 

33,560

 

13

 

Debt securities issued by foreign governments

 

2,368

 

 

2,368

 

 

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

 

2,213

 

 

2,203

 

10

 

All other corporate bonds

 

23,135

 

 

22,934

 

201

 

Redeemable preferred stock

 

132

 

2

 

122

 

8

 

Total fixed maturities

 

63,474

 

2,051

 

61,191

 

232

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

Public common stock

 

691

 

691

 

 

 

Non-redeemable preferred stock

 

208

 

82

 

126

 

 

Total equity securities

 

899

 

773

 

126

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

55

 

19

 

 

36

 

Total

 

$

64,428

 

$

2,843

 

$

61,317

 

$

268

 

 

During the year ended December 31, 2014, 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 three months ended March 31, 2015 or the year ended December 31, 2014.

 

Financial Instruments Disclosed, But Not Carried, At Fair Value

 

The Company uses various financial instruments in the normal course of its business. 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 at March 31, 2015 and December 31, 2014, and the level within the fair value hierarchy at which such assets and liabilities are categorized.

 

(at March 31, 2015, in millions)

 

Carrying
Value

 

Fair
Value

 

Level 1

 

Level 2

 

Level 3

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Short-term securities

 

$

4,490

 

$

4,490

 

$

1,238

 

$

3,215

 

$

37

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Debt

 

$

6,249

 

$

7,654

 

$

 

$

7,654

 

$

 

Commercial paper

 

$

100

 

$

100

 

$

 

$

100

 

$

 

 

(at December 31, 2014, in millions)

 

Carrying
Value

 

Fair
Value

 

Level 1

 

Level 2

 

Level 3

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Short-term securities

 

$

4,364

 

$

4,364

 

$

1,283

 

$

3,042

 

$

39

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Debt

 

$

6,249

 

$

7,522

 

$

 

$

7,522

 

$

 

Commercial paper

 

$

100

 

$

100

 

$

 

$

100

 

$

 

 

16



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

4.                   FAIR VALUE MEASUREMENTS, Continued

 

The Company utilized a pricing service to estimate fair value for approximately 99% and 98% of short-term securities at March 31, 2015 and December 31, 2014, respectively.  For a description of the process and inputs used by the pricing service to estimate fair value, see the “Fixed Maturities” section in note 4 of notes to the consolidated financial statements in the Company’s 2014 Annual Report.

 

The Company utilized a pricing service to estimate fair value for 100% of its debt, including commercial paper, at March 31, 2015 and December 31, 2014.

 

The Company had no material assets or liabilities that were measured at fair value on a non-recurring basis during the three months ended March 31, 2015 or twelve months ended December 31, 2014.

 

5.                   GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill

 

The following table presents the carrying amount of the Company’s goodwill by segment at March 31, 2015 and December 31, 2014:

 

(in millions)

 

March 31,
2015

 

December 31,
2014

 

Business and International Insurance (1)

 

$

2,455

 

$

2,476

 

Bond & Specialty Insurance

 

495

 

495

 

Personal Insurance

 

613

 

613

 

Other